Hi Elliott Waver,

Read this report from The Wall Street Journal, dated December 31, 2009:

The decade’s best performing U.S. diversified stock mutual fund [is] CGM Focus Fund, which rose 18.2% annually.

That’s an amazing performance, especially for a decade in which the S&P lost value.

Question: How much money did investors in this fund make over the full ten years?

The table below shows the growth of a $100,000 investment in the CGM Focus Fund based on annual average growth of 18.2%. It more than quintupled in value to $532,000:

But this table does not answer the question I asked. It shows the growth of money in the fund, but I asked, “How much money did investors in this fund make?” Here’s the answer from the article:

The typical CGM Focus shareholder lost 11% annually in the 10 years ending Nov. 30, according to investment research firm MorningStar Inc.

Say what? Somehow, the actual experience of investors in this top-performing fund was an 11% annual loss, compounded. Over the ten-year period, then, the average investor in the CGM Focus Fund turned $100,000 into $31,200, for a total loss of 68.8% (see the table below):

How can this be? The answer is: herding. As the article explained:

These investor returns incorporate the effect of cash flowing in and out of the fund. Shareholders often buy a fund after it has had a strong run and sell as it hits bottom.

Investors are buying high and selling low, over and over again.

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