Performance Guides: The Longer the Track Record, The Sharper the Image

by Mark Hulbert

The bear market that began in March 2000 may have been devastating to many investorsÂ’ portfolios. But it did have at least one silver lining: It provided the ultimate test of whether performance-monitoring systems can separate advisers with genuine ability from those whose past returns are attributable to nothing more than luck.

This silver lining exists because, during bull markets, even advisers with no ability can look like they know what they are doing. This is the origin of the sage wisdom on Wall Street not to confuse brains with a bull market.

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For example, when the stock market was performing as well as it was in the 1990s, more than a handful of advisers were producing regular annual returns in the high double digits. Not all of them were geniuses. But how was an investor to know which ones were truly worth following?

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