Morningstar's Fair Value Vs. Bobo

February 27, 2008

Bobo, our favorite dart-throwing chimp, typically only makes his stock selections known to Jim. But after Morningstar released the following statement today, he couldn't wait for our fearless leader's return from vacation.

The announcement in question was the following: "Our new analyst reports mark a novel approach to evaluating ETFs. We're harnessing the research that our 100-plus equity analysts conduct in order to estimate the fair value of stock ETFs."

It continued: "By comparing our fair value estimate for an ETF's portfolio with the fund's market price, we can better gauge whether an ETF is cheap, dear, or reasonably priced. In so doing, we can help you profit from inviting opportunities as they arise."

Timely and instructive, eh? Not to Bobo, who tells me he's tinkering with his own value-minded approach.

First, he tried breaking all of a portfolio's names into value and growth camps. Then, he looked at weightings and came up with whether an ETF's selling at a discount or premium to its fair market value.

Next, he ranked each one via asset class categories as to their current market ratings. Bobo selected his top 10 ETFs and put them together into an all-ETF portfolio.

Finally, Bobo threw 10 darts at a board full of names of 600-plus ETFs and selected those for a portfolio. He'll get back to us in a few years as to which one performs better.

My Aunt Sadie has another idea. She invests her money by stashing bills under an old mattress. Her notion is to wait until the market crashes, then put everything into SPY. She calls that the ultimate in value investing.

My Uncle Lou has an even better idea. He picks up the phone book and randomly calls advisors. He says about three out of every five say they're value-minded. Uncle Lou manages to pull a few names out of a lot of them and then posts the winners on a bulletin board.

Uncle Lou is also fond of Bobo's final screening method. But he prefers a paint gun to darts.

Personally, I wonder why if people want to worry so much about fair values at any given point in time in a fund portfolio, why they just don't use closed-ended funds. Isn't that what they're designed for? And there's no doubt whether they're selling at a discount or premium since it's a closed-end market ...

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