Professionals in the marketing and advertising business know how to mold, manipulate and control the behavior of Main Street investors in highly sophisticated way, whether they’re making investments decisions or any other consumer, economic or financial decisions. And most of the time the investor doesn’t even know how the subtle messages are effectively his emotional brain is being impacted. Madison Avenue knows the right formula, how to package the Wall Street’s message using all the new research, technology and tools of the new neurosciences, plus visual and auditory tricks that create an effective mind control delivery system designed to get individual investors addicted to immediate gratification, while blocking the long-term thinking gene.

During the final days of the nineties dotcom insanity, we saw Wall Street insiders and Main Street insiders alike complained that returns of a “mere” 30% were not enough. Why? In the year 1999 more than one hundred funds had returns in excess of 100%, several greater than 300%. That euphoria carried over long after the tech market has collapsed, and in one special case we also saw how the advertising industry, the so-called “independent” data-trackers, the SEC’s rules on fund advertising, the press and the ongoing greed of fund executives conspired to tell the story of a once high-flying fund that had already collapsed.

According to a full-page in the August 2000 issue of the highly–respected Kiplinger’s Personal Finance magazine, The Internet Fund, America’s #1 equity fund back in 1998 was still “#1 ranked by Lipper of all equity mutual funds,” number one of 4,759 stock funds, said Lipper. And not only that, we were also told that the fund had been awarded one of Morningstar’s coveted 5-star ratings. The ad said you can buy it from Schwab’s elite “OneSource” service.

This souped-up hot rod was road tested

The ad was truly impressive, an eye-catcher, a marketing grabber! In big bold letters right in the center of the ad, blazoned against the background of the centerline of a highway was a bold statement: “The Internet Fund: Road Tested!” It sounded like a pitch for a new top-of-the-line Lexus, Jaguar, even a Bentley. It sure sounded like a great investment, considering that by August 2000 the market was collapsing all around it.

Great news, right? According to the ad, the Internet Fund was still #1 in America—in spite of the big tech sector crash. Ergo buy some, right!? The news surrounding this ad was impressive—although most indexes were down and tech was crashing. But we were being reassured: The Internet Fund was still on top, a winner.

Hot rod fails crash test, kills dummies

But then a bit later I was flipping through the Business 2.0 magazine, an insider’s journal of the “new economy” which most investors probably didn’t read, and I ran across this note: “When the Internet stock juggernaut ran into a brick wall this spring, collateral damage was inflicted on Internet-focused mutual funds. Big-name Net stocks dropped 50% and smaller Net stocks plunged 80% or 90%. For the mutual funds that depended on the likes of Yahoo! And Amazon.com, the downturn meant that at their nadir in April, they were down 40% or more … For example, from Jan. 1 through June 21st, while the Nasdaq dropped by just 1.4%, the Kinetics Internet Fund was down 24.8% ….” Oooopps, what’s that? Down 24.8%? More than the benchmark Nasdaq? But I thought the fund was #1? So I went back to Kiplinger’s and took a second look at The Internet Fund’s ad again. Very interesting. It quoted some sizzling statistics:

- Total return the past year: 77.25%.
- Average annual return the past 3-years: 143.88%.
- Average annual return since inception: 99.25%

And yes, the ad also said that the independent rating agency, Morningstar, gave the fund a 5-star rating “Overall risk-adjusted performance, rated among 3,571 domestic equity funds.” Plus you could buy it from Schwab’s prestigious OneSource.

All fund data is always grossly out-of-date

 So what was wrong? Well, here’s the problem. The information was out of date! So I looked a little closer, at the fine-print. The data is as of March 31, 2000, colledted well before that, and definitely prior to the big tech crash.

