Hulbert’s 4 Big Lessons

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

Category: Apprenticed Investor, Investing, Markets

Mid-Summer Night’s Linkfestival

Category: Financial Press, Weblogs

Retail Roundup

Category: Consumer Spending, Economy, Retail

The latest Agflation news: 8% increase in food prices

Category: Consumer Spending, Inflation, Psychology

Friday Night Jazz Rock: Magic Numbers

I learned an astonishing fact from the WSJ’s Weekend Adviser: the first CD from The Magic Numbers sold a mere 44,000 copies in the US. That’s astonishing to me, considering what a great CD it is. Long time readers may remember a mention of this from our Best of 2006 music list. I thought the…Read More

Category: Digital Media, Music

Coming Soon: the Touchscreen iPod

Category: Digital Media, Film, Music, Technology

Media Appearance: Bloomberg TV (07/13/07)

Category: Consumer Spending, Media, Retail

Retail Follow Up

Category: Consumer Spending, Data Analysis, Economy, Inflation, Retail

“This is a bullshit rally!”

Fascinating and instructive conversation with a few of our traders/clients this afternoon, including a hedge fund momentum gunner who asked me "if this rally really mattered."

The answer is simply if it goes against you, it matters to your bottom line and/or your clients net for the year. If you were long going into this you made money, you showed a better P&L, your assets under management grew, your clients are happy. If you were short, you got your nuts squeezed, and that’s that.

More importantly, the S&P cleared key resistance, the spread triple top so many technicians have been talking about is now toast (See chart at bottom). If this breakout holds holds the next couple of days, that will inform of us about the technical strength right here, and if it fails, that will also be quite instructive. Indeed, this is shaping up to be quite an important rally. 

So to answer the original question, yes, this rally matters.

"This is a bullshit rally"  he said.

I asked him Why? Specifically, I ask:

"Do you disagree with this because you were positioned improperly, or because you cannot find a rational basis for today’s move? Do either of those things matter?"

No answer. He then asks me, "What did you think of today’s Retail data?"

Sigh. . . I said it was weak, that most retailers were doing only fair, that in addition to anyone home-related (i.e., Home Depot (HD) and Sears (SHLD)), we saw the Department stores doing poorly, Macy’s (M) and JCPenney  (JCP). We already heard Target (TGT) was at the low end of their range.

Here comes the money shot:  "And Wal-Mart" he asked?

Mediocre. They don’t break out food (as they do energy), but we can draw some assumptions from their breakdown between Wal-mart and Sam’s Price Club (see our earlier post), as well as what BJs said. As we learned today, Food sales at Wal-Mart, Sam’s, Cost-Co (COST) and BJ’s Warehouse (BJ) were robust.

Here’s the key line from BJ’s report:

"Sales of food increased by 6% and sales of general merchandise increased by
approximately 1%."

So to answer all of his queries: yes, today’s rally mattered. Yes, the retail sales data was weak. Yes, it was essentially a celebration of higher food prices.

However, if you are looking for a rational basis for the day to day movements of markets, if you seek to find a degree of serenity by understanding why markets do what they do short term (A/K/A noise), well then you are going to drive yourself insane.


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Category: Consumer Spending, Markets, Psychology, Retail, Technical Analysis, Trading

Economic Research and Retail Shopping

Mrs. Big Picture is smart enough to know that when she wants to go
shopping, she best not call it that if she wants me to come along. So
the clever lass has taken to calling sport shopping "Economic Research."

I do this sort of "research" every week.

That’s why I laughed on Tuesday night, when Noah Blackstein busted my chops for shopping at Sears (I’ve been a Land’s End client for years). While I was there, I looked at appliances, lawn mowers, plasmas, and Levis. On a Saturday afternoon, tumbleweeds rolled by — the store was totally empty.

I have the same routine every time I visit a store: I look at the merchandise, see how well the store is stocked, merchandised, organized, cleaned, etc. Typical Peter Lynch stuff. I lurk around, watching other customers interact with store employees. I often buy something, if only to return it and see how the process is. (A pair of Levis went back to Sears 3X — they were defective and split in the wash).

Over the past month, I have been to the following stores:

Target (TGT)
Home Depot (HD)
Lowes (LOW)
Best Buy (BBY)
Circuit City (CC)
Ralph Lauren Polo (RL)
Macys (M)
Apple (AAPL)
BJs (BJ)
Nordstrom (JWN)
Starbucks (SBUX)
Smith & Wollensky (SWRG)
Saks Fifth Avenue (SKS)
Pottery Barn (WSM)
Coach (COH)
Williams Sonoma (WSM)
Gap (GPS)
Sears (SHLD)
Blockbuster (BBI)

Netflix (NFLX)
Amazon (AMZN)

Lord & Taylor
Century 21
Barneys (formerly BNNY)


That doesn’t count all the small mom and pop stores and restaurants.

Over that period, I purchased items at Home Depot and Lowes (all sorts of stuff), Fortunoffs, Target, Polo, Century 21 (my Ted Baker ties come from there as well as Saks and Ebay), Lord & Taylor, Amazon (books and DVDs/CDs), and an auto dealer (I used to replace the wifes RX8). Oh, and I got a new keyboard at Apple.

I avoid Wal-Mart (WMT) in NY, as the stores are these horrific garish fluorescent nightmares. In California, where they seem to be open til midnight or even 24 hours, I have made emergency/lost luggage purchases at the only slightly less ugly versions. I cannot recall the last time I was in a K-Mart (SHLD), but many years ago they wrere the only big box retailer in the Hamptons/Riverhead.


Sandy in comments asks: Aside from Sears, how does everything else look?

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Category: Consumer Spending, Economy, Retail