It's easy to dismiss the outrageousness of the claims made by someone like Wade Cook. Even if you don't know that Cook has been in trouble with securities regulators and courts for many years now, your common sense tells you that five and six digit returns are well outside the realm of reasonable expectations for stock performance.
But what about the more believable performance claims, in the range of 20 and 30 percent, that can so easily dupe an investor into thinking they're true? Like the annualized return of 23.4% claimed by the Beardstown Ladies. Sounds reasonable, and why would a bunch of ladies from a small town in Illinois mislead you? Well, back in 1995, I asked the Beardstown Ladies to send me some account statements so that I could verify their return claims, but they turned me down, citing a decision "not to make our return an issue . . . we're not out to be bragging." (Have they told that to their publishers, who've plastered the return claims across the cover of their book?)
I even offered to have an independent accounting firm review their records and the club refused. That told me loud and clear how authentic their 23+ percent performance claims were.
Turns out their claims were indeed bogus. Shane Tritsch, a reporter for Chicago magazine, wrote a piece in the March 1998 issue, entitled "Bull Marketing," in which he exposed gross inaccuracies in how the Beardstown Investment Club calculated its stock market returns. Tritsch was tipped off to potential problems by a note added to the copyright page of the paperback edition of the Beardstown book in which it said that the club's 23.4 percent annualized returns were determined "by calculation the increase in their total club balance over time. Since this increase includes the dues that the members pay regularly, this return may be different from the return that might be calculated for a mutual fund . . ."
May be different? Indeed. Using documents from the investment club provided by a The Wall Street Journal reporter, Jim Raker, a senior research analyst at Morningstar, told me that he calculates that the investment club earned a return of a mere 9 percent per year—a far cry from the 23+ percent returns claimed by the club.
Even worse, though, is that the Beardstown investment club underperformed the market. For the period in question (from 1983 to 1992), while the Beardstown club earned just 9 percent per year, the Standard & Poor 500 Index—the widely followed index for the U.S. stock market—returned about 16 percent. In fact, if you had invested in lower risk bonds, you would have earned nearly 12 percent per year and outperformed the stock picks of the Beardstown club!
From Mutual Funds For Dummies®,2nd Edition by Eric Tyson. Copyright © 1998 Eric Tyson. All rights reserved. Reproduced here by permission of IDG Books Worldwide, Inc. ...For Dummies is a registered trademark of IDG Books Worldwide, Inc.
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