What Really, Really Works On Wall Street
What a difference two decades makes.
Mark Hulbert was a former philosophy student from Kansas, when I met him. He had recently come back from advanced study at Oxford, where he had been a contemporary of Bill Clinton.
He had the demeanor of a philosopher – with wire rimmed glasses, blue jeans, and a careful, though light-hearted, conversational manner. He looked like someone who had actually read Kant and Wittgenstein. Maybe it was the cut of his hair that betrayed his philosophical tendencies. Or maybe it was just the quizzical way in which he addressed every thought that passed his way.
“Mark,” I asked him one day, when we shared an office “can you change the paper in the printer?”
“Into what?” he replied.
Later, I asked him if he would like to write a newsletter. The idea would be to track the performance of other investment newsletters.
He agreed to do so and has been at it now for the last 20 years. In fact, the fruits of 2 decades of this work appeared this month in a brief article in the journal of the American Association of Individual Investors.
In early 1980, Mark selected 26 of the leading investment newsletters of the day and began to construct model portfolios based on their advice. There has been much controversy around this effort – Mark has been threatened with lawsuits often – because the advice given is often ambiguous, or simply very difficult to follow in a methodical way. Mark must apply certain rules to make it possible for him to compare the investment advice of a great number of quirky, idiosyncratic writers.
One point of contention, for example, was Mark’s decision to treat a “hold” as a “sell.” The two produce, of course, vastly different outcomes…but they are logically the same. You are either long a stock or you are short. You either think it is worth buying at present prices, or you think it should be sold. A “hold” is merely the lazy ground in the middle, when you are not sure what to do or when you have a loss that you do not care to recognize. But a new subscriber to an investment letter has to decide whether to take the recommendation as a buy or a sell…or ignore it. The ‘hold’ gives him no useful advice.
Newsletter gurus were so upset at this that there was, at one point, an effort to get up a class-action suit against Mark. One publisher told me that he thought what Mark was doing was misleading and unethical.
One of the most colorful personalities in the newsletter business was a guy named Bob White, author of the The Duck Book. White was a paving contractor from Florida who somehow got in the business of writing a financial newsletter. He cut a sharp, though ridiculous, figure in the industry – wandering around in his blue jumpsuit, threatening people, and pushing various conspiracy theories.
He believed, for example, that the Bank of England was engaged in a plot with the Federal Reserve to destroy the dollar. Spotting a BOE official on a flight from London, Lord Carrington, I think, White went up to him, pointed his finger at him and declared:
“I’m on to you, Ol’ Buddy, and I’m not going to let you get away with it.”
Lord C. must have thought he had a raving lunatic before him. Which he did.
Bob White met Mark Hulbert at an investment conference…and then came up to me, and said of him,
“Nice kid…but not much upstairs.”
But rarely, if ever, has a newsletter complained when Mark’s analysis showed him producing above average profits for his followers.
So what do the figures show? Whose advice really paid off for subscribers over the last 20 years?
First, it should be pointed out, that many of the original newsletters Mark followed went out of business. There are only 16 left. Of those only 2 outperformed the Wilshire 5000 on a risk-adjusted basis.
The Wilshire 5000 grew at an annual rate of 17% during the last two decades. Few people were able to beat it. Those who did were, not surprisingly, those who invest unflinchingly in stocks.
Al Frank’s Prudent Speculator is at the top of the list – with an annual gain of 20%. Next is Dan Sullivan’s “The Chartist” at 18.4%.
Meanwhile, at the bottom of the list is Joe Granville, another colorful character. Joe was at the height of his glory in the early 80s. He was the George Soros and Abbey Cohen of the day. Word that he was buying or selling could move markets.
He was, and still is, also a great showman. He would drop his pants during a speech – to show ‘the importance of shorts.’ In one episode, he had a board painted blue and placed just beneath the surface of the water in a pool. Then, he strode across the pool – to prove that ‘he walked on water.’
Yet, following Granville’s advice during the last two decades would have left you penniless. In an average year, you would have lost 22% of your money. Over two decades – you would be wiped out.
Many of the old-timers in the newsletter business were gold bugs and stock bears. Because the big trend of the 70s had been the rise of hard assets – and the fall of paper ones. The lesson they had learned was to mistrust paper – and stay long gold.
Granville remained bearish throughout the greatest bull market of all time. It was a consistent, but costly, position.
But now, a new lesson has been learned – that you cannot trust gold…and you must stay invested in paper. So persuasive has this new 20-year curriculum been that even many of the former gold bugs of have become convinced.
