beginners corner


The Sarbanes-Oxley Act of 2002 stiffened the requirements of all mutual funds to disclose their holdings on a quarterly basis. This was done in an effort to increase the fund’s transparency so as to protect Blue Collar Investors like ourselves. As a result, fund managers were exposed to the possibility of being found to hold certain poorly performing equities or have some outstanding performers noticeably missing from their portfolios. 

To get around this, certain fund managers have resorted to an unscrupulous practice known as window dressing. This refers to the practice of altering a fund’s holdings just before the end of a reporting period. Great performers will be purchased while the dogs will be sold. This is utter and total deceipt perpetrated upon us by the very people who are supposed to represent our best financial interests.

The main reason this done is protect the image and reputation of the fund so as to keep existing investors and attract new ones. After all, the paychecks of institutional managers are tied directly to the fund size, so they are trying constantly to attract new money. This represents an inherent conflict between fund managers and investors. This classless strategy will deceive certain uneducated investors (not us), but will adversely affect all those participating in the fund. This is due to the fact that unnecessary trading activity is costly due to brokerage commissions and implicit trading costs. As a result, the funds’ return performance will be negatively impacted.

I am sure that there are many ethical and talented institutional investors who do not resort to window dressing. But as Blue Collar Investors we need to be on our toes and aware that the practice does exist. This, by the way, is another reason why 80% of all actively managed (non-index funds) mutual funds underperform the market.

Oddly, as option sellers (Blue Collar Style), window dressing may actually be an asset to us!  First of all, our portfolio has no dogs so we don’t have to worry about a plethora of selling at the quarters’ end. However, we do have a bevy of great performers! Nearing the end of a reporting period, it is quite possible that there will be a buying frenzy of stock in your portfolio. If we’ve sold out-of-the-money calls, this bodes well for our monthly returns. Here are some examples of stocks that this may apply to:






If you look at a funds prospectus and see these equities (and others like them) as part of the portfolio, delve a little deeper. How long have they been there and what stocks were sold prior to the acquisitions?


1- On November 30, 2007, I highlighted MHS, a stock that met our system criteria about which a 2-for-1 stock split had been announced. About one week ago, this equity was recommended by Jim Cramer on his Mad Money Show (Think he reads my blog?).

2- The government is considering allowing Exchange Traded Funds in 401Ks. This will be good news for those of you selling options on the Qs, including my Mom.

3- Speaking of the Qs, there has been a re-ranking of the Nasdaq-100 index:

Added are HOLX, FMCN, HANS, STLD and SRCL. Expect some buying pressure on these stocks.

Removed are ERIC, PTEN, ROST ( a banned stock anyway), SEPR, and XMSR. There could be some selling pressure on these equities.

4-As we approach the years end, all the key market indicies are up for the year:

Dow is up over 8%

S&P 500 is up about 5%

Nasdaq is up over 12%

Wilshire 5000 is up about 6%

Blue Collar Investors are up a lot more!

Wishing you all a prosperous 2008



About Alan Ellman

Alan Ellman loves options trading so much he has written four top selling books on the topic of selling covered calls, one about put-selling and a sixth book about long-term investing. Alan is a national speaker for The Money Show, The Stock Traders Expo and the American Association of Individual Investors. He also writes financial columns for both US and International publications along with his own award-winning blog.. He is a retired dentist, a personal fitness trainer, successful real estate investor, but he is known mostly for his practical and successful stock option strategies.

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