Those are two separate questions. They deserve separate answers. The BlackRock Latin America Fund has done a great job for its investors over the last 5, 10, and 15 years. Unfortunately, investors managed to blow it.
Morningstar keeps some great data on mutual funds. One of the most interesting numbers to look at is the split between fund returns and investor returns. Fund returns show you the portfolio returns. Investor returns show you the experience of the fund’s average investor.
http://www.investorquestionspodcast.com/storage/investor-questions-podcast-episodes/IQP_0018_Should_You_Buy_The_BlackRock_Latin_America_Fund.mp3 Over the last 5, 10, and 15 years, BlackRock Latin America has returned between 10 and 20% a year. But that’s the fund itself. Investors in the fund haven’t done so well. They tend to buy and sell at the wrong time. When things look bad they sell. And of course that’s exactly when the stocks in the fund go up.
Investor returns over the last 5, 10, and 15 years have been terrible. While the fund’s portfolio has grown between 10 and 20% depending on whether you look at the 5 year, 10 year, or 15 year returns, actual investors in the fund have only made between 1 and 2% per year.
The fact that the S&P 500 goes up or down 20% in a year means nothing to investors unless they actually owned the S&P 500 all year long.
The sad truth is that investors are sheep. The sadder truth is that investors don’t know they’re sheep. Before they invest in a fund like BlackRock Latin America they look at past returns. That’s smart. But instead of looking at past returns for investors, they look at past returns for the fund. That’s dumb.
The average stock market investor should assume he will do worse than the market. And the average mutual fund investor should assume he will do worse than the fund.
The average investor is an idiot. Unfortunately, the average investor doesn’t know he’s an idiot. That’s because the average investor thinks he’s an above average investor.
Although amateur investors have tons of advantages over professional investors, they don’t use those advantages. They play the same game professional investors play. And as in any game where amateurs and professionals compete, the professionals crush the amateurs.
That’s not because the game is rigged. It’s because the amateurs really are that bad.
Warren Buffett’s teacher, Benjamin Graham, liked to say that investing is most intelligent when it is most businesslike. He was always pushing investment managers to become more professional.
He wanted investment managers and stock analysts to become professionals. He wanted them to have their own professional journals. He wanted them to be like doctors, lawyers, and accountants.
Graham wanted investment managers to take their field seriously. He wanted them to think of themselves as a special group. A group apart. He didn’t want them just to think of themselves as employees of the companies they worked for. They had to be more than that. It was fine for an investment manager to handle a pension fund, a university endowment, or an insurance company’s investments. But even when they did those things, Graham wanted investment managers to stand apart and hold themselves out as experts in their field. Professionals. Professionals who served their clients. But professionals who stood firm in their judgment.
I’m telling you all this because Graham’s vision for the future is not the world we live in. Investors do not treat fund managers the way they treat they treat doctors, lawyers, and accountants.
I’m going to give you some strange advice here. I think most investors are not trusting enough. They hire professionals. And then they decide they know better than the experts they hired.
The issue here is not intelligence. I’m not saying fund managers are smarter than investors. Nor am I saying accountants are smarter than they’re clients. All I’m saying is that they practice a profession. They draw a circle in the sand and say that is where I work. That is what I know. That is what I spend my life doing and learning and getting better at.
Fund managers know more about investing than you do. If you think you know better than the fund manager, go ahead and pick your own stocks. That’s what I do. That’s what the best amateurs do. They aren’t wrong to do that. If they have the time and passion needed to take their work as seriously as doctors and lawyers take their work, amateurs can beat professionals. But only by learning the profession on their own. Only by making investing their business.
The problem with most mutual fund investors is that they are not businesslike. They are not professional. And more than anything else they are bad clients.
No lawyer, doctor, or accountant would put up with the antics investors pull. They ask mutual fund managers to take their money and invest it for the long-run. They say they’re saving up for retirement. They won’t need the money for decades. And, yes, their risk tolerance is high.
Then they freak out. They pull their money. Worse yet: they actually manage to put their money in at the wrong time, take it out at the wrong time, and then put it back in at an even wronger time.
The numbers I showed you from the BlackRock Latin America fund are a good example. Latin American mutual funds are marketed to investors as great long-term investments. No one is selling Latin American stock funds in the U.S. by saying they’re super safe. No one is saying Latin American stocks aren’t volatile.
What they’re saying is that in the long-run you’ll do better in volatile Latin American stocks than less volatile U.S. stocks. They’re probably right.
But the point isn’t whether money managers are advertising their funds honestly. The point is that investors believe the advertising on the way in and decide it’s a bunch of lies on the way out.
Listerine does not advertise its pleasant taste. It doesn’t advertise how soothing it is. Listerine says it kills germs. And, yes, we know it burns. The ads admit that. And people buy Listerine anyway. They use it in their homes. And it burns as advertised. And those people go out and buy another bottle. Because Listerine does what it says it does.
The BlackRock Latin America fund is like Listerine. It burns. And it works. And it tells you it burns. And it tells you it works. And it’s not lying about either point.
But investors aren’t as rational with their money as they are with their teeth. When the Listerine burns, you don’t spit it out and swear you’ll never buy another bottle. You do what the directions say and swish it around for 30 seconds and spit.
The directions on the BlackRock Latin America Fund tell you to hold the stock for the long-run. Investors ignore those directions.
The BlackRock Latin America fund has done everything it promised. And investors who bought it 5, 10, or 15 years ago and held on are richer today. But there aren’t many of those investors. Most investors bought and sold the fund so badly that they actually managed to erase all of the fund’s gains.
What those investors did is no different than hiring a lawyer and then ignoring his advice. It’s no different than having an accountant prepare your taxes and then using only a couple of the lines from that tax return.
