The Amazing Money Race

Everyone has seen the reality show, The Amazing Race. Couples compete against each other, racing around from one global location to another. During each leg of the race, they must complete different tasks, and beat the competition to the finish line. The last couple crossing the finish line, may be eliminated.

Mutual fund companies are no different. Each January, they start out on their Amazing Money Race, with the goal being to cross the December 31st finish line ahead of the competition and win a 5-star fund ranking in the new year's list of "must own mutual funds." But with a simple index fund outperforming most mutual funds over time due to fees, expenses and the decision making process, the fund manager must go to great lengths to get his mutual fund in the "must own" list.

In TV's Amazing Race, each couple is interviewed as they attempt to complete each leg of the race. The ones that are likely to be eliminated, seem to grab the majority of camera time during the broadcast as they make their plea to why they're falling behind, or how proud they are that they have come so far in the race.

In the Amazing Money Race, Mutual fund managers report their year-end holdings to their shareholders, include an annual commentary of the recent year, and outline their opinion of the year going forward. Shareholders have read the local after-Christmas papers, and know that the Apple Ipod was the hottest must-have Christmas present in 2004. They will quickly scan their report from their mutual fund manager, looking for the AAPL ticker of Apple stock. If they don't see it, they begin to wonder if they should sell that mutual fund. If the GOOG ticker of Google stock doesn't show up in the list of stocks held, the customer worries that their fund manager "doesn't get it." Everyone knows that Howard Stern inked a huge deal with Sirius, so the fund manager better have a boatload of SIRI in the portfolio. Lord help the fund manager who lists the tickers of Merck, Pfizer, or Sharper Image on their list.

We enter the final five trading days of 2004, with fund managers knowing that in order to win The Amazing Money Race, they must buy as much of the winners of 2004 as possible. They must dump as many of the 2005 losers as possible. No manager wants to explain to their shareholders that they missed the boat on Apple, or why they believe that Pfizer is a value play with a great dividend, even though the shares dropped a lot in price. They want to show that they're on the ball. They want to show that they own the hot stocks that everyone knows are only going up.

And thus, we have a historic trend during the last week of the year, where stocks that have done well during the year finish strong. Stocks that have done poorly, continue to fade.