The Big Picture

« Mid-Summer Night's Linkfestival | Main | Linkfest: Week in Preview »

Hulbert's 4 Big Lessons

Sunday, July 15, 2007 | 08:27 AM

in Apprenticed Investor | Investing | Markets

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.

Source:
Getting More Out of Lessons
MARK HULBERT
Barron's, Tuesday, July 3, 2007
http://online.barrons.com/article/SB118343520842056372.html

TrackBack

TrackBack URL for this entry:
http://www.typepad.com/services/trackback/6a00d8341c52a953ef00e0098ff55e8833

Listed below are links to weblogs that reference Hulbert's 4 Big Lessons:

Comments

Very interesting indeed...

It is always a good idea to check HFD, in order to verify a newsletter's performance claims.

Yet I am somewhat skeptical whether the ranking of the top performing newsletters is a validation for the methods they employ (fundamental, technical, etc.)

I am thinking that it could be simple survivorship bias. For instance, let's say there is a large number of technical analysis newsletters among the ones HFD monitors. It is conceivable that after year one a certain percentage of them has good results. After year there will be a certain number, albeit less than after year one, with excellent performance over 2 years.

In the final year when results are tallied a number of them will have survived. It could be just pure chance. The number of surviving technical analysis newsletter could be just a function of the total number of technical analysis newsletters monitored.

Posted by: Werner Merthens | Jul 15, 2007 9:03:55 AM

He's about the most objective, informed, responsible and balanced motor trucker I know.

Posted by: Eclectic | Jul 15, 2007 9:07:00 AM

Werner Merthens-

Over the long sample period that Hulbert uses (27 years) survivorship is not likely to be a factor, unless the TA newsletters were added to the survey just a year or so ago. I'm assuming that all of the newsletters have been around for similar lengths of time (~27 years), or that Hulbert has used newsletters that have ceased to exist in his calculations. I do not know for sure as I do not subscribe to Barrons and cannot check. I'm making the assumption that his calculations are robust.

What I am more interested in terms of survivorship is the stat from lesson #1. Also, I would like to be able to see the data used to derive the stat. Alas, again, I'm a non-subscriber.

Posted by: Woodshedder | Jul 15, 2007 11:23:32 AM

Hulbert's observations are really excellent but:

"...regression to the mean is a powerful force..."

It may sound like picking nits but calling regression to the mean a force implies it is causal and this could be a rather fundamental mistake or, at least, it could lead to some very bad decisions. It is far more likely that, rather than economic causes, regression towards the mean is a system behavior reflecting uncertainty of prediction.

It's in the same genre as the so-called "sophomore slump" in sports: If the rookie season was particularly good it is actually fairly likely the second season may not be as good; it's just a label for an observed phenomenon and causal explanations are likely to be spurious.

But over very long periods of time, well, that's a good indicator that someone either has identified and appropriately weighted a few genuinely useful variables -- or at least they are not unduly confounded by other variables they use -- and probably also has a very disciplined approach; i.e., items #1 & #3 are likely to be closely related.

Posted by: RW | Jul 15, 2007 11:53:22 AM

Woodshedder,

Even though I do not put much faith into technical analysis any more, I did not mean to pick on it in particular. Substitute technical analysis with fundamental analysis if you wish. You then have a fundamental analysis newsletter in the top position.

It is quite possible in my opinion, but by no means certain, that it took top honors by chance alone, due to an effect known as survivorship bias. In other words the same argument still stands.

The fact that one fundamental newsletter 'won the competition' does not prove conclusively that fundamental analysis is superior to other methods.

Posted by: Werner Merthens | Jul 15, 2007 1:02:35 PM

RW,

"...regression to the mean is a powerful force..."

Very interesting observation you have there in your questioning of regression as being a force:

I think you are right about the reference to human behavior.

To my mind, regression to the mean occurs as a result of the recognition of a prior erroneous assumption of the mean, and indeed that can not be a force, either mechanical or philosophical, because a force can only exists as a present tense entity of causation.

