"The rant. This week is continuation of last week. Okay what i've done here is. I've added kind of another chapter to the story story so last week. I talked to you about the way that wall street turns conservative investment vehicles into pure toxic waste is what i'm calling colleague and i mentioned two examples right. The investment trusts starting in the late nineteenth century ending in the nineteen twenty nine crash and the u._s. thirty year mortgage around the time of the financial crisis. You know maybe from around two thousand two through just say two thousand nine this week. I wanna talk a little bit about mutual funds in that same light okay and the story begins with something called the prudent prudent man ruling of eighteen thirty. We're getting in the weeds here folks. There's a lot of material here all right so the prudent man fiduciary the tradition in american well in american law and in american finance goes back couple of hundred years before the nineteen sixties when when and mutual funds kind of blew up in the way that i'm about to describe but there was this one particular decision in eighteen thirty in a case called harvard college versus amory sorry you can google that and and learn the details of that amac and talk about just mention the a quote from the decision that was made at that time so so here's the quote from a decision which outlined the prudent man rule okay so these are the words of judge samuel putnam in eighteen eighteen thirty quote all that can be required of a trustee is that he shall conduct himself faithfully and exercise a sound discretion and he is to observe how men of prudence discretion and intelligence manage their own affairs not in regard to speculation but in regard to the permanent ah position of their funds considering the probable income as well as the probable safety of the capital to be invested and quote. That's a lot of that's a lot of stuff there but the salient points are prudence discretion intelligence probable income probable safety of the capital title so this is what's known as the prudent man rule it still alive today though you'd probably be hard pressed to find very many true practitioners. The decision was made in a boston court. Okay it became the ruling principle of among others a whole class of money managers that will called the yankee trustees they were the living essence of the prudent man rule and they viewed the avoidance of losses as more important than achieving leaving gains right very conservative so in boston almost one hundred years after the prudent man ruling the first open ended mutual fund was created in nineteen twenty four and it was very much a product of the trustee culture right people who took care of trusts and were these the yankee trustees who used the man ruin invested very conservatively it was called the massachusetts investors trust and it was different because it didn't have a fixed the number of shares like all the funds before it it's sold shares to the public based on demand and investors could sell them right back to the company at whatever the current price was right. That's an open and mutual fund as we know today so as a product of the boston prudent man culture it was so conservatively run it came out in nineteen twenty four right just when the twenties were kinda getting getting cooking and it was seen as being out of step with the times sort of like warren buffett in nineteen ninety nine fine and you know it it did all kinds of things issued detailed quarterly reports listing all of its holdings and transactions and costs that was the exact opposite visit policy of at that time the the new investment trusts of the era which refused tell investors what was in them in turn out as we said last week to be toxic waste okay now you fast forward a little bit you go nineteen forty-three edward crosby johnson. The second is a lawyer who takes over the fidelity fund and fidelity right. The company knows fidelity. It's got like two and a half trillion of assets under management today well. He took over this boston. Mutual fund operation called fidelity fidelity at the time. They managed three million bucks. It was hardly anything that was even a small amount of that time in nineteen forty three now in his book the gogo years author author john brooks noted of that event quote the man who turned the fidelity organization over to him refuse to take nickel for it in keeping with the traditional boston austin concept of a trusteeship as a sacred charge rather than a vested interest to be bought and sold and quote brooks looks continued the notion of a mutual fund as a trust was deeply ingrained in state street sort of like wall street and boston deeply ingrained in stay street st st st at that time and would remain so until about nineteen fifty five in quote so the laws governing mutual funds and trust were different but until the the mid fifties according to brooks mutual funds felt like trusts right it wasn't seen as an opportunity to get rich speculating with other people's money far from it. It was a sacred charge so but johnson you know eventually. He left those old conservative ways behind. It's a necessary step in solving the toxic waste. He was a fan of jesse. Livermore johnson love jesse livermore. That's what got him interested in. The stock market to begin with of course livermore was the famous trader who made lost i i if i'm not mistaken for fortune speculating on stocks you know including in the twenties and eventually shot himself in the head nineteen forty in the cloakroom grooming sherry netherlands hotel in new york so with his one transaction of taking over the fidelity fund the old conservative way of the yankee trustee was kinda taken out back and shot in the head johnson grew the business by trading stocks okay now the dow rose about one hundred and fifty percent between nineteen forty-three the year he took over and nineteen fifty two the year johnson met a man named gerald cy who's a chinese fellow his last name aside t._s._a. Sign was born in shanghai china in nineteen. Twenty eight came to the u._s. In nineteen forty seven to go to college got a bachelor master's degree from boston in university and stuck around so these guys met nineteen fifty two and they were both inclined more towards market timing and rapid-fire trading in large positions positions you know no diversification long-term view neither had a trace of the prudent man in him johnson. Let size start his own fund in nineteen fifty seven the fidelity capital fund. I'm sorry i left outside went to work for johnson when they met okay and he started his own fund in nineteen fifty seven the fidelity eddie capital fund from nineteen fifty eight to nineteen sixty five the fund return two hundred ninety six percent according to john moguls forward to a book called super money by adam smith breath aka george goodman good book. You should read those those adam smith books along the way si- had to deal with the crash nineteen sixty two that year the dow jones average fell twenty