Jail the Beardstown Ladies!

By Daniel Kadlec

They came across my desk bing, bang, boom: three books that, years from now, may prove to have been the clearest sell signal ever missed. It was spring 1996, and, yes, the stock market has been levitating since then. Sometimes sell signals are early. The first book was by David and Tom Gardner, a brother act in jester hats with the catchy title of Motley Fool Investment Guide. The second, The Whiz Kid of Wall Street's Investment Guide, was by Matt Seto, 17. The third was the now infamous debut, Beardstown Ladies' Common-Sense Investment Guide, by a 14-member investment club from Beardstown, Ill., a lovable but math-challenged gaggle of stock-picking grandmas.

This is what the bull market hath wrought: two jesters, a teenager and a band of recipe-reciting septuagenarians as market heroes. Well, last week one bubble burst. The lovable ladies were unmasked as frauds--unintentional, mind you--but frauds nonetheless. Five books, hundreds of speeches and dozens of national-TV appearances later, Chicago Magazine challenged their claim of earning compound annual average returns of 23.4% in the 10 years ending in 1993.

Undeterred but under pressure, the ladies went to Price Waterhouse for an audit and discovered that their actual return was a sickly 9.1%--far less, according to Lipper Analytical Services, than the Standard & Poor's 500 average annual return of 14.9% or even the average general-stock-fund return of 12.6% during that same period. Updated through 1997, the audit shows that the ladies have picked up some slack, earning an average annual return of 15.3%. But that still lags the comparable S&P 500 figure of 17.2%, though it's better than the average stock-fund gain of 13.8%. It should be noted, however, that beating the average stock fund is no harder than beating the Chicago Cubs. Nearly everybody does it.

The ladies, who for a while thought they might have been counting annual club dues as investment gains (they weren't), evidently were making incorrect entries into their computer. Nobody double-checked the math. Poof! There goes their mystique, and possibly the lucrative cottage industry they had developed. Their first book, which mixed down-home recipes for the likes of Kentucky cream cake with investment tips, had that Warren Buffett-like 23.4% emblazoned across the cover. It sold 800,000 copies.

So far, their publisher, Hyperion, is standing by its investing women. A sixth book is in the works. And the ladies' speaking engagements continue. In fact, an appearance last Wednesday drew more fans than could be seated, according to Sheilagh Mylott, the ladies' spokesperson. In the end, though, performance counts. Grandmotherly advice is only invaluable so long as it beats the market.

Spurred by the fiasco, I thought I'd check on the authors of the two other tomes that came my way in a bullish burst two years ago. Seto is now a third-year undergrad, majoring in economics at the University of Michigan. His father tells me he is doing wonderfully, running the Matt Seto Fund. I could not reach the younger Seto. He's traveling overseas, but if he's still cranking out the 34% his book cover promises, he's the one who should be publishing more books. Still, it is unrealistic for most people to expect these kinds of returns year after year.

The Motley Fool is a different case. The Gardners invest in a wildly popular public forum www.fool.com) and have always posted their results. Why not? They've been spectacular over the long term. But not lately. The Fools lagged the market in '97, and are below par again this year. They too, by the way, say it's no big deal to get average gains of 30% a year, indefinitely.

The great bull market has created a lot of experts like the Gardners, the Beardstown ladies and Seto. But the attraction of stocks--even if overhyped--has also transformed many just plain folks into sophisticated, independent investors. Thank the Beardstown ladies, for example, for the explosive growth in investment clubs, which have doubled in the past three years to 36,000, and are forming at the rate of 40 or so a day. Kenneth Janke, president of the National Association of Investors Corp., says the average club starts with 15 members, only one of whom has any investing experience. But after five years, all but one are investing outside the club. That's good.

Not so good, though, are the high expectations being promoted. If beating Wall Street really were that easy, the ladies would never have fallen. (Can they get up?) That's not to say individuals can't beat the market. You really do have the advantages of time and unique insight into businesses around you. You also have the Internet to enhance access to news and company filings. Use it. And even if you don't beat the market, odds are that any sensible collection of stocks will beat inflation and Treasury bonds over a long period. But don't bank on 25% or 30% a year when the long-term market average is only 11%. And buying Wal-Mart just because the parking lot is full has become a quaint cliche. It might have worked for Peter Lynch in the '80s. But the Beardstown batch tried it in the '90s and discovered yet another recipe--the one for crow.

TIME's Daniel Kadlec can be reached at [email protected]