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No. of Recommendations: 104
OK, this will be my last swipe at Hidden Gems and their Arthur Anderson style math. I don't want to sound like a broken record and I've already commented on the subject twice before:

http://boards.fool.com/Message.asp?mid=20837876
http://boards.fool.com/Message.asp?mid=21786866

But it still somehow amazes me that TMF makes some rather misleading claims about the returns on their Hidden Gems. The latest culprit is this article:

http://www.fool.com/news/commentary/2005/commentary05012605.htm?source=mptoppromo

This article seemed like quite a nice piece about "indexing plus a few" which is the strategy I follow. But then it changes gears a bit to make the, by now, familiar claim: Tom Gardner and his guest analysts have rolled up 38% average returns since the product's inception in July 2003. That stacks up very well to the comparable S&P 500 return of 7%.

Which leads to my (now familiar) uncontrollable urge to go over to BigCharts.com and see if that is actually true. And of course, BigCharts has a very different opinion on this. The S&P 500 (I use the ETF SPY as a proxy here) has gone up by about 20% between July 1st 2003 and today.

MOREOVER, as I am always stressing (and sorry to the regular readers for being repetitive) the S&P500 as a Large Cap index is an inappropriate benchmark for the largely Small Cap Hidden Gems. A more appropriate benchmark would be the S&P Small Cap 600. Using as a proxy the ETF IJR, we see that this index is up about 42%.

So again we have the Hidden Gems at 38% versus the S&P 600 at 42% over the same time period. A whole lot of effort and commissions, just to underperform the index by 4%.

Now I know that there is some restaurant math that goes into TMF's calculations of returns: there have been excellent replies to my earlier posts explaining that TMF calculates its returns as if one invested in the S&P500 (still the WRONG benchmark!) at the same time as one bought each Hidden Gem (recommendation dates). According to this math, TMF's numbers are correct. Fine. But being correct does not mean they are not misleading. The unqualified way in which the returns are presented in these articles, gives the casual reader the impression that, "Hey, if I have 10K in the bank today, and my options are to buy an ETF like IJR or to start buying Hidden Gems, why the HG route is the option with the higher returns!" That is misleading; and from 2003 to today, that would have been a mistake.

The very first book of the Brothers G spoke long and hard about appropriate benchmarks and warned of misleading statements regarding mutual funds and investment advisors. I think if they applied the same level of candor to their current writings, they would not be making the careless and misleading statements about Hidden Gems that they do. Hidden Gems may be a fantastic product, but if so, don't sell it like a used car.

-Otto
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