American Investment Services, Inc.

Disciplined, Diversified, & Cost Effective

Oct. 2005 – Money Management Evolves (Gradually)

The answer is D. Who’d a thunk? The sage of Omaha, that venerable value investor, the patron saint of stock pickers, Warren Buffett, is a devotee of index-fund investing.

The basic precepts of passive investing are being increasingly adopted, if more subtly, by the investing community. For example, Both Lipper and Morningstar, the biggest names among mutual fund ratings firms, for many years had categorized funds along a hodge-podge of labels that seemed to reflect marketing conventions (these included “growth and income” and “capital appreciation” among others). In recent years, however both have switched to categories more familiar to our readers, these include Small Cap Value, Small Cap Growth, Large Cap Value and Large Cap Growth.

Investment consultants have steadily gravitated toward segmenting the market along size and value-growth dimensions, the very approach we advocate. We applaud this approach to fund classification. We are, however, alarmed by another development; the widespread adoption of the term “index” to describe funds. Indexes have been launched to capture every conceivable market or industry “sector.” An index in itself is nothing more than a measure of a market segment, while an asset class is defined by unique risk and return characteristics. “Sector picking” is no better than “stock picking.” Sector-based index funds may offer investors lower costs versus actively managed counterparts, but are not necessarily based on sound methodology.

The mutual fund industry remains largely dominated by prognosticators, that is, those who insist that investors can consistently reap market-beating returns without exposure to the systematic risk factors of size (small cap versus large cap) and value (high book to market versus low book to market).

We on the other hand contend that markets efficiently and consistently evaluate and reflect all relevant risks, and that these risks are reflected in prices. Investors can only hope to earn larger gains through increased exposure to these quantifiable risk factors. Through the INVESTMENT GUIDE and our advisory services we help investors to achieve those returns through a structured and measured approach.

Also in This Issue:

Quarterly Review of Investment Policy
Smart Tax Swapping Strategies
The High-Yield Dow Investment Strategy
Recent Market Statistics
The Dow-Jones Industrials Ranked by Yield