THE BLOG
09/02/2007 04:23 pm ET Updated May 25, 2011

Who Has the Magic Bullet?

The quest for a financial guru who can deliver outsized returns is unending. How do you determine who (if anyone) has the magic bullet?

Robert Kiyosaki, of Rich Dad fame believes he has it. In a recent column, he predicted the secret to wealth: silver. He was unable to contain his enthusiasm. "I think this precious metal is about to become the most spectacular investment in recent history -- bigger than oil, even bigger than Google."

Before we all load up on silver, let's take a look at the track record of some other market gurus who were not reluctant to share their opinions with the investing public.

Jim Cramer does so with great panache every weeknight on Mad Money. His hyper-charged personality and antics ("boo-ya" comes to mind) have made him a cult figure with the college crowd and with older investors as well.

Barron's studied 1,300 of Cramer's market picks over the past two years. It found that the stocks he touted rose 12 percent, which was pretty dismal since the DJIA increased 22 percent and the S & P 500 was up 16 percent during the same time period.

So much for Mr. Cramer's stock picking ability.

What about hedge funds? Over $1.5 trillion of the most sophisticated money in the world is invested in these funds. The government of China recently announced that it was committed to increasing its investments in hedge funds. Surely, the managers of these elitist funds (and there are thousands of them) must have the key to financial success.

Apparently not. An exhaustive study for the 12-year period 1994-2005 found that "the overall performance of hedge funds as an asset class is about the same as that of U.S. equities (S & P 500)."

The authors of another study, which reached the same conclusion, explained why hedge funds are failing to deliver better than market returns:

"Is it therefore likely that suddenly we are facing a whole new breed of super-managers; not one or two, but literally thousands of them. Of course not! And, if anything the rise of the hedge fund industry has made global financial markets even more efficient, not less."

Investors in hedge funds have to meet net worth requirements. Many funds require a minimum investment of $1 million or more. And the fees are off the wall, starting at 1-2 percent of the amount invested, plus 20 percent or more of the profits of the fund.

It is not only wealthy investors who have flocked to these funds. The 200 largest pension plans increased their "alternative investments" from 5 percent in 1995 to almost 10 percent of their total investments in 2005.

In stark contrast, any working stiff with $3,000 could have purchased the Vanguard S & P 500 Index Fund (VFINX) with an expense ratio of 0.18 percent. That is a cost of less than one-fifth of 1 percent. The results of this investment would have been, on average, the same as those achieved in exclusive hedge funds made by the country club set.

It is doubtful that the well publicized hedge fund disasters of Bear Stearns, Goldman Sachs and others will deter those who continue to look for the magic bullet.

So, is Mr. Kiyosaki's prediction that silver is the pathway to financial riches correct? Only time will tell. Be aware, however, that silver has sharply escalated in price from a low of $4.30 per ounce in 2001 to its current price of $12.06.

If he is correct, it is not because he has the magic bullet. Before you follow the advice of this (or any other) self-styled financial pied piper, remember that the second part of the title of his most famous book is Poor Dad.

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