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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Mark Hulbert is editor of the Hulbert Financial Digest, a newsletter that ranks the performance of investment advisory newsletters. It is published monthly and is located at 5051B Backlick Rd., Annandale, Va. 22003; 703/750-9060.
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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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Even absent that perfect world of third-party verification of all advertising claims, however, it is possible to subject any investment performance claim to a reality check. In this column, I review a number of rules of thumb that I have distilled from the HFD’s 32 years of monitoring more than a thousand distinct investment portfolios.

Maximum Realistic Long-Term Return

Perhaps the most important rule of thumb to remember is that stellar short-term returns do not last. The maximum sustainable return over very long periods of time appears to be around 15% annualized.

This knowledge immunizes you to the otherwise alluring claims of performance well in excess of this level. It allows you to know that one of two things must be true about the adviser or strategy making such a claim: Either the performance was turned in over too short a period of time to be a reliable guide to the future, or the claim was false.

Interestingly, it matters relatively little which of these two possibilities turns out to be the true explanation. The correct course of action in either case remains the same: Run, not walk, the other way.

Figure 1 supports of the notion that 15% annualized is the maximum realistic return you can expect over the long term. It reports the return of the top-ranked mutual fund and investment newsletter over various periods of time. Notice that, by the time the measurement period extends to 20 years and more, the best returns are remarkably close to the 15% threshold to which I have been referring. (The equity mutual fund with the best 30-year record, according to Lipper, is Fidelity Select Health Care [FSPHX], with a 14.8% annualized return through November 30, 2011. The best performing investment newsletter, according to the HFD: The Prudent Speculator, with a 14.7% annualized return.)

To be sure, Warren Buffett has done better over the last three decades than 15% annualized. In fact, Berkshire Hathaway’s book value since 1980 has grown at a 20% annualized rate.

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But, I would submit, Buffett is the exception that proves the rule. What are the chances that the adviser whose investment ad you have just received is going to be the next Warren Buffett?

In any case, notice that even Buffett—widely assumed to be the most successful investor alive today—didn’t make more than 20% per year. Many of the outrageous investment advertisements that come across my desk claim returns well in excess of “just” 20% per year; some claim returns in the triple digits, and a few even more than that.

Related Rules of Thumb

Knowing that returns in excess of 15% per year over the long term are vanishingly rare should be all you really need to protect yourself from outrageous advertising. But hope springs eternal, especially since it’s theoretically possible to do a lot better and it is therefore impossible to be absolutely certain that a particular adviser or strategy hasn’t lived up to what otherwise appears to be exaggerated performance claims. Even though believing such claims almost always represents a triumph of hope over experience, I present a few additional rules of thumb for those who nevertheless succumb to the temptation.

One such rule is to be on the lookout for advisers who pick and choose past periods in order to truthfully report performance that is misleadingly good. Since even stopped clocks are right twice a day, advertisers usually have no difficulty finding some period in which their clients looked like geniuses.

Advertisers who are guilty of this sleight of hand rarely report the time period over which they are reporting performance. Instead, they only vaguely or ambiguously report that period, referring to it with phrases such as “recently” or “over a recent three-year period.” Such phrasing is usually a dead giveaway that the advertiser is not providing you with the full and unvarnished truth.

Another trick is when the performance period doesn’t encompass the entire time that the adviser has been in business.

Consider the investment newsletter that has one of the very best returns over the last five years in the HFD’s ranking. That fact is impressive enough, as far as it goes. But the newsletter in question has been around for decades, and its long-term return is far more dismal. Over the 30 years through November 30, 2011, in fact, it lags a simple buy-and-hold strategy by more than three percentage points per year on an annualized basis.

To immunize yourself from this trick, do some digging to see how long the adviser has been in business—and insist on seeing performance over that entire period.

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Finally, another trick can still be played: Reporting only one of several portfolios that were simultaneously maintained by the same adviser or investment manager.

This has become a bigger problem in recent years through the proliferation of multiple portfolios. Some of the newsletters monitored by the HFD now offer more than a dozen portfolios, and some investment software programs offer several hundred different portfolios. With that many portfolios, of course, it is relatively easy to find one that has genuinely had stellar long-term returns. But that doesn’t necessarily mean that the adviser is worth following.

