The Times, They Are A’Changin

Embrace Change… and Everything Will Get Better.

Come gather ’round people
Wherever you roam
And admit that the waters
Around you have grown
And accept it that soon
You’ll be drenched to the bone
If your time to you is worth savin’
Then you better start swimmin’ or you’ll sink like a stone
For the times they are a-changin’ – Bob Dylan

Not long ago, only the rich or privileged could afford to invest in the stock market. There were three main reasons for this: 1) Each trade used to cost at least $7.00; 2) getting company information such as annual reports was difficult and slow; and 3) professional investment advice was expensive and limited to wealthy clients. But this ain’t your father’s world anymore. Times are indeed changing, and changing for the better.

Now, investors are more empowered than ever. With the click of a button, we can find information about any stock, bond, mutual fund or any other financial instrument. Everyone with internet access can open a brokerage account and start investing with any amount. Now, everyone can own a piece of those engines of prosperity called “businesses.” In fact everyone should. You should.

Yet, many people are still sticking to all habits. They continue to invest the same old way: in mutual funds. It’s as if they didn’t know there was a better way to put money to work. As if they didn’t know there was a way for busy people like you to easily:

  • Earn superior returns on their savings,
  • Pay less investment taxes over time, and
  • Have their voices heard over matters affecting their investments and society.

Well, there is a new and better way. With an Abbilon account, you can accomplish your financial goals investing directly in great companies – All from the comfort of your phone.

Why is investing in mutual funds an obsolete idea?

There are several reasons. Let’s start with the obvious one: Performance.

According to the latest independent research, mutual fund investors earned an awful 3.79% average compounded annual return over the past 30 years vs. 11.06% for the S&P 500 Index.  In other words, $10 thousand invested in the average mutual fund 30 years ago would be worth only $30,525. vs. $232,664 if invested in the S&P 500 Index. The third alternative is even better. Our research shows that buying shares in a small group of growing businesses at fair prices could produce average annual results at least 5% better than the S&P 500’s results over a long period of years, or 15%+. That would make a $10 thousand investment worth $662,117 after 30 years.

Another reasons is Costs.

Index funds charge much lower management fees than active funds. But all mutual funds, including index funds and ETFs, have other unapparent costs. All mutual funds commonly suffer from the following non-apparent costs: (1) disclosed costs, (2) hidden costs, (3) costs due to a tax inefficiency, and (4) costs due to their sneaky behavior. Naturally, these costs can eat away at returns.

  1. Disclosed costs

Even disclosed costs of mutual funds are easy to miss because there are many. For example, there can be shareholder fees, which can consist of front-end loads, back-end loads, purchase fees, redemption fees, exchange fees, account fees, and then there is also the expense ratio, which includes operating costs, management fees, 12b-1 distribution fees, and administrative costs.

How much do they cost? According to a study published in the Financial Analyst Journal that was authored by finance professors at the University of California Davis, University of Virginia, and Virginia Tech, the average expense ratio is 1.19%.

  1. Hidden costs

According to the same Financial Analyst Journal study cited above, the average hidden cost of mutual funds is 1.44%. These costs are created primarily of by trading. Mutual funds conduct trades, many on behalf of other investors. For example, after you buy a mutual fund, the mutual fund will continue to accommodate other investors as they invest into and sell out of the fund. Their trading on behalf of other investors imposes a cost onto you. There are three sources of these costs. First, mutual funds must pay brokerage commissions when they trade. This cost is shared by all mutual fund investors. Second, mutual funds will often purchase securities from dealers at ask prices and sell securities to dealers at bid prices. Ask prices are higher than bid prices. This bid-ask spread represents the dealer’s profits. Because mutual fund investors are commingled, the profits that go to dealers when mutual funds trade, to accommodate other investors entering or exiting the fund, imposes a cost onto the fund, which is shared by all investors. Third, when mutual funds trade, because their trades are often so large, their trades can cause securities’ prices to move. Their buying can push prices up, and their selling can push prices down. This phenomenon is known as price impact, but because the price of the impacted securities tends to return to its previous price, price impact causes mutual funds – and you – to lose money.

  1. Costs due to tax inefficiency

Mutual funds are infamous for their tax inefficiency. Here is a sample illustration. Suppose you buy a mutual fund and it contains a stock valued at $50/share. Let’s suppose the stock price later drops to $40/share. Assuming no other stock prices change, you have lost money in your investment. Now let’s suppose the mutual fund decides to sell the stock. It is possible that the fund purchased the stock at $30/share before you purchased the mutual fund. This means mutual fund investors must pay a capital gains tax on the $10/share profit that the fund realized (i.e., it bought the stock at $30/share and sells it at $40/share). As an investor in the fund, you can share the burden of this tax.

This means you can pay taxes for capital gains that you did not personally enjoy, even if you lost money on the mutual fund investment. How much do they cost? According to Morningstar, the average cost of mutual funds’ tax inefficiency is about 1.10%.

  1. Costs due to sneaky behavior

There are thousands of mutual funds competing for your savings. So, it should come as no surprise that many mutual funds engage in sneaky or questionable behavior to get new business. For example, some window-dress. Prior to reporting their quarterly holdings, some mutual funds sell their poorly-performing securities to hide that they owned these losers. The funds then buy securities whose price recently increased to make it look like they owned these winners all along. Another questionable behavior is risk-shifting. This is taking large gambles prior to their quarterly reporting to try to squeeze out some more returns, but these gambles usually do not pay off. A third unfortunate behavior is shirking. This is where mutual fund managers with institutional clients care more about their funds’ performance than other mutual fund managers who primarily have individual investors as clients. That is, mutual funds with primarily individual investors as clients are more likely to be lazy and shirk. Finally, another sneaky behavior is mutual funds buying “cold” IPOs that their investment banking partners could not sell to other investors. All of these questionable actions can cause mutual funds to underperform.

