How to buy a glider affordably - redux

Tom's advice:

Don't buy Euros in 11/05, instead buy ContraFund (versus
alternative funds, such as an S&P ETF or Euro-based
index) and wait.

Specific Euro prediction: weakening Euro from $1.20
in 11/05 to $1.10 or $1.05.

Actual performance:

Euro has strengthened from $1.20 to $1.25.

What can I say, I was wrong on where the Euro would end up. I also said
you can go broke trying predict currency exchange rates. My stated
philosophy is to wait until the real invested returns allow you to buy
the glider at what you consider to be an affordable price. Exchange
rates WILL cycle; being patient is what it is all about.


ContraFund: up 10.9% or 9.97% after management expenses
S&P 500 index: up 15.1%
DAX (German market) index: up 28.2%

The S&P 500 did outperform ContraFund over the last year, but FCNTX
handily beat it over a (longer) 3 year period. I realize that a lot of
you regard 1 year as long term, but it isn't.

I said it before, but I guess it just hasn't sunk in: I don't "chase"
returns, I find money managers that are in the top quintile (that is
the top 20%) of their peer group over a long period of time. Relative
performance can vary pretty dramatically over a short period of time.
The S&P 500 has outperformed FCNTX for just the last 6 months.




So if you had taken $100,000 for a new glider (pick
your own number, but this one is nice and round) and
invested it in the ContraFund and taken it out yesterday
to buy Euros you would have 87,644 Euros or a 5% return
after adjusting for exchange rates.

If on the other had you had bought Euros a year ago
and put your money in a no-load DAX index you would
today have 107,017 Euros, or 23% more than under Tom's
strategy. In fact buying Euros and investing in a short-term
money market fund would have done better too.


You are, indeed, extraordinally skillful at predicting the past! Again,
short term time horizons amplify differences in investment strategies,
but give us little insight as to what the future will bring.

Personally, I recommend a minimum of 5 high-grade mutual funds for an
adequately diversified portfolio. And this should include international
exposure, which has outperformed U.S. concentrated mutual funds such as
ContraFund (FCNTX). It is a moot point now because FCNTX is closed to
new investors. For a strategy that relies on mutual fund upgrading
(keeping your portfolio in the top quartile or quintile) go to
http://www.fundx.com. They are now recommending a number of ETFs
(exchange traded funds) such as PWV, EZU FEV and IEV. In practice, I
rebalance my portfolio 3-4 times per year. This process led me to
reduce my holdings in FCNTX, which now represents about 3% of my
holdings. My largest holding is AEPGX (American Funds EuroPacific -
notice the "Euro"), which returned 20% in the last year, followed by
Fidelity Diversified International, which returned 17%. I also own one
fund , Fidelity Latin America (FLATX), that returned 45%, but this is
definitely not one for the faint of heart!

My recommendation regarding FCNTX was based on its outstanding
performance over the long haul (10 years), and that, given the
attention span of the typical glider pilot, I had to limit it to a
single pick. I still believe that 10 years from now it will be a good
choice.

Of course there is still a month to go so maybe the
ContraFund will make a big move, but over the past
12 months (and particularly the past 3 months the ContraFund
has significantly underperformend all the major market
indicies.

This was the point about chasing past returns - anyone
looking at the ContraFund performance up to last November
and deciding to invest with an expectation of above
market returns would have been disappointed.

Credit to Tom for putting his money where his mouth
was and making a prediction - many people don't have
the strength of their convictions. He just didn't turn
out to be right on either count up until now.


The principal of compound rate of return will make me right at some
point in the future. FCNTX's historical return of over 11% means it
will double, by the rule of 77s, in 7 years. And FCNTX is STILL in the
top quintile of its peers, which is why I still own it. But you have to
manage your portfolio; if any funds fall out of the top quantile dump
them and replace it with one that is (and has been over a significant
time period).

BTW: my portfolio returned over 17% in the last year.

Tom