If there’s a force, it exists as the propensity of human psychological behavior to make erroneous conclusions... In that sense it’s very accurate to call it a force, because the force is what induces the behavioral change.

Contrast that with real mechanical causation. For example: Catch and weigh rabbits. You may experience accurate observations that depict a digression from the mean, and unless the experimental measures were recorded inaccurately, there wouldn’t necessarily be a later regression to some previous mean. Rabbits may genetically be modified; they may eat better; something else in the environment may cause their mean weight to increase or decrease. All you can say is that they will statistically be found to have weights that a-d-h-e-r-e to the mean within statistical standard values, but not that that observed mean can’t change.

This may be a bit esoteric, but my opinion of the definition of inflation is that it is: "the failed mutual recognition of a reorganization of currency unit value that was formerly and erroneously attributed to p-r-o-f-i-t."

You have an excellent observation. When you begin to attribute macroeconomic outcomes to philosophical and psychological rather than mechanical causations (as with Classical Theory), you're on a track that wasn't understood perfectly by either Adam Smith or John Maynard Keynes, and certainly not by any Monetarist central banker world-wide today.

However, after saying all of that, my opinion is that regarding PE ratios, corporate profitability and other mean macroeconomic observations, regression of the causation of prior erroneously recognized shifts of the mean is at least inexorable, whether you consider it the primary force or in a sense the correcting force.

I also like to think of this process as outbound and returning psychological w-a-v-e-s that ripple and reverberate, just like the waves of a pond when a rock is tossed in it.

Posted by: Eclectic | Jul 15, 2007 2:01:26 PM

Hey Electric,

I'd like to get me some of the stuff you are on. It must be great. What is it?

Posted by: Werner Merthens | Jul 15, 2007 2:46:14 PM

Werner,

Read all my (serious) theoretical macroeconomic commentary on this blog... study it and understand it... and you'll no longer feel your feet.

Don't look for it in any books... It's not there.

Posted by: Eclectic | Jul 15, 2007 3:17:34 PM

I have always thought that believers in efficient markets should be able to design a criteria by which indices rise to the top, however they can only arrive at doing better than average due to reduced fees. While funds suffer survivorship bias, and better risk adjusted performance of some may be due to chance, it is revealing that even a choice of criteria over long periods can not demonstrate their unilateral superiority, only their averageness.

Posted by: Lord | Jul 15, 2007 3:29:39 PM

Couldn't post the following re "Hulbert's 4 Big Lessons"
(perhaps because it mentions "roulette")?

Twenty-seven years? That means starting in 1980 -- almost at the end of the last real bear market, and the start of a period that has been nearly all bull market, with frantic Fed liquidity-flooding -- real interest rates several percent negative -- at any sign of weakness since Greenspan's ascent in 1987. How can this be a real test of investment strategies?

Moreover, in a game of with a large element of chance and a large number of players, it is not possible to definitively distinguish luck from skill. Some years ago, thinking to teach my children that in gambling only the house ever comes out ahead in the long run, I created a spreadsheet to simulate a roulette-like game, each row a player, each column a spin of the wheel, ran it again and again with hundreds of players -- and found that on every simulation run, there was at least one "Mr. Lucky", a row that would win again and again and still be way ahead in column 256. Of course that row was different every time -- this was purely a game of chance -- but people watching a part-skill-but-mostly-pure-chance real-life game with such results would be certain to acclaim "Mr. Lucky" a genius. Nassim Taleb has written well on this issue in some recent books.

With so many investment funds and newsletters out there, the odds are nearly certain that some will have achieved consistent success by pure chance even over the long term.

Posted by: Jim Meek | Jul 15, 2007 3:39:51 PM

jim
a spreadsheet of your own making is like the models our CDO geniuses use it can't take into account the aberrations of real life
i'll still stick to fundamentals and discipline and donate to the local mr lucky poorhouse when i can
as leon levy said anyone can be a genius in a bull market
rgds pcm

Posted by: peter from oz | Jul 15, 2007 6:18:37 PM

"my opinion of the definition of inflation is that it is: 'the failed mutual recognition of a reorganization of currency unit value that was formerly and erroneously attributed to p-r-o-f-i-t.'"

