started his own money management firm. He hyped it as "conservative value" and entirely fabricated an outstanding eight-year record.

Did anyone, including a number of consultants, question his num-h)ers? Heck no. The fantasy performance built him a nice business.

Or take a recent group of small-cap stock-pickers who started their business after several years as marketers for another firm. None had the experience they claimed. These fellows launched their firm with a mouthwatering record, litde of which was theirs. What they did was to "simply borrow" the excellent performance record of the firm they had previously worked for. Even several large consultants didnt Ixjther to check, until made aware of the problem by anxious clients. Their performance was a disaster.

Its not only the out-and-out frauds that can suck you in. As my friend Halligan also observed, everyone has a winning streak. At some point the canny manager can get coverage from naive reporters who fail to note that the performance owed its sizzle to a handful of risky stocks- while over three to five years the results were near the bottom of the barrel.

Checking the performance numbers of money managers is harder work than for mutual funds, where the figures better be good or its "go direcdy to jail." The SEC has issued detailed rules for how a manager must calculate performance, and most firms with assets of $1.5 billion to $2 billion or more are audited regularly. Still, the unscrupulous manager can, in effect, keep "two sets of books." One for marketing and the other, the real performance numbers, for SEC audits. (This was the technique of the former junior oil manager I discussed earlier.)

Short of outright lying, investment managers can do other cute things with dieir figures. One prestigious "white-shoe" firm sent a letter to many of our clients a few years ago claiming their style easily beat our firms low P/E investing record and backed the claim with an impressive chart.

Curious, I read the footnotes and found that the record was not one investment style but a blend of carefully chosen methods, ranging from foreign to momentum to growth, with the portfolio heavily weighted in the style that had the best performance in a given year. Call it "hindsight investing."

The final numbers game is played by some prominent national consultants. They offer their clients multimanager investment packages for value, growth, momentum, and various other performance styles. The managers they show you naturally knock the socks off their peers. What die consultants dont tell you is that they prepackage the managers with the h)est records at a given time-again, selection by hindsight.

The moral: Dont just take somebodys word for it. Ask for audited ten-year numbers for each of their managers. Find out whether they are the same team used three to five years back. If you hear a gulp, its time to move on. A few hours spent researching records and asking for the performance of representative portfolios can save you big bucks.

In this chapter, we looked at the facts and myths of investing in small-sized companies, the Nasdaq follies, as well as a number of other ways even astute investors can get blindsided. In the next we will ask how much the opinions and beliefs of groups of investors we respect can influence our investment decisions-invariably for the worst.

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PSYCHOLOGY AND MARKETS