Mark Hulbert is the founder and chief honcho of Hulbert Financial Digest. He’s been tracking investment newsletters for almost 3 decades. In addition, he is a columnist for Marketwatch, and a contributor to both the Sunday NYT business section and Barron’s.
I’ve long appreciated his rigorous approach to markets, analyzing data, and working off of specifics, rather than emotions.
Last week, he had a Barron’s column that was quite informative. He analyzed which strategies have worked over the years, and which have not. From that, Hulbert noted that several important investment lessons could be drawn.
Here are the highlights:
"Certain investment truths are timeless enough to transcend the year-to-year, or even decade-to-decade, cycles of the various financial markets:
Lesson #1: Returns in excess of 20% to 25% annualized are unsustainable.
Every newsletter Hulbert monitors that has ever gained more than 100% in any given year has suffered through other years in which it produced big losses. Clearly, regression to the mean is a powerful force in the investment advisory arena.
To be sure, Warren Buffett, chairman of Berkshire Hathaway, has
outperformed the best-performing newsletter and mutual funds. Since
1980, the net asset value of Berkshire Hathaway has grown at an
annualized rate of around 22%. But even Buffett has had weak years, under-performing in the late 1990s when Tech was king.
Lesson #2: There is more than one road to riches
Hulbert looks at these intractable investment questions:
• Is fundamental analysis better than technical analysis?
• Is successful market timing possible?
• Is buy-and-hold better than in-and-out trading?
After studying Newsletter writers for twenty-seven, he notes he is "no closer to answering these questions" than when he started. However, he did discover the following:
Over the last 27 years, the top performing newsletter advocates the long-term buying and holding of good quality stocks. No surprise, considering that 20 of the 27 years were a bull market.
But consider that the second-place newsletter involves a combination of both fundamental and technical analysis, as well as market timing. The average holding period of its recommended stocks is less than six months. And in third and fourth place are newsletters whose approaches are based exclusively on technical analysis.
Lesson #3: Discipline is the premier investment virtue.
What is the difference between success and failure? I believe the answer is discipline.
Discipline is what keeps us from reacting impulsively and emotionally to what happens in our portfolios. It is a willingness to stick to a strategy during those temporary times it may be out of synch with the market.
Lesson #4: Past performance is a helpful guide to picking an adviser — if it is measured over a long-enough period.
Consider what happened if you chose to follow the five newsletters in January 2000 which, had the best performance over the trailing 12 months. (Or, you could have bought the top performing mutual funds). Four of those five newsletters still exist today, and their average return over the last seven and one-half years has been minus 2.9% on an annualized basis. The fifth of these newsletters was discontinued in mid-2002; at that time, its return since January 2000 was minus 39.6% annualized.
The bottom line? In my opinion, the random walkers are close to being right when performance is measured over the shorter term. But they become wrong in important ways when returns are measured over the very long term.
Very interesting stuff. Thanks, Mark.
Getting More Out of Lessons
Barron’s, Tuesday, July 3, 2007