And, of course, The Internet Fund know full well the data was out of date, because they must report the data to the SEC, as well as Kiplinger’s and any data-trackers, Lipper and Morningstar. In fact, everyone associated with this little magic act, and certainly the fund’s owners, knew this information is out-of-date, bogus and misleading to the public. Yet no-one blew the whistle. They just ran the ran knowing it was a lie, and did it with the blessing of some of the most reputable names in American finance … no wonder you can’t trust any of them!

New investors shouldn’t drive Formula 500 racers

But the real question is: Is the average Main Street investor savvy enough to see the information was out-of-date? Okay, maybe a small percentage of sophisticated investors would realize the ad is misleading. But what about the vast majority of American investors you’d classify as novices, naïve, unsophisticated or just plain new to the game? For them, this kind of advertising is at best unethical. So fugetaboutit! Why? Because here were some facts from Lipper on the actual performance of The Internet Fund as of mid-year:

- Year-to-date performance: -22.7% (a loss )
- One-year performance: 14.7%
- Technology sector: 1-yr. ranking: bottom 20%

The fund did have a high average annual return for the most recent 3-year period. But the rest of the short-term information suggested a major downturn was already in progress after the first quarter tech collapse—so the add in Kiplinger’s was clearly misleading.

Time for fund industry ads to start telling the truth

Actually, I knew immediately when I saw The Internet Fund ad in Kiplinger’s that something was fishy. Year after year the industry tolerates this fantasy world of fund numbers and facts and ratings and rankings. And the SEC is as much a part of the “Alice-in-Wonderland” fairytale as anyone for “looking the other way,” even though all insiders knew the game was rigged. As SEC Chairman Arthur Levitt later in Take On The Street: What Wall Street and Corporate America Don’t Want You to Know: Funds are “eager to be seen as pro-investor, but the truth is they aren’t.” In fact, Levitt had a hard time containing his disdain for the fund industry, referring to it as “a culture that thrives on hype … withholds important information” and a “cutthroat business” that regularly “misleads investors.”

So yes, I did sense a big problem. But I also knew the vast majority of investors probably wouldn’t see the cleverly disguised old data in the ad. And unfortunately, ads like this—loaded with misleading statistics—continue down to today, although in far more clever disguises, thanks to help from the new behavioral economists and the new immoral culture of neuro-marketing. In All Marketers Are Liars, one of America’s marketing geniusest, Seth Godin writes about the decline of ethics in the ad industry:

“I’m upset that politicians and corporations and even job seekers have figured out how to tell stories that trick people into doing things that the regret later. I’m bitterly disappointed that something that could do so much good is often used for selfish ends. It’s not just the obvious stuff you’ve seen on 60 Minutes. Somewhere along the way , marketing started walking down a slippery path of something worse than irresponsibility: non-responsibility. It’s okay … because, hey, you’ve got quarterly numbers to hit.”

In 2000 a contemporary Vanguard/Money “Investor Literacy Test” showed a downward trend in the scores of fund investors answering a simple 20 question test correctly. The scores were down to 37% from 51% four years earlier.

Advertising guru: Advertisers got too much power and no morals

Why the deterioration? Because the number of new investors was rapidly increasing. Naïve novices. Sitting ducks for scams, cons, misleading statistics and the “usual suspects” all over our shady $10 trillion fund industry. Plus the existing investors aren’t getting any smarter. The financial industry loves it this way … and it’ll get much, much worse.

As Bob Garfield, one of Advertising Age’s leading critics bluntly put it recently: Advertisers “have too much power and they’re wielding it brazenly and corruptly … if you’re looking for anyone in the advertising industry to find moral equilibrium, you’re wasting your time. They will act purely in their self-interest and the interest of their shareholders, that’s their fiduciary responsibility … Advertisers will try to exert even more influence and be even bigger bullies than they have been before because they know the mainstream media is desperately trying to retain them … Increasingly we’ll see print publishers whoring themselves to their advertisers in a desperate attempt to stave off reality.” And Wall Street, one of America’s biggest advertisers, knows this better than anyone.

FirstPubDate July 2000