Eclectic: I believe a functioning definition of inflation is critical.

I like this definition: a rise in the tradeable units required for end use goods and services due to the competition created by ease of replacement of expended tradeable units.

Posted by: Winston Munn | Jul 15, 2007 7:55:14 PM

I'm not an economist but according to Debt as Money in the debt money system total money must equal P/P+I being that credit is continuously being extended and the total monies required to pay back the extended debt far exceed the principle lent, the money supply must continuously be being expanded. Once all debts are paid in full there is no money left in the system. No permanent money supply period.
They quote Fed Reserve Chairman Eccles to support this. According to the tutorial people must work to pay back debts from the pool of money which is only created upon lent principle being this is the only money in the economy. When banks restrict credit and the pool no longer expands people are scrambling to pay back interest from the only pool available the principle pool. Given the mechanics of this system, if this description is accurate we better pray hard for inflation. In this theory new debt is the cause of inflation but without new debt there is not enough money in the pool to pay the debt. This they claim explains why even responsible lenders get burnt in the credit contraction. Even thought before the mishap they may have been easily able to service debt during the contraction the money pool shrinks as money heads back to the banks and there is no money to keep people employed. So even though there are laws now not allowing banks to arbitrarily call in loans all they need to do to create massive deflation is stop lending to new players. Then with their reserves run around and buy everything for pennies on the dollar.

I really hope I got this concept wrong. But they were pretty plain.

Posted by: stormrunner | Jul 15, 2007 9:16:40 PM

I just came across your blog, great info for both small and large investors.

Posted by: Jane | Jul 15, 2007 10:17:34 PM

Winston,

Let me rephrase your observation with [my annotations]:

Inflation is:

"a rise in the tradable units required for end use goods and services [this is exactly where the failed mutual recognition of a reorganization of currency unit value occurs – you see, the return psychological wave I referenced before is the same recognition – it’s a 'wave of recognition']

...due to the competition created by ease of replacement of expended tradable units [this ease of replacement you reference IS the result of a prior erroneous attribution of profit]."
---
A review of my terminology developed from a lifetime of philosophical experimentation:

-Money and Power are each the component expressions of the same philosophical entity, that of being a coercive or compelling force that facilitates economic exchange whether cooperatively or uncooperatively. They also share a relationship that is analogous to the relationship of matter and energy. Power is to money as energy is to matter... different forms of the same thing.

-Profit is an erroneous philosophical concept, because it by necessity requires the mismatching of price and cost, and thus must function to misallocate economic resources. Every realization of profit thus causes the realization of an amount of anti-profit that is larger than profit, if only infinitesimally larger.

-The real objective of all human economic endeavors is the reduction of the cost of goods and services marginally approaching philosophical infinity. Mankind misconceptualizes this objective to be rather the attainment of infinite riches via the profiting from economic exchanges. Mankind’s consciously sought out economic objective is merely a substitute for his real one… it’s his only means of subconsciously attaining his real objective. I realize this is profoundly counterintuitive, but don’t blame me… I didn’t invent it… I just discovered it.

In seeking that real objective just referenced and defined, mankind can easily be duped into the erroneous conclusion that something gained that is attributed to the expression of profit is, in reality, only a reorganization of currency unit value.

Now, you may say that you can prove to me that profit does exist and demonstrate any number of individuals or corporations that might evidence it, even Barringo I'm sure. I don’t doubt you based on the terms commonly understood in human culture.

Ultimately what actually occurs in wealth creation is that we all combine our intellectual and mechanical labor to yield, via human productivity, a perpetual reduction in the costs of goods and services. The profit motive consciously drives this achievement, although profit is not its ultimate objective, if only understood subsconsciously.

Assume the following experimental analogy:

Think of why we use gasoline in an engine. We do it ultimately for motive power [tantamount to p-r-o-d-u-c-t-i-v-i-t-y], but its greatest expression of power is in the heat it produces [tantamount to p-r-o-f-i-t] which is not the primary objective, but merely a waste byproduct.

