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Arthur Levitt, during his tenure at the SEC, experienced many cases where the non-indexed mutual fund manager bought shares for their own accounts before the fund bought the shares. The modern day mutual fund is like a remake of the movie 'The Sting' where Paul Newman's character has been replaced by the fund manager!

A fund run by Dreyfus Corp., owned by Mellon Financial Corp., paid almost $3 million to settle, without admitting or denying guilt, similar charges of fraudulently luring investors with unsustainable returns.

Arthur Levitt, during his tenure at the SEC, experienced many cases where the non-indexed mutual fund manager mercenary shares for their own rehearsal by vote the fund mercenary the shares. The fund’s purchases drove up the price of the stocks and the fund manager’s made a killing on the deal. This is styled “front running,” and is illegal under securities laws.

Mr. Levitt also witnessed instances where the funds would buy huge trinket to run up the stock price at the end of the financial reporting period. This made the fund look like it had a high profit when it did not. This makes the fund’s performance look reshape than it really is.

The SEC brought enforcement cases contrary to some of the largest and most respected companies during Mr. Levitt’s tenure as SEC chairman. A mutual fund run by Van Kampen Investment Corp. for example, alleged in public advertisements that it had returned 62 percent in 1996. This information the fund-rating service Lipper Inc to report the mutual fund as the top performer in its class, a full 20% for of the second-best performing fund in the category.

But investors weren’t told that the excellent returns of the Van Kampen fund were on tiny bottom dollar of $200,000.00 to $380,000.00. This is seeing it was really a so-called incubator fund operating on seed money until its portfolio manager could establish a track record for marketing purposes. Nor were investors told that more than half the returns came from investments in thirty-one hot IPOs. An IPO is an “Initial Public Offering” that occurs when a firm first offers its stock biased a public exchange. Since the stock is new nobody knows how it will perform except insiders.

The fund only had to buy midst 100 and 400 shares of each IPO to bob up a huge upping of the returns. The 62% return unrealistically raised investor expectations and was unsustainable. When senior managers of Van Kampen decided to sell the fund to the public some 15,000 people invested $100,000,000.00 within six weeks. Van Kampen settled SEC shot that it had misled investors. What a jam of con artists. The modern day mutual fund is like a remake of the movie “The Sting” where Paul Newman’s capacity has been replaced by the fund manager!

A fund run by Dreyfus Corp., owned by Mellon Financial Corp., paid $3 million to settle, without admitting or denying guilt, similar bad debt of fraudulently luring investors with unsustainable returns. Its manager pretended returns of more than 80%, but failed to tell investors that the fund had received a disproportionate number of IPO shares that should have been allocated to other Dreyfus funds.

The fund industry should work less on image creation and more on making sure that it has done everything it can to safeguard investor’s money and a leg up returns. The mutual fund industry has get a financial powerhouse over the past twenty years and only cares almost how much money it can suck out of the public just as it was at the turn of the last centimetre when they were named investment pools. Funds are glitzy marketing operations instead of stewards of other people’s money. Don’t put your trust in them unless they are fully indexed like the Vanguard 500 (VFINX).

Just a quick update on Japanese stocks.

A while back I wrote a post entitled “Buy Japan”. A little later, I put out a report on 15 Japanese net-nets.

Some readers are curious about whether I’ve been putting my money where my mouth is.

Yes. Over the last couple weeks, I’ve been buying some of the smallest, most obscure – and least liquid (that's why it's taken weeks) – Japanese stocks.

So far, I’ve put 34% of my portfolio into a total of 4 Japanese micro cap stocks. There’s a fifth Japanese stock I’d like to buy. I’m willing to put 10% into it. If I get that order filled, I’ll have about 45% of my portfolio in Japan.

No. I’m not revealing which Japanese stocks I bought. Over the last couple weeks, I’ve been buying most of the volume of these stocks. They don’t trade much. So I have to be very patient. And very quiet.

All 4 stocks had negative enterprise values. In fact, I got my shares in each of the 4 stocks for less than 60% of net cash. Over the last 10 years, 3 of the 4 stocks had no losing years. One of the 4 stocks had an operating loss exactly 10 years ago. None had any losses in the last 9 years. And 3 of the 4 stocks were bought at less than 10 times normal after-tax earnings. All pay dividends.

Despite my feeling that the Yen could be overvalued against the dollar by as much as 25%, I decided not to hedge the currency.

All my other assets are in U.S. dollars. And I have no view about inflation in the United States. So having anywhere from a third to half of my assets in another currency isn’t the worst form of diversification.

I’ll hold my 4 Japanese micro caps for a little over a year. I plan to re-evaluate them in July 2012. I don’t know enough about Japan to evaluate their business performance in between.

I think it’s probably better to impose a trading ban on myself for a full year so I’m not tempted to sell based on headlines. I didn’t buy these stocks because of headlines. I bought them because they are the cheapest stocks I’ve ever seen. It would be a mistake to sell on news what I bought purely on price.

If any fat pitches come along they'll have to be funded through sales of the 50% of my portfolio in U.S. stocks (which is actually only 2 stocks). 

Right now, having more ideas than money is definitely not my problem. There are almost no good net-nets in the U.S. I mean literally almost zero decent net-nets. Don't believe me? Ask Jon Heller. 

But nothing lasts forever. One day, American net-nets will return.

Until then, at least we have Tokyo.

Talk to Geoff About Japanese Stocks

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