Believing Performance Claims: A Triumph of Hope Over Experience
by Mark Hulbert
I am constantly bombarded with questions about investment advisers that my Hulbert Financial Digest (HFD) has not been monitoring.
Inevitably, the inquiries focus on alleged performance that is tantalizingly good—so good, in fact, that even if actual performance were only half as good, it still would justify our immediately allocating all our investment portfolios to following the adviser or strategy in question.
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My reply is always the same: Don’t believe it.
To be sure, it is theoretically possible that the adviser or strategy over which I am throwing cold water has discovered the key to understanding the financial markets once and for all. More likely, however, is that the adviser is analogous to Joe Granville, editor of the Granville Market Letter, who called several market turns correctly in the early 1980s, bragged that he should receive the Nobel Prize in economics for unlocking the mystery of the markets, and subsequently became the worst performer of any the HFD has been tracking over the last three decades.
Of course, I wish that the HFD were a large enough organization to track every adviser, strategy, software program, day-trading system, and so forth that exists. In that case, you could compare any conceivable advertising claim to what the HFD has independently been able to verify.
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Discussion
I sure wish you had included Buffett's risk adjusted rate of return over the 30 years. I suspect it might really prove the rule to which you refer.
posted 4 months ago by Arthur from California
Unfortunately, human nature being what it is, there is that group of investors who will flock to the "high return" investments without taking the time to analyze the foundation for such reports. Further, I have never been able to reconcile the rate of return on my mutual funds annual statements from with the return rates as listed on the funds' websites and independent evaluators, such as Yahoo Finance, et al. I suspect mutual funds are doing much more than is reported.
posted 4 months ago by Stephen from California
As a new member to AAII, the inital information sent to me indicated that the Model Shadow portfolio has averaged a 20% return over the last 10 years! After reading the article by Mark Hulbert, I wonder!
posted 4 months ago by Roger from Washington
Roger, the Shadow Stock Portfolio invests in value-oriented, small and micro-cap stocks. Because these stocks are often mispriced, they tend to be more volatile and have better long-term performance than the stocks owned by most newsletters and mutual funds. This factor helps the Shadow Stock portfolio achieve returns not otherwise available to other investment strategies. You can see a detail of the year-by-year performance for the portfolio at http://www.aaii.com/model-portfolios/stock-annual. -Charles Rotblut, AAIII
posted 4 months ago by Charles from Illinois
Roger, to add to your comments, what about the AAII stock screens that I've been following? Some of them have returned an average annualized return of 28 or 29% since 1998, and that is pretty impressive seeing as how that includes the "Great Recession" of 2008-2009! I am also a very skeptical investor but I have looked over AAII's numbers and they are accurate. I realize that if one actually invested (as I do) in the screens, then you lose a little each trade due to bid/ask spreads, timing, and things like that, but you can certainly do better than 15% per year.
posted 4 months ago by Jeff from Colorado
Many of us have exceeded the 15% max - for a short period. I would be happy to have a reasonably assured 15%. A question: If I follow the Super Stock system, but decide to sell a Group 4 stock that has not done well, how do I select a replacement Group 4 replacement?
posted 4 months ago by William from Alabama
Hulbert is right. Any system that exceeds 15% will eventually flame out including AAII screens. 10 years is just 10 years and past performance is no guarantee of future performance. There are some interesting independent reviews of AAII screens that can be googled.
posted 4 months ago by Peter from Washington
William-We monitor the holdings in the Stock Superstars Report and will replace them when they violate one of our sell rules. If you want to pick a Group 4-type stock on your own, you would look for a growth stock that is trading at a reasonable valuation with rising earnings estimates. -Charles Rotblut, AAII
posted 4 months ago by Charles from Illinois
I've followed Mark Hulbert for a long time and have in general been displeased with the scientific rigor of some of his arguments, although he's improved a lot over time. I agree with every word of this article, though, having been one of the "hope springs eternal" people he refers to. I've spent a lot of time & money proving myself wrong, including analyzing & using the Shadow Stock & SIPRO screens.
posted 4 months ago by Britni from California
