George W. Karpus, BridgeTower Media Newswires
Over the last 49 years, I have met with thousands of individual investors and have been a student of the markets and investor behavior.
Why are some investors successful, and why do others fail?
Dalbar, an independent research firm, studied investor results in equity mutual funds over a 30-year period and found that the average investor underperformed the average equity mutual fund by a whopping 3% annually. Likewise, Fidelity did a study years ago on the Magellan Fund run by the star portfolio manager, Peter Lynch. In their study, they found that almost half of the investors in this top performing fund actually lost money.
These two studies show that individual investors tend to get caught up in news coverage and lack discipline. Their decisions often are based on emotion, and they lack patience.
For the last 30 years, our firm has been dedicated to following closed-end funds. Closed-end funds are cousins of open-end funds. However, when an investor wants out of a closed-end fund, they have to find a buyer; that buyer may only be willing to pay something less (a discount) than the full value of the fund’s underlying assets (the net asset value). Closed-end funds are often initially underwritten when an asset class is in favor and at a premium. When an asset class is out of favor, closed-end funds often sell at wide discounts to their net asset values.
We have made it a business to exploit the fundamental mistakes made by retail investors of buying high and selling low with closed-end funds.
Recently I had a conversation with a client who was unhappy because in their first 9 months, their municipal bond account was down about 2%; they were expecting 3% or 4% annualized returns based on previous conversations. I suggested they try to be patient, explaining that the slight rise in interest rates, trading cost of acquiring securities and the significant widening of closed-end municipal bond discounts caused these negative returns, with longer-term returns most likely ending up higher than originally forecasted.
I also suggested they look at the last 15 years of quarterly returns for our No. 1 ranked municipal bond management, where they would find 25% of the quarterly returns were negative and another 15% were below prevailing coupon returns. As for the remaining 60% of the calendar quarters, the returns were outstanding.
Successful investors are patient, disciplined and stay the course.
Returns often tend to come in patches. Who would have thought that the stock market would have been up 30% in the last year and a half? How many people know that longer term interest rates often go down when the Federal Reserve is nearing the end of raising short-term interest rates?
Investors should select a top investment manager. If the investor can be patient, the investment manager will supply top returns.
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George W. Karpus is chief investment strategist and chairman of the board of Karpus Investment Management, an independent, registered investment advisor that manages assets for individuals, corporations and trustees. Offices are located at 183 Sully’s Trail, Pittsford, NY 14534, (585) 586-4680.