How much do they cost? According to several academic studies published by finance professors at institutions such as the University of Texas at Austin, University of Virginia, University of Missouri, and Georgia State University, the additional cost due to mutual funds’ sneaky behaviors is 2.49%.

The total cost?

So how much can mutual fund costs eat away at returns? A lot. Consider this example: Suppose you invest $100,000 in a mutual fund that invests in stocks. The stock market goes up 8% after you invest. Naturally, you would expect to have earned $8,000. But your returns can be much less. While the market has increased by 8%, your returns could be eroded by disclosed costs (1.19%), hidden costs (1.44%), costs associated with the tax inefficiency of the mutual fund (1.10%), and some additional costs caused by the mutual funds’ sneaky behavior (2.49%). These costs could leave you with just 1.78%, or only $1,780 instead of the expected $8,000.

Another reason is Random Performance.

If higher costs translated into better performance, investors would be happy to pay more. However, it is very difficult for investors to select funds that can reliably beat their peers. Even when they find funds with a good track record, their performance does not persist.

According to the S&P Persistence Scorecard, relatively few funds consistently stay at the top. Out of 641 domestic equity funds that were in the top quartile as of March 2014, only 7.33% managed to stay in the top quartile at the end of March 2016. Furthermore, 8.5% of the large-cap funds, 3.26% of the mid-cap funds, and 0.68% of the small-cap funds remained in the top quartile.

That result is no better than chance. But perhaps one year is an unfair measure. Not even professional athletes are expected to outperform every year. But clients do hope they can deliver superior returns over the long run. What if the S&P Dow Jones Indices ran the numbers in a different way? It is even worse. They found an inverse relationship generally exists between time horizon and the ability of top-performing funds to maintain their status. Only 0.78% of large-cap funds and no mid-cap or small-cap funds managed to remain in the top quartile at the end of the five-year period.

When it comes to mutual funds, investors had a higher chance of picking a loser than a winner.

But why? How come even good fund managers can’t consistently beat their rivals? One reason could be size! … yes, size does matter when it comes to investing. Successful managers attract more money, which means as their fund’s size grows they must find more investments ideas, other places to put the new money to work, and there is a limited availability of those.

A second possibility is that mutual funds have to follow constraints set out in their own prospectus. If a fund says it invests in large cap US stocks, it must buy large cap US stocks. Even if the stocks prices of companies in that category are overpriced, the fund must continue to invest in them. It cannot go elsewhere and start buying, say, small cap stocks.  These self-imposed constraints tend to have a negative effect on the fund’s performance during certain periods.

The final possibility is that out-performance (or under performance) is simply the result of luck. Picking shares is enormously difficult, given all the potential factors involved. The value of companies has little to do with the prices investors are willing to pay for them any given period. The old saying that “past performance is no guide to the future” is not a piece of compliance jargon. It is the truth.

So Why Don’t We All Invest Directly in stocks?

The first obvious problem is that most people don’t have the knowledge or time necessary to do it well. To invest intelligently in stocks, you don’t have to be a genius or have special skills or business knowledge. But you do need something even more important – Time. Who has time to sort through thousands of companies’ financial reports and evaluate them? In addition to keeping on top of company news and quarterly reports, investors must stay in tune with the latest news about the economy, technology, consumer preferences, interest rates and politics – to name a few of the factors that may affect stock prices.

The second is that traditional investment advisers don’t offer the right solutions for individuals investors. Unless you’re already rich, most advisers will push you into mutual funds.

Why We Started Abbilon

We started Abbilon because we knew there was a better way for busy people to invest their hard-earned savings. And since we couldn’t find it, we decided to invent it. Our research shows that using a combination of mathematical models and human judgement is the best way to select and manage investments.  Our proprietary software allows us to implement mathematical models that measure the value, quality and financial strength of hundreds of companies in real time. It lets us identify great companies whose share price are significantly below their true value.

Then, we use research and personal judgement to exclude those whose valuation or quality is questionable due to subjective factors the models cannot account for. Finally, we invest our clients’ money in the 15 to 30 companies that we believe offer the best combination of safety and profits. Our software helps us repeat this process continuously.


In short, Abbilon offers busy people like you a better way to put their savings to work. Our service makes it easier to:

  1. Earn superior returns over the long pull (buying shares of good companies cheap is a proven superior strategy);
  2. Potentially pay less taxes over time (holding stocks for a long period results in lower tax liability than trading often); and
  3. Make your voice heard (as an individual shareholder with voting rights) over important corporate matters that affect your money and society at large.

And you don’t have to be rich to open an Abbilon account and start investing. You can start with any amount, anytime.


Copyright@2017 Abbilon LLC

The information provided in this article is for educational purposes only. It is not intended as investment, legal, or tax advice. Past performance is not guarantee of future results. before investing, consider the risks and costs of each investment and how it may or may not fit your particular circumstances. Investing in securities such as stocks and mutual funds carries certain risks, including the risk of loss. Although we believe the information, stats and numbers presented here are accurate, we relied on third parties to obtain such information. Abbilon LLC is not responsible for its accuracy or reliability.

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