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risk – profit margins might shrink, the flow of new products might dry up – not the market fluctuation risk which still consumes so much scholarly attention.55 It is puzzling how much talent is wasted on

this effort to measure, as Friedrich von Hayek said in his Nobel lecture, Laureat address, what is measurable instead of what matters.56 Twenty

years ago, when Buffett did a fund study similar to this one, he noted that the managers of the nine funds under his scope never bothered to

calculate the beta of their holdings, the beta being a statistical risk measurement based on a stock’s short-term volatility.57 Rodriguez of FPA Capital explained this to some Wharton students and professors in 2004, saying that because of his fund’s tight investment concentration, he is able to define his investment time frame as three to five years. And thus he is “willing to accept greater portfolio volatility.. . .”58 Or as Whitman put it, “the only risk that we ever guard against is [business] risk. . . . We absolutely ignore market risk.59 (Ital in original) And the managers of the Tweedy Browne American fund almost chortle as they recite the results of a study some years ago which highlighted the fact that a group of highly successful value funds had underperformed the market one year in three.60 They live comfortably with the market’s manic/depressive patterns; it’s the long-term results that matter.

(c) Eating your own cooking. It is obvious that fund managers should invest significant dollars of their own in their funds, so as to align their personal interests with their investors’. And it’s become even more obvious as the pervasive market-timing, late-trading and other abuses at mutual funds have come to light. But it’s not just the blatant conflicts of interest that are troublesome. Management fee structures are out of line with their actual costs; according to Jack Bogle, founder of the Vanguard Group, mutual fund management fees total $72 billion, of which less than 10% is spent on research.61 Agency costs are what economists call the range of temptations for someone entrusted with other people’s money. It’s an inherent problem, but one that has gotten worse. Some fund families, such as Alliance, conceive of themselves as financial supermarkets for the masses, dicing their funds into ever smaller cubes, so as to harvest more investor dollars.62 The sense of a fiduciary duty has dried up. I can recall a discussion some while back with the senior manager of a large, brokerage firm family of funds, in which he said


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