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What is American Funds and my 401k choice

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It’s 401k enrollment time, because of my recent job change. I have lived life without 401k contribution for several months now, although I tried to keep up with buying mutual fund Scottrade IRA account. But I found this IRA thing is not as easy my good old 401k account. Couple reasons:

1) Automatic payroll deduction and investment in 401k vs. manually deposit/buy fund in IRA;

2) Dollar average cost (DCA) for the investments (mutual funds) in 401k, vs. picking the best time to buy mutual fund cheap (not easy to time the market);

3) Choosing from about 10 mutual funds vs. choosing from thousands of mutual fund Scottrade offers (a daunting task, which I talked a bit in my earlier post).

Anyway, here is the new mutual funds and their respective weight I chose for my new 401k plan.

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Confidence level

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(Update March 15) Remove Bill Miller from the Masters list. His holding Countrywide Financials, Sprint, Bear Stern blew up one after another. Although his 15 years streak to beat S&P is admirable, but 3 strikes in a row, not that impressive. I gave him a rating of 4.5, between good fund managers and masters 🙂

It also shows how tough to be a fund manager. I think it’s wise for Lynch to retire after 14 some years.

1) Yahoo Message Board, many other stock bbs (the world renown mit for one).

2) Many articles on Seekingalpha etc.; many articles written by bloggers and financial journalists (people who make a living on writing or talking, not on investing). Jim Cramer and guys on Fast Money (blog dedicated to them) should also fall into this category. Sometimes I found we can almost use those as a reverse indicator: for instance, if Cramer says buy, take it as a sell 🙂

Shui Pi, the famous financial journalist and chief editor of ChinaTimes probablly should get 2.5.

3) Sell side analysts; Management with lots of stock options. Sell side analyst makes a living by help selling stocks. Management with stocks options tend to focus on stock price in the short term.

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Mission impossible: beat the index

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For the mutual fund, besides being the leader in its category each year, one key performance measure is to beat the bench market index. For instance, if a fund is invested in emerging markets, one key bench mark is MSCI emerging market index (EFM, an ETF tracks this index). For reference, the index is up 33.44% from Dec 21 2006 to Dec 20 2007.

But, beating the index is very hard. Consider Bill Miller, the legendary fund manager of Legg Mason Value Trust, and he is going to underperform the market second year in a row after beating S&P continously for 15 years. Here is a link to the fund details. From the portfolio, Bill hit a home run with Amazon, but he also had dogs like Sprint, Yahoo and to a lesser extent, eBay. The following is Performance of Monthly and Average Annual Total Returns (as of 11/30/07, source: Legg Mason site).

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Congrats to Bill Miller

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Today Bill Miller must be very happy, as his fund (Legg Mason Value Trust) core holdings Amazon (5% of $20 b, roughly $1 b) went up more than 20%, this is the second time AMZN came out with a blockbuster quarter this year, and the stock has been up more than 100% in the past 6 months. I think his AMZN made more than $1 b for his clients in a year or so. Last year, largely due to the underperformance of AMZN, Bill Miller’s fund did not beat the market. Many people laughed at him, but he believed in himself.

Would like to talk a little more about AMZN. I believe most people know they are the largest online retailer, they sell things from books to mobile phones.

But in recent years they have used their experience in building online store, and information technology to expand in related areas. They build stores for other retailers, as we can see the “other” options when look for things, in some cases Amazon’s price may not be lowest. This is OK because they still collect money from their partners when customers buy from the partners. Arguably their profit margin on the “3rd party store” is higher than their own store.

They have this “Amazon Marketplace”, which is similar to eBay, and is gaining popularity lately. Their developer program and other web services also bring values to small retailers. Just like I talked about “what exactly is Google, Apple or MasterCard”, we are still trying to figure out what exactly is Amazon.

But when we all figure out what it IS (and its potentials), maybe it’s time to sell the stocks. I’m glad I don’t need to worry about that, it’s bill’s problem 🙂

amazon logo

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Bill Miller’s childhood story

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From CNNMoney, the full article is here:

I was nine years old, and I walked in to see my father reading the financial pages of the newspaper. And they didn’t look like the sports pages or the comics or whatever.

So I asked him what they were. And he said they were financial pages.

And I said, “What does that mean?” And he said, “Well, these are stocks.”

I said, “What’s a stock?” And he said, “Well, look at this thing. See this thing? This represents a company.” And he said, “And see this ‘+ .25’?”

And I said, “Yeah.” He said, “Well, that means that if you own this company, one share of it, which cost you like ten dollars, then if you owned it yesterday, then today you have 25 cents more than you had yesterday.”

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