When it comes to mutual funds, too many investors have an attitude of "Shoot first, and ask questions later. " They pick a fund largely...

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When it comes to mutual funds, too many investors have an attitude of “Shoot first, and ask questions later.”

They pick a fund largely on the basis of recent performance and with insufficient data about how the fund and its manager really operate. They are taken in by dreams that past results will be repeated in the future and they trust too quickly in the image a firm creates in advertisements and marketing documents. They might have had an easier time if they lived in the Old West.
In his recent book, “Cowboy Ethics: What Wall Street Can Learn from the Code of the West” veteran money manager James Owen talks about how investors have confused rules with principles, and how the financial-services industry needs less regulation and more inspiration.

He dissects the “code,” which was a way of living for the working cowboy, rather than a set of rules to live by. And while Owen is trying to teach Wall Street a better way to live, he may have inadvertently struck a chord for fund investors as well.

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The Code of the West, as presented by Owen, has lessons in the way an investor should act, as well as what an investor should expect from the fund companies they take on as hired hands to manage money. This week and again next, we’ll examine Owen’s version of the code, and how investors might use it to ride the new frontier of post-scandal mutual-fund investing.

The Code of the West

Live each day with courage.

This is not so much about physical bravery as it is a moral strength of character.

For an individual investor, living with courage means facing up to mistakes, rather than allowing them to fester, acknowledging areas of weakness — and finding help to attend to those issues.

For an investor looking at a fund, you want managers who are unafraid of telling you what went wrong, rather than always focusing on what they think will happen next.

Too many managers discount the experience you have just had in their fund, hoping you will stay focused on the future; a manager who lives like a cowboy is going to talk straight, provide detailed information and transparency because there is no reason to hide things when you act with honor.

Take pride in your work.

Owen notes that “Cowboying doesn’t build character, it reveals it.” The same can be said for running a mutual fund.

A money-management company should never be taking actions it can’t be proud of, and an investor who sees a fund firm that has something to be ashamed of may just want to look for firms that have never had such problems. As the scandals begin to fade toward memory, investors should not forget that lesson.

Do what has to be done.

For individual investors, living up to this part of the code may be toughest, because everyone wants the easy way out. That’s the shoot-first mentality that leads people to buy yesterday’s winner and then be perplexed when it starts losing.

But it also involves putting your investments in a position to succeed.

Someone who belongs to the massive group labeled “Americans who aren’t saving enough” needs to recognize that if they don’t reach their investment targets, it’s not necessarily the fault of the money managers who were given a paltry portion of income to work with.

Chuck Jaffe is senior columnist at CBS Marketwatch. He can be reached at jaffe@marketwatch.com or Box 70, Cohasset, MA 02025-0070.