As investors, and we all are investors these days, it is important that we understand the idiosyncrasies of the Stock Market pricing data we use to help us in our decision making efforts. On Wall Street, investing can be a minefield for those who don't take the time to appreciate why securities prices are at the levels that appear on quarterly account statements. At least four times per year, security prices are more a function of institutional marketing practices than they are a reflection of the economic forces that we would like to think are their primary determining factors. Not even close... Around the end of every calendar quarter, we hear the financial media matter-of-factly report that Institutional Window Dressing Activities" are in full swing. But that is as far, and as deep, as it ever goes. What are they talking about, and just what does it mean to you as an investor?

There are at least three forms of Window Dressing, none of which should make you particularly happy and all of which should make you question the integrity of organizations that either authorize, implement, or condone their use. The better-known variety involves the culling from portfolios of stocks with significant losses and replacing them with shares of companies whose shares have been the most popular during recent months. Not only does this practice make the managers look smarter on reports sent to major clients, it also makes Mutual Fund performance numbers appear significantly more attractive to prospective "fund switchers". On the sell side of the ledger, prices of the weakest performing stocks are pushed down even further. Obviously, all fund managements will take part in the ritual if they choose to survive. This form of window dressing is, by most definitions, neither investing nor speculating. But no one seems to care about the ethics, the legality, or the fact that this "Buy High, Sell Low" picture is being painted with your Mutual Fund palette.

A more subtle form of Window Dressing takes place throughout the calendar quarter, but is "unwound" before the portfolio's Quarterly Reports reach the glossies. In this less prevalent (but even more fraudulent) variety, the managers invest in securities that are clearly out of sync with the fund's published investment policy during a period when their particular specialty has fallen from grace with the gurus. For example, adding commodity ETFs, or popular emerging country issues to a Large Cap Value Fund, etc. Profits are taken before the Quarter Ends so that the fund's holdings report remains uncompromised, but with enhanced quarterly results. A third form of Window Dressing is referred to as "survivorship", but it impacts Mutual Fund investors alone while the others undermine the information used by (and the market performance of) individual security investors. You may want to research it.

I cannot understand why the media reports so superficially on these "business as usual" practices. Perhaps ninety percent of the price movement in the equity markets is the result of institutional trading, and institutional money managers seem to be more concerned with politics and marketing than they are with investing. They are trying to impress their major clients with their brilliance by reporting ownership of all the hot tickets and none of the major losers. At the same time, they are manipulating the performance statistics contained in their promotional materials. They have made "Buy High, Sell Low" the accepted investment strategy of the Mutual Fund industry. Meanwhile, individual security investors receive inaccurate signals and incur collateral losses by moving in the wrong direction.

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