Personal Finance recently reported Granville’s current position. He’s become a stock bull: “[F]urther evidence indicates a new bull upleg,” he says…”nothing has broken the bullish pattern of rising bottoms…”
The same issue of PF shows another fair weather friend of gold who has kicked the hard stuff in favor of some very soft paper. Mark Skousen is buying the dips. He says the Nasdaq decline “provides us with the biggest buying opportunity in years.”
Harry Dent, meanwhile, goes completely over the top with his “bare minimum” targets for the Nasdaq of 30,000…possibly 45,000…by 2008.
“There is one characteristic,” writes Mark Hulbert, summarizing the conclusions of two decades of work, “that I have discovered that does distinguish the top performers: discipline. They were willing to stick to their strategies during the discouraging interludes in which they were lagging the market or even losing money. In fact, I think the importance of discipline may be the most important lesson to emerge from my 20 years of tracking investment newsletters. It is what keeps us from dumping a good long- term strategy because of short-term underperformance.”
Paris, France June 14, 2000
*** Two important news stories met investors on Tuesday. But only one of them will turn out to be true.
*** “The remarkable surge in the availability of more timely information in recent years,” said ‘Easy Al’ Greenspan yesterday, “has enabled business management to remove large swaths of inventory safety stocks and worker redundancies.”
*** “Most of the gains in the level and the growth rate of productivity in the United States since 1995,” he continued, “appear to have been structural, largely driven by irreversible advances in technology and its application.”
*** The chairman of the Federal Reserve System is apparently not yet reading The Daily Reckoning. He seems blissfully unaware that the productivity numbers are both unremarkable and unreliable. In fact, he said that those who question the BLS numbers were “cynical.”
*** But there was nothing cynical about Wall Street’s reaction. The rosy remarks of the Fed chairman were greeted with applause on Wall Street. The Dow rose 57 points and the Nasdaq climbed back 83 points.
*** The Commerce Dept. also cheered investors with its report that retail sales fell for the second month in a row. And the Bloomberg News headline signaled its importance: “Dollar Falls as U.S. Data Point to a Slowdown.” The euro rose to 96 cents.
*** While the productivity story will eventually be unmasked as a fraud, reports of a slowdown are almost certainly heralds of tougher times ahead. The dollar will fall. Corporate profits will shrink. Unemployment will rise. Investors seem to think that a slowdown would be good for stocks – since Easy Al wouldn’t be forced to raise rates. But stocks will not be able to resist the general trend. Global investors have meters too. They will not want to stay invested in US assets while corporate profits fall along with the dollar. They will pull out, and the prices of U.S. stocks will fall.
*** “The Web improves the productivity of many kinds of businesses…” says a cheerful article in the San Francisco Chronicle. “One type of enterprise that benefits greatly… is fraudulent stock promotion.” A well-placed discussion board post. A free e-mail newsletter or two… and voila: “…the stock price can soar from a few cents a share to $10, or in some cases, much more.” After the pump and dumpers sell out… the share price plummets.
*** Earnings, as I explained yesterday, have been far from the concerns of most investors. And yet, a Fed study found that among the 140 largest non-financial companies, 40% of earnings were spent to buy back shares in ’99 – up from 17% in ’94. Dell spent 80% of its earnings over the last 3 years.
*** Another study by professors at Stanford and UCLA came to the shocking conclusion that “executives manage the disclosures of corporate news to increase the value of their options.”
*** Oil rose by another 82 cents. Oil hurts the dollar, because the U.S. is the world’s largest importer.
*** Gold, which rose $5 early in the day, ended the day $1 down.
*** I put the question directly to very long-time gold watcher and newsletter writer, Harry Schultz. Has a bull market in gold finally begun? “Yes,” he replied, “I think a new bull market has begun in gold. I am awaiting confirmation or cancellation of that either via a break out above 290 or a break below recent low.” *** The World Health Organization just released an alarming report. The bugs that cause infectious disease are mutating faster than previously thought. “A decade ago in India,” says the report, “typhoid could be cured with the use of three inexpensive drugs. Today, those drugs are largely ineffective…” In Eastern Europe, roughly 10% of tuberculosis patients have strains resistant to the two most powerful antibiotics.
*** My daughter, Maria, was in a little theatre production – a comedy skit, actually – at her school last night. She played an obnoxious American tourist at a French hotel. She played the part with such confidence – it seemed, well, natural.
*** Nothing but bad news on this day in history: June 14, 1940… German troops entered Paris during World War II. And Che Guevara was born in 1928…