Your philosophical light bulbs should begin to flash.

Posted by: Eclectic | Jul 15, 2007 10:51:53 PM

There is only one BIG flaw in Hulbert's approach: He doesn't follow any of the most successful Trend Followers like Bill Dunn, Salem Abraham, John Henry, Jerry Parker and the likes.

These guys have just trounced the market big time over the long-term.

What I would really like to see are the audited results of the 200 most enduring traders/investors of the last, say, 10-15-20 years and find out who's been and still is the top dog.

Could be interesting.

Francois

Posted by: Frankie | Jul 15, 2007 11:14:42 PM

Eclectic in some real abstract way I think I follow it.

There reality is there is no such thing as money only the signiture on the dotted line pledging the signers resources to the pool enforced by the state, in essence a transfer of energy or labor, only the receiver of this power had nothing other than than this imaginary concept called money which is nothing but a paper receipt to trade for this bondage. Thus other than for some transaction fee why is it that high power money at a 10 to 1 reserve ratio is worth a 50% bondage premium, because were still stupid enough to allow it thats why. Its not the bondage thats the issue, nothings free, its the usury premium.

Monetary reform before chaos anarchy or worse.

Posted by: stormrunner | Jul 15, 2007 11:53:26 PM

Eclectic-

i agree with you on most of what you said except for the myth of profit.

profit is not a mismatch of price and cost, but the difference between cost and the eagerness for goods (aka time preferences).

profit is a signal that certain goods provide a higher level of satisfaction to consumers than others.

costs, as you describe them, do not factor into it as much as you think, because costs of production provide profit to someone else.

it's a cycle.

at every stage of the production chain, there is a producer and a consumer.

e.g. motorists consume gasoline, gasoline refiners consume crude oil, crude oil producers consume drilling rigs, rig makers consume steel, steel makers consume crude oil, etc.

the profit is a result of each consumer's eagerness for the producer's product; it's not a mismatch at all. one man's cost is another man's profit.

in fact, if sustainable profit is made, then by definition it cannot be a misallocation of resources.

Posted by: m3 | Jul 16, 2007 12:21:32 AM

Stormrunner:

You pretty much got it. If there were no debt, there would be no money in circulation.

Posted by: Winston Munn | Jul 16, 2007 12:30:27 AM

"-The real objective of all human economic endeavors is the reduction of the cost of goods and services marginally approaching philosophical infinity."

Eclectic: I think another way to state this would be to say that the goal of all human economic endeavors is to increase the affordability of goods and services, and that affordability can assume twin identies: a real reduction in unit costs, which is the true goal, or an increase in wealth, which is a misconceptualized goal.

In previous posts I have described my opinion that monetary expansion of itself is not inflationary until that capital targets a goal and is infused into the economy.

It makes sense to me that lowered risk premiums are an example of this type of targeted inflation, i.e., higher risk accepted due to the competition for assets related directly to the ease of replacement of expended trade units cause a higher price for failure. It would also explain why risk premiums have risen with the slight credit tightening of late.

Posted by: Winston Munn | Jul 16, 2007 1:14:21 AM

Correcting [by alteration] something I wrote incorrectly:

"In seeking that real objective just referenced and defined, mankind can easily be duped into [erroneously concluding that gains come from profits, whereas, in reality, the gains came only from a reorganization of currency unit value]."

Again, this references my definition of inflation, which is a phantom source of wealth creation resulting from a nominal reorganization of currency unit value.

Real economic gains that create true wealth, in the aggregate, can only come from human productivity gains, and these are ultimately expressed not as profits but as reductions in costs of goods and services.

It's the true engine of wealth creation.
---
Stormrunner - I'm guessing you'll eventually break out as a gold bug... zat riite?... It seems that your commentary runs to the conspiratorial, and that's usually my first clue I'm fixin' to see the shiny stuff pop up. Nothing wrong with that, mind you... I have no opinion on gold, plus or minus.

