Invest like Mr. Howell

The television series Gilligan's Island ran for three seasons from 1964 through 1967 -- and for decades ever after in reruns.

One thing that strikes us as money managers is the way the show's producers chose to characterize "The Millionaire" -- Thurston Howell the Third, played by the late Jim Backus.

Among the many devices they used in order to set "The Millionaire" apart from the other castaways, along with having him talk about yachting and golfing, was to have him refer regularly to the stock market. Occasionally, the transistor radio on the island would announce some piece of stock market news, which would send Mr. Howell into fits of despair, while the only response from the rest of the castaways would be varying levels of sympathy for his plight. To them, the stock market was as foreign as most of the other fixtures of the lifestyle of the mega-wealthy.

In this way, Gilligan's Island is a kind of window back in time, to a period not so long ago, when a far smaller percentage of the American population owned shares in businesses or paid attention to what was taking place on Wall Street. If you were very wealthy, you probably had a stock broker, who recommended individual companies and individual bonds to you, who lived in your city and whom you knew personally.

A small percentage of the population may have owned some shares in the companies that they worked for, if they worked for a public company, but otherwise their entire exposure to stocks would probably be only indirectly, through their participation in some sort of a pension arrangement at their company. In those days, the average retirement age for men was 65, and their average life expectancy was just over 67, one of the big changes that accounts for the difference between our era of investing and the situation depicted in Gilligan's Island.

Since then, there has been a dramatic increase in life expectancy, primarily brought about by the increase in wealth and standards of living that resulted from the explosion in business growth in all parts of the economy after the malaise of the 1970s. There has also been a tremendous increase in wealth and in the ownership of investment securities -- so much so that if Gilligan's Island had been filmed today, every one of the castaways would probably be huddled around the radio along with Mr. Howell, and when he moaned about the performance of his stocks, Mary Ann would have asked him, "What will this mean for my 401(k)?" and the Professor would probably calculate in his head the exact percentage decline in his own 403(b).

This dramatic increase in the percentage of the population with investable wealth during the 1980s and 1990s led to the rise of an entirely new kind of money management from the individual stocks and bonds that Mr. Howell would have owned, a sort of "money management for the masses." With so many investing it was no longer possible for everyone to know the portfolio manager who was investing their assets the way the wealthy had in the past. The primary vehicle that would facilitate money management for thousands of investors would be the mutual fund.

In 1965, there were only 170 mutual funds in the US, with total assets of only $35 billion. By 2008, there were 8,889 mutual funds in the US, with total assets of $9.6 trillion (statistics on mutual fund investment are available from the Investment Company Institute).

We have written about what we believe are significant drawbacks to the mutual fund investment structure before, such as in this previous post.

In addition to taxation issues, "deworsification" issues, and "style drift" issues, mutual funds have an even more serious drawback: they tend to divorce their investors from the truth that investment should be about providing capital to businesses.

It is perhaps easiest to understand this pernicious effect through our mental exercise of thinking back to the days of Thurston Howell, III. The ultra-wealthy Mr. Howell was very aware that he was an owner in various business interests -- news of those business interests were often featured in the radio broadcasts that caused him such anxiety.

But owners of mutual funds do not typically have personal contact with the managers of those funds, and therefore do not typically have the opportunity to understand the businesses that they own indirectly through the fund, nor have explained to them the investment thesis behind the ownership of those particular companies.

As a result, they tend to become more focused on the market performance of those funds, rather than on the business performance of those companies. Numerous studies show clearly that the masses who invest in these forms of "mass-managed money" consistently buy into them when their prices are highest, and sell out of them when their prices plummet. The second graph in this post from January 2008 clearly shows massive amounts of money flowing into equity mutual funds in 1999 and 2000 and flowing out of them at the very bottom of the 2000-2002 bear market, in 2002. A story in today's Wall Street Journal chronicles several individual investors who sold equities near the market's most recent bottom in March, and notes that $70 billion flowed out of equity funds in February and March alone.

Mr. Howell, who had no qualms about expressing elitist opinions, might have said that this is exactly what one might expect when you come up with a way to distribute the stock market to the masses.

In fact, while there never was such an episode, we can almost imagine a Gilligan's Island in which everyone on the island decides that they want to participate in the stock market too. There would be general euphoria as the market goes up, and Mr. Howell obligingly sells some of his shares to Ginger, Mary Ann, the Skipper, and Gilligan, who eagerly buy more and more as the market reaches new highs.

Soon enough, however, the market would turn around, and the other castaways would become increasingly angry, fearful, and frustrated. They would decide that -- just like the actual episode in which the Howells adopted Gilligan as the new "G. Thurston Howell, IV" -- what seemed wonderful at first quickly became totally distasteful and ultimately something they all wanted no part in.

The episode would no doubt end with a gleeful Mr. Howell buying back everybody's stock at prices far lower than he originally sold them for, while telling his wife what a wonderful thing it is to be a Howell.

This is in fact something very close to what just happened in the markets over the past several months. It is definitely what just happened to those retail investors described in the Wall Street Journal article, who sold their equity index funds and mutual funds on or about March 9th of this year. Thinking about it in terms of Gilligan's Island might help some aspiring investors to take a more "Howell-like" approach.

In fact, there are many important investment lessons that can be learned from a reflection on Gilligan's Island. We personally believe that the tremendous growth in wealth that has taken place since the first season aired in 1964-1965 is a good thing, as is the greatly increased percentage of the American public who can participate in providing capital to businesses, and can participate in the rewards of the growth or those businesses.

But in order to really benefit, investors should remember what owning stocks or bonds is really all about. To do that, they might want to think a little more like Mr. Howell (without adopting the arrogant mindset that frequently got him into trouble of his own).

For later posts on this same subject, see also:

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