It makes no sense. But that’s exactly what most investors do.
I’ve talked about unspoken assumptions before. And that’s really what we’re talking about here.
The unspoken assumption investors make when they pick mutual funds is that they will do well when the fund does well. That’s a huge assumption. For most investors, it’s wrong.
Most investors will buy and sell this mutual fund at the wrong times. Most investors will squander all the work they hired the fund manager to do.
This particular fund is volatile. That means it’s year-to-year returns bounce around a lot. And that’s a big part of why investors do so badly in the BlackRock Latin America fund.
The portfolio was up 44% in 2007, down 55% in 2008, and up 119% in 2009.
Those are the numbers you need to look at. And don’t just look at the returns. Look at the years too.
Whenever you tell yourself you’ll stick with the fund in sickness and health, look at that down 55% number and think back to 2008. That was sickness. This is health.
The year 2008 is the real test. Take yourself back to the fall of 2008 when it looked like the world was going to end. When it looked like another Great Depression was coming. Do you remember where you were when the first TARP vote failed in the House of Representatives. Do you remember those huge swings in the Dow? Well those swings were bigger and scarier in Latin America. So were the headlines.
It didn’t look like stocks were dropping for no reason. It does now. But it didn’t then. Back then there were a million reasons on every page of every newspaper telling you exactly why you should sell. Sure, it was a panic. Everybody knew it was a panic. And everybody sold their stock. Wouldn’t you?
Maybe not. You know yourself better than I do. If you know you can handle that kind of volatility, then go ahead and invest in the BlackRock Latin America fund.
Don’t worry about the fund. Worry about yourself. I guarantee you are a much bigger risk than the fund manager. You are a bigger risk to your money than any of the stocks in that fund. You are the threat. And you are what you have to analyze before buying this fund.
If you’re sure you can handle it, I don’t have anything bad to say about BlackRock Latin America. The fund did better in the 2008 crash than most other Latin America stock funds.
It’s returns over longer periods are good too.
Although you might think a Latin America fund would own stocks pretty evenly spread around the Spanish and Portugese speaking countries in the Americas, you’d be wrong.
The BlackRock Latin America fund is like most Latin American funds in that it owns a lot of Brazilian and Mexican stocks and not much else. Really, the fund lives and dies by the performance of those 2 countries.
Around 92% of the fund is in Mexico and Brazil. And more than 75% of the fund is in Brazil alone. That makes sense. Brazil is a big economy. And it has a big stock market.
But it’s not very diverse. There isn’t a lot of variety in Latin American stock funds. That means you’re best off focusing on just finding a reasonably cheap fund that is reasonably cautious with your money. Don’t look for a brilliant fund manager. These Latin America funds all own the same stocks.
A big reason for that is their focus on huge companies. And some of that comes from the Brazilian economy. There are a few huge Brazilian companies. And the selection among small companies is not so great. But, then again, I don’t think foreign investors are really interested in buying small Brazilian companies.
I hate to say it, but the best place to find individual stocks is still the United States. The U.S. economy will not grow as fast as other countries. And our stocks aren’t cheap. But we have thousands and thousands of them. We have new ones and old ones. We have companies that make semiconductors and companies that make slippers. We have local companies and national companies. We have exporters and importers. We have everything. So the United States is a great place to hunt for stocks.
But the United States is not a great place to hunt for mutual funds. It’s not a great place to own an index fund. If I lived in any other country, I would never buy a U.S. index fund. I would never own the S&P 500. There’s no reason to.
You can find better bargains in other places. Latin America might be one of those places. I don’t know.
But you aren’t picking the stocks yourself. You don’t know the prices. There will be times when things get too expensive. There will be huge rises and huge falls.
If you are going to buy the BlackRock Latin America fund, you need to set it and forget it. You need to never sell.
Whatever you do, don’t think you’re the expert. Don’t hire someone else to manage your money and then decide you know when Brazilian stocks are cheap. Don’t read some article in The Economist or the FT and decide you have some great insight on Brazil. You don’t.
If you did, you wouldn’t need someone else to invest your money. If you did, you’d be the expert.
For most of his life, Warren Buffett did his own accounting. That’s because he knew a lot about accounting. From some stories I’ve heard, he probably knew more than most accountants.
But Warren Buffett didn’t represent himself in court. He didn’t perform surgery on himself.
Buffett is a genius. And a big part of that genius is knowing what he doesn’t know.
He separates things that matter from things that don’t. He separates things he can control from things he can’t.
Once you buy the BlackRock Latin America fund there is nothing you can control. Or at least there’s nothing you should try to control.
The numbers show most investors in this fund do badly because they move in and out of the fund at the wrong times.
You need to promise yourself you will not sell the fund until you need the money for something in your life. Your real life. Not your investment life. Don’t say you’re going to rebalance. Don’t say you’re going to adjust how much you put in the fund. Once the money goes into the fund, it stays in.
But before you do any of that, you need to spend some time analyzing yourself. Don’t analyze the fund. That’s a waste of time. You don’t know Brazilian stocks. You do know yourself.
Ask yourself how you would have behaved in 2008? Would you have sold the fund?
If you aren’t 100% sure you would have stuck with the fund through 2008, don’t buy it.
Even if the fund does well, you won’t.
But if you have the stomach for it, go ahead and buy the fund.
There is no one size fits all answer to whether you should buy the BlackRock Latin America fund. The truth is that an investor’s own behavior is what decides most of his returns in this fund.
Investors who can stomach the ups and downs of this rollercoaster have done well. Those who can’t have lost their lunch. The same will be true in the future.
So the real question is: which kind of investor are you?
That’s all for today’s show. If you have an investing question you want answered call 1-800-604-1929 and leave me a voicemail. That’s 1-800-604-1929.
Thanks for listening.