BTW, part of what you write makes sense to me too, and that frightens me so badly I may not get any sleep tonight. Haha. Cheers.
---
Winston - Traditional thought has to give you the nod. What I'm speaking about is the abstract basis for the philosophical expressions of money, profit, productivity and economy, and I'm quite confident it holds in all respects I've discussed.

Should a person be able to accept my discovered principle that "the real objective of all human economic endeavor is the marginal reductions of the costs of goods and services towards zero," they will be able to absorb my other theories without much problem. Otherwise, they'll reject them.

But let me say this. My principle holds. It's written in the psychological nature of mankind no differently than it's a fact that the planets orbit the sun.

All new theories are the red-headed step-children of convention. I didn't expect mine to be otherwise. Cheers.

Posted by: Eclectic | Jul 16, 2007 1:24:09 AM

Stormrunner:

You pretty much got it. If there were no debt, there would be no money in circulation.

________________________________________

Thats the simplest part of the whole concept. The disturbing part is why are the creators of the currency, merely a medium with which to facilitate trade allowed such a premium, this eventually leads to a ruling class. Our constitution was not intended to do this. People here are speaking of inflation ie currency issuance ignoring the siphoning that is the system, I'm not talking about retail banking interest I'm talking about fractional reserve banking. The masses are held hostage to the issuers of the currency, the productive economy is in a constant state of debt to a cartel.

A wave of recognition? This infers some benign natural process. High powered money issuance causes excess supply leading to instant premium for the first users of the new currency while the end user gets fleeced. This is a scam, why speak of it as a only a natural process peeling off the scam layer. Debt free money would also have an inflation issue but less the usury. I'd be more inclined to accept the 'wave of recognition' in the Debt free environment. This type of abstract explanation of the "con" makes this man made siphoning process appear a natural function.
If I'm wrong about this please elaborate it is the very purpose of my concern, if it is a con it can be exposed , once exposed it can be remedied. The incredulity of it all, seems its greatest asset.

Posted by: stormrunner | Jul 16, 2007 1:24:09 AM

Wow. One should lay off the bong on school nights. Please be sure to sober up before executing any trades tomorrow. Cheers!

Here are a few notes on the dissertations posted in this thread:

"If there were no debt, there would be no money in circulation." Whaaat? But what if we were caveman capitalists ... before the time of contracts? There was still money ... be it meat, arrowheads, or whatever. You can still have a marketplace without debt. Debt is another layer of complexity.

Also, it was said that "Profit is an erroneous philosophical concept, because it by necessity requires the mismatching of price and cost, and thus must function to misallocate economic resources. Every realization of profit thus causes the realization of an amount of anti-profit that is larger than profit, if only infinitesimally larger." Whaaat? Love it or hate it, profit helps (as a catalyst) to properly allocate economic resources. Want to see nasty externalities from Hell? Go visit the old Eastern Block and look what happens to economies and the environment when something other than supply and demand attempts to allocate resources. Not pretty.

Posted by: rebound | Jul 16, 2007 3:45:55 AM

Rebound,

Explain profit to me. Assume I'm a wilderness traveler self-reliant with no human contact.

Do I have an economy?

What is profit?

Can I function without profit?

What is money?

Can I obtain resources, and how do I allocate them?

Rebound, I'm not talking about political economy as you are. I accept the tenants of capitalism and the conventional concepts of profit and resource allocation, and generally agree with you.

You're talking molecules. I'm talking sub-atomic particles and the psychological dynamics that put the atoms and then the molecules together.
---
Winston, your twin identities discussion isn't that far removed from what really happens. I'll just say that the strength of all of humankind's wealth creation has always come from ever advancing human productivity. It trumps profits and the conventional understanding of both wealth and riches.

It obviates m-o-n-e-y. It does, Rebound, it really does. You can go down and argue with a stop sign near you, but it's still going to be red and white and say the same thing when you're finished.

Posted by: Eclectic | Jul 16, 2007 7:50:23 AM

Rebound:

I was referencing specifically the present fiat money system when stating that without debt there is no currency.

Posted by: Winston Munn | Jul 16, 2007 8:22:16 AM