Lessons of the Last Quarter Century: Tie Yourself to Your Strategy

    by Mark Hulbert

    The completion of a quarter century of the Hulbert Financial Digest’s (HFD) tracking of investment newsletter performance has already been the occasion for the drawing of many lessons.

    The lessons that have been drawn most frequently have to do with the low proportion of newsletters—about one in five—that have been able to beat a buy-and-hold strategy in the stock market. That is an important lesson, to be sure, since it defines the odds of success that prevail when trying to beat the market. Investors forget or overlook the poor odds at their own peril.

    But the lesson I want to focus on for this column has to do with the diversity of investment approaches at both the top and the bottom of the newsletter rankings. This lesson also has a crucial corollary concerning those traits that are held in common among the newsletters that are ranked highest.

    The Results of 25 Years

    Table 1 lists the 25-year records of those newsletters for which the HFD has performance data extending back to mid-1980. The returns were calculated according to the HFD’s standard methodology, which calls for executing all transactions on the days that subscribers would actually be able to act on a newsletter’s advice, and debiting returns for transaction costs (such as bid-asked spreads and discount brokerage commissions).

    You will notice that only 13 newsletters are on the list. The table doesn’t include every one of the services that have existed continuously over the last 25 years, but it includes most of the prominent ones. The number is small because almost all of the newsletters that are published today did not exist 25 years ago. And most of the newsletters that existed 25 years ago are now defunct.

    Although it is always dangerous to generalize on a sample size of 13, this sample is nonetheless representative in several ways. For example, the proportion of newsletters that beat the market is quite similar to the proportion of the larger universe of mutual funds that have done so over similarly long time periods. And although the top-ranked newsletter’s return is modestly higher than that of the top-ranked mutual fund, the difference is not large.

    More Than One Road to Riches

    The primary lesson I want to focus on in this column is that there is no one investment approach that works equally well at each stage of the market cycle. At both the top and the bottom of the rankings you will find newsletters that are market timers, for example. But at both ends of the spectrum you will also find newsletters that pursue longer-term buy-and-hold approaches.

    The same can be said of many of the other great investment debates, such as that between fundamental and technical analysis, growth stock investing vs. value stock investing, small cap vs. large cap, and momentum vs. contrarian.

    This lesson seems fairly innocuous at first glance, but in fact is quite profound. It means that in the right hands, almost any approach can work, and in the wrong hands it will not work.

    And that implies investors should focus less on strategy and more on whatever else the top-performing advisers do to transform a particular approach into a successful strategy.

    The Ingredients for “Success”

    What is this “something else”? After closely studying investment newsletters for 25 years, I have come to the conclusion that it is the patience and discipline to follow a strategy through those (hopefully short-lived) periods in which it is out of synch with the market. Without this patience and discipline, advisers are tempted to second-guess their strategies at the first signs of market-lagging performance. They sell stocks they should be holding and buy stocks that have run up too far and would probably better be sold. In addition, their constant second guessing greatly increases transaction costs.

    Perhaps investors should turn to Greek mythology for an allegorical prescription of what to do: Emulate Ulysses’ behavior when he was about to sail within hearing distance of the Sirens.

    In Greek mythology, the Sirens lured sailors by their songs to cast themselves into the sea. Ulysses had his men tie him to the mast so that he would be able to resist the Sirens’ songs.

    One big lesson of the Hulbert Financial Digest’s 25 years, in my humble opinion, is that investors should figure out the investment equivalent of Ulysses’ behavior.

    Tie yourself to your chosen approach—whether it be through mechanical rules or dogged willpower—and don’t let the Siren song of the market-of-the-moment lure your portfolio underwater.

    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; www.hulbertdigest.com. This column appears quarterly and is copyrighted by HFD and AAII.

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