seven percent and most of the downward move which was really from kind of january first until june twenty six of that year most of that downward and move happened in two months between april twenty fourth june twenty six with a drop of twenty two and a half percent so is short and sharp and kind of brutal john brooks. It's not how well the mutual fund industry weathered the storm quote the great rising giant of american finance the mutual fund industry had come out with honors cash chevy still conservatively managed in the prudent fiduciary tradition the funds had bought unbalancing the falling market of monday and had sold on balance and the rising market of thursday day thus besides protecting their shareholders from excessive risk. They had perhaps actually done something to stabilize the market and quote. Apparently there's one particularly if you look at the chart of that time there's one particular week those pretty brutal right around the time it bottomed out and i think that's what he's talking about. Their size fidelity capital fund was down by may of that year but he recovered and the fun rose sixty eight percent in the last three months of the year okay so a few years later nineteen sixty five big year for gerald outside that year has fun was up almost fifty percent of course the turnover one hundred twenty percent right so turnover of one hundred percent means. You held everything for a year. Basically like you sold every share you bought that year so he sold one hundred twenty percent implies and even shorter period right so one hundred percent turnover would be if you bought on january first sold on december thirty first every share and this one hundred twenty percent is like i don't i don't know maybe he sold it all by by november. Let's just say but really what what happened was. He's just constantly turning over daily by then by nineteen nineteen sixty-five gerald saone twenty percent of fidelity instead of picking is his successor to run fidelity et johnson picked his son ned johnson then who actually was a pretty good stock quicker to write in a bull market. Everybody looks good. Silence fidelity immediately started his own fund called the manhattan fund. It started with around two hundred forty seven million in assets the quote the biggest offering an investment company history end quote according to the new york times by mid sixty st eight. It had five hundred sixty million bucks in it. The fun didn't do so well that year though and si- sold his company to c._n._a. Financial corporation regime for thirty million. He got out of the top pretty smart a year later. It fell ninety percent that was closed <hes> so by december thirty thirty one thousand nine hundred seventy four near the bottom of brutal bear market. The manhattan fund had these single worst eight year track record of any existing fund at the time accumulative would've loss of seventy percent of all the capital that had gone into it while manhattan fund wasn't the only one there were other kind of gogo funds of the year. I remember one called. The enterprise fund was up like six hundred percent at the top and down by more than half or so at the bottom but cy was the most famous money manager of time he was really the first kind of celebrity financial major financial guy he would later lie to an institutional investor magazine interviewer when he said quote we had one bad year in nineteen sixty eight night been killed in the press ever since. I don't think it's fair dr and quote one bad year. How about the worst eight years ever at that time size gruden end there. He later worked for an insurance company that bought american can a tin can manufacturer and he turned that business into a financial services company called primerica. You may have heard of it primerica which he sold to a guy named sanford weill in nineteen eighty eight. It's the company that became came city group okay short short story there from primerica to citi group so you know size fingerprints are still on american finance today so that's the short version of how ed johnson and even more so gerald cy turn mutual funds you know this thing born out of the conservative a bit of boston yankee trustee culture into they turned it into toxic wastes into these rapid fire trading vehicles in in in the nineteen fifties and sixties so mutual funds began life in america as a conservatively managed sacred dacre charge of the prudent man the yankee trustee and they ended up as the new gogo mutual funds of gerald site irritating huge positions in highly speculative stocks trading in and out quickly and size manhattan fund was just the most famous and most disastrous example but there there were others said and you know they took these huge positions they weren't diversified and the brokers hated it but they couldn't not do it. Because <hes> you know cy was a big deal. He was the biggest thing in finance at that time that two hundred and forty seven million deal right that was the biggest deal is like fifteen percent of all the offerings that year in mutual fund so you know it was the brokers had to deal with them. They had to play along with these huge positions that he was taking even though they didn't like it because it looked dangerous to them <hes> and trade in out very quickly. It's just like the investment trust of the late nineteenth and early twentieth centuries and it's just like what they did into the thirty year mortgage with mortgage-backed securities and c._d._o.'s in the housing bubbles it housing bubble singular really have one of those wall street takes these conservative vehicles and turns them into toxic waste. Every year is a little bit different. Every bubble has its own characteristics characteristics and course today. What are we seeing today the very biggest bubble in the history of the world the global bond bubble label featuring at last count according to data compiled on bloomberg. They keep track of it. If you have bloomberg you can you can log in and get the latest chart art of the world's negative yielding debt. It's over sixteen trillion about sixteen point four trillion according to bloomberg it's insane. It can't end well. These things things never ever ever do the thing that worries me about this and of course i have to give credit where it's due wall street had less to do with this than central bank central banks did this when this on them of course they're clearly taking a page. I don't know did wall street. Take a page from them. Wall street was around before central banks right so <hes> at least before the federal reserve's early so i think we we have to say that <hes> the central banks take a page from wall street and turned you know the conservative -servative thing most of the negative yielding data sovereign debt and they've turned it into toxic waste guaranteed to lose you money if you hold it to maturity pretty insane insane. That's the rant for this week if you liked it or didn't like it or have a question or a comment right into feedback back at investor our dot com."