Jail the Beardstown Ladies!

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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.