To immunize yourself from this trick, do your homework and find out how many different portfolios or approaches the adviser has recommended, either now or in the past.


You’ve heard it countless times, but it remains very good advice nonetheless: If an advertisement makes an investment strategy appear too good to be true, it probably is.

Mark Hulbert is editor of the Hulbert Financial Digest, a newsletter that ranks the performance of investment advisory newsletters. It is published monthly and is located at 5051B Backlick Rd., Annandale, Va. 22003; 703/750-9060.


AKessner from California posted over 2 years ago:

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.

Stephen from California posted over 2 years ago:

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.

Daniel from Massachusetts posted over 2 years ago:

I made a 90% return recently.

Roger from Washington posted over 2 years ago:

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!

Walter from Pennsylvania posted over 2 years ago:


Charles from Illinois posted over 2 years ago:

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 -Charles Rotblut, AAIII

Jeff from Colorado posted over 2 years ago:

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.

Patricia from North Carolina posted over 2 years ago:

Thanks for an interesting article.

William from Alabama posted over 2 years ago:

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?

Peter from Washington posted over 2 years ago:

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.

Charles from Illinois posted over 2 years ago:

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

Britni from California posted over 2 years ago:

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.

alpha mean from New York posted about 1 year ago:

Does the AAII Shadow Stock Screen performance take into account transactions costs and expenses i.e. taxes etc.?

David Hester from Tennessee posted about 1 year ago:

I notice the volatility of the Shadow portfolio is significantly higher that of the Vanguard small cap index. For instance, it would take a staunch investor to "keep the faith" and hang on thru the 50% drop in the 2007-2008 time period (see Model Shadow Stock Portfolio Reaches an All-Time High
by James Cloonan ). The big returns of the Shadow Stock Portfolio appear to come at the price of assuming considerable risk. I would advise any investor (myself included) to know well your risk tolerance before following this portfolio.

John Samsell from Washington posted about 1 year ago:

Read:__Don't Count On It_ By John Bogle

John is the founder of Vanguard and he gives one insight into the projected returns in the " Mutual Fund" industry. He explains alot of what is being chatted about.

Randall Wall from Washington posted about 1 year ago:

Some of the discrepancy is probably due to the fact that investors don't usually deposit money on Jan. 1st, and measure only until Dec. 31st. If you want to be able to accurately measure your returns, taking into account inflows and outflows, I highly recommend Investment Account Manager from Quantix, which AAII has reviewed more than once.

Randy Wall, MBA, CFP®

George from Texas posted about 1 year ago:

Does anyone know of a convenient source of annual performance returns by year ( say last 20 years) along with corresponding volatility ( e.g. standard deviation ) that one could compare the leading mutual funds and self directed portfolios with?

Agree past perfomranc is no assurance of future results;however, when investing for long haul what else does one use to guide investmetn of retirement funds ?

Hitesh Patel from Pennsylvania posted about 1 year ago:

I would like to thank you Mr Hulbert for the insightful article and your great work with HFD.

I personally like to calculate R-Multiple of the return, instead of absolute return of the portfolio as guided by Mr Van Tharp and it gives me a good perspective of What I am in market for.

But I do follow your argument that at the end of the day Dollar amount counts and return beyond 15% in Long term is TOO DIFFICULT.

Harold Skelton from Maine posted about 1 year ago:

If you line up 100 advisers or screens and they all flip a coin once a year, 50% of them will come up heads, representing better than market returns. Do it once a year for a decade and when you're done 4 or 5 will have flipped heads 10 times in a row. After 15 or 20 years, you may still have one or two very lucky participants who flipped heads 15 or 20 times in row. It's the laws of probability at work. It doesn't mean they have any greater insight into the market than anyone else. If you want to bet the farm on a coin toss, it's your choice, but it's more logical to rely on reducing risk by appropriate diversification and long-term investing and to expect to profit from the market's long-term upward trend resulting from growth in the economy.

Vaidy Bala from posted about 1 year ago:

After I read all comments, I feel the individual investor weigh in the risks and benefits; there is no single expert /method that guarantees 20 % return annually. Re: Warren Buffet his daughter in law reveals much of WB wealth came from merger & acquisitions, this is a huge gain. This is where WB steady about 20 return came not from any stock investment. M&A is not referred in AAII site, I suppose someone will review in future.Good to remember this fact.

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