The More Things Change, the More They Stay the Same

    by Mark Hulbert

    What can you learn from three decades of monitoring investment newsletter performance?


    It was nearly three decades ago that the Hulbert Financial Digest (HFD) began independently monitoring the performance of investment advisory newsletters. I’m devoting this column to a couple of the most important investment lessons that emerge from the list of newsletters that dominate the rankings of top performers.

    The investment world today couldn’t be more different than the world that existed when the HFD set out to track newsletters, in mid-1980, at least on the surface. Back then, for example:

    • The Dow Jones industrial average stood below 900—lower than where it had stood in 1966, 14 years earlier;
    • Gold bullion, on the other hand, was just coming off a high of just under $900 per ounce—a record level that remains unbroken today, more than 27 years later (though gold is getting close);
    • Inflation was in the double digits, as was the interest rate on long-term government bonds.

    Given this stark contrast, it would seem that caution should be exercised in drawing any investment lessons based on which newsletters have performed the best since 1980. Why should anyone think that strategies appropriate to the investment world in 1980 would be appropriate today?

    But I would argue that a closer look shows that, on average, the period encompassing the nearly 30 years since 1980 is not really all that different than what came before.

    Down Memory Lane

    Imagine, if you will, that you have traveled back in time to the early 1980s, and you are perusing the data in the 1980 Ibbotson Associates yearbook. This firm was created in 1977 by Professor Roger Ibbotson, and its yearbooks of historical data have become a must-have for financial planners and advisers. Those yearbooks, of course, contain the year-by-year performances back to 1926 of stocks, bonds and Treasury bills, and inflation rates.

    What conclusions would you have reached? Here are two:

    • Over the period of 1926 through 1979 (the period that would have been covered in the 1980 yearbook), stocks provided a handsome return, in both nominal and inflation-adjusted term;
    • In addition, there was a healthy equity premium—that is, stocks outperformed bonds, compensating investors for the additional risk associated with investing in stocks.

    But these same conclusions hold for the period since 1980, as is illustrated in Table 1.

    To be sure, stocks in recent decades have produced higher returns (both in nominal and inflation-adjusted terms) than the returns they produced before 1980. But the real difference is not stock performance but rather bond performance—bonds did much better after 1980 than they did before. Because of this, the equity premium since 1980 has actually been less than the longer-term average, despite stocks themselves providing better overall returns.

    This stock/bond relative performance difference between these two long-term time periods indicates, to me, that any “lessons learned” from the list of long-term top performers would have questionable relevance to the future if any of those top performers were highly ranked because they were heavily invested in bonds.

    However, this is not the case—none of the newsletters at the top of the HFD’s rankings for performance since 1980 (see Table 2) derived a significant portion of their investment earnings from bonds.

    All of which leads me to be fairly confident in drawing the following lessons.

    Lesson 1: Long-term investors need not lose sleep over the markets’ short-term gyrations because the markets’ long-term patterns will eventually assert themselves.

    To be sure, I am under no illusions that my drawing of this lesson will change many investors’ behaviors. For whatever psychological reasons, many are obsessed about the short-term and therefore can’t imagine not paying it the closest of attention.

    What my data show, however, is that investors need not focus on the very short term to perform very well over the long term, thank you.

    Consider The Prudent Speculator, the newsletter in first place on the HFD’s ranking for performance since mid-1980. Of any of the newsletters I monitor, this service has been the most buffeted by short-term market gyrations. And yet, none surpasses it in its willingness to either ignore or tolerate those gyrations.

    Consider what happened to it in the crash of 1987, which just celebrated its 20th anniversary. On that day, according to the HFD’s calculations, the newsletter’s model portfolio lost 57%. And yet, far from panicking, Al Frank (the newsletter’s editor at the time) maintained his fully invested (and heavily margined) posture, patiently faithful that the stock market’s long-term uptrend would eventually win out. The newsletter’s long-term top ranking is a testament to that faith.

    Lesson 2: Worrying about the short term can work against you.

    Another lesson that emerges from my tracking of investment newsletters is related to the first: Constantly monitoring your investment performance can cause you to unnecessarily reduce the amount of risk you are willing to incur, causing your long-term performance to suffer.

    According to behavioral finance researchers, constantly looking at how your portfolio is performing is not a benign act. It leads you to focus more of your attention on the short term than you would otherwise, leading you in turn to miss the veritable forest for the trees.

    One researcher who has extensively studied this behavioral pattern, Richard Thaler of the University of Chicago, calls it “myopic risk aversion.” He hypothesizes that the more frequency with which an investor re-evaluates how he is doing, the more frequently he will experience loss, since any risky asset will not infrequently be exhibiting a short-term losing streak. No investor (except the occasional masochist) enjoys the experience of loss, and most investors prefer to avoid losses; therefore, this greater frequency of re-evaluation will tend to cause investors to own less risky assets and avoid stocks.

    To test this hypothesis, Professor Thaler and fellow researchers several years ago constructed an elaborate simulation that imitated the many decisions that investors make over their lifetimes. One group was able to look at how they were doing every month, another group every year, and the third group got to take a look just once every five years. Just as Professor Thaler hypothesized, the investors who re-evaluated their portfolio every month had the lowest average equity exposure.

    So, why does my own newsletter that reports investment newsletter performance come out monthly?

    It’s a good question. The problem, of course, is that I wouldn’t be in business if I had a subscription product that came out infrequently. But the tension exists nonetheless.

    One way I try to resolve this tension is by focusing my monthly newsletter on long-term performance. For example, none of the performance rankings in my monthly newsletter cover periods of less than five years. And most of my scoreboards cover much longer periods.

    My hope is that, in the very act of responding to investors’ desire for constant re-evaluation, I can get them to focus on the long term. After all, a ranking covering performance over the last five years, or especially the last 10 or 20 years, doesn’t change that much from month to month.

    Table 1. A Tale of Two Periods: Stock and Bond Relative Performance
      1926 to 1979 1980 to 2006
    Stocks (nominal) 9.0% 13.3%
    Stocks (real) 6.3% 9.7%
    LT gov't bonds (nominal) 3.1% 10.1%
    LT gov't bonds (real) 0.4% 6.5%
    Equity premium 5.9 percentage points 3.2 percentage points



    If investors nevertheless want to obsess about the short term, they can be my guest.

    But these short-term traders shouldn’t fool themselves into thinking that this obsession is necessary to build long-term health. On the contrary, it is probably standing in their way.

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

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