What the Hulbert Financial Digest really taught us
Reprinted courtesy of MarketWatch.com.
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Investment newsletters are interesting, but the reality is that many aren’t worth the money.
Once in a while, a great investment teacher comes along with valuable lessons you can’t get anywhere else. Case in point: Mark Hulbert, whose Hulbert Financial Digest was closed a few months ago after spending most of his waking hours for 36 years studying, thinking about and writing about investment newsletters.
When Mark began publishing the digest in 1980, there were 28 investment newsletters; they were printed on paper and came in the mail. Mark subscribed to each of those 28 letters, and over the years more than 100 others were added.
Mark made it his business to keep meticulous records as if he were an investor following each letter’s advice exactly. This gave him a unique view of the value of various newsletters and their many differing approaches to making money.
(Disclosure: I have known Mark for more than 30 years and always found him to be an intelligent, objective observer who called the shots as he saw them.)
Although I’m sorry this service is no longer available, I’m delighted to present some of the overriding lessons I learned from tracking all these portfolios over the years.
Use index funds
The main lesson he came away with was one that echoes advice from Warren Buffett and John Bogle, among others: Most investors should use index funds. Despite all the hard work and thought that went into their strategies, only a minority of newsletter portfolios produced higher returns than the Wilshire 5000 Index, which Mark uses as a proxy for the market.
Imagine that you’re publishing an investment newsletter. How do you attract attention and get people excited enough to subscribe? You certainly don’t do that by recommending buying index funds and holding onto them.
Almost by definition, you have to do something different: Something that appears to be “the right thing.” Something that gives your subscribers a reason to think you have something special.
Sometimes that “something special” is a massive amount of data along with a bit of analysis and some predictions. The venerable Value Line Investment Survey certainly does that. Some of its many followers diligently visit their local libraries to check on the latest recommendations for the stocks they’re following. (Later in this column, we’ll see just how “special” this letter’s advice has been.)
Avoid market timing
Other times, the “something special” is a system, either subjective or mechanical, for knowing when to get into and out of the stock market. Timing the market is an enormously appealing idea, and once in a while it works very well. But very few investors do well with this approach over the long haul.
Hulbert tracked a dozen timing newsletters, with returns ranging from 0.1% to 8%. The average was 4.3%. That 0.1% return, by the way, was from the most famous market-timing letter in the industry, Successful Investing, published by Doug Fabian. (This was originally the Telephone Switch Newsletter, founded by Doug’s father, Dick Fabian.)
The real returns
Now let’s look at some numbers from Hulbert’s meticulous research. The returns I just cited and those below are for the 15 calendar years 2001 through 2015 (admittedly one of the worst 15-year market periods of the past century). As you think about these figures, keep one number in mind: In these years, the Wilshire 5000 Index compounded at 5.6%.
HFD tracked 55 “low-risk” portfolios, which had an average return of 5.6%. Not one of them lost money for the period, but 19 had returns less than 5.6%. Their volatility was 60% to 90% as high as that of the Wilshire 5000.
The average return of 59 “average-risk” portfolios was 6%. Two of them lost money over the period (averaging 0.5%), and 23 failed to keep up with the 5.6% of the Wilshire 5000. Their risk varied from 90% to 110% of the market.
Mark also tracked 47 “high-risk” portfolios, with average 15-year returns of 5.4%. Five of them had cumulative losses averaging 3.3%. Eighteen of these portfolios earned less than 5.6%. Their volatility was 10% to 50% higher than that of the market.
For high rollers, Mark tracked 45 “very-high-risk” portfolios that averaged returns of 4.1%. Eight of them lost money, including one that suffered a minus 20.1% compound return. (It’s hard for me to imagine many investors sticking with such a set of recommendations to the bitter end, but perhaps some did.) Volatility of this group was 1.5 to three times that of the market.
These results seem to be about the opposite of what you would expect from a basic rule of thumb for investors: Higher risks should result in higher returns. Average risk resulted in 6%; high risk resulted in 5.4%; very-high risk resulted in 4.1%.
The most dependable investment is …
As Mark wrote in his final newsletter, the most important thing he learned over these 36 years was this: Index funds are the most dependable way to invest. He tracked four newsletters with a total of 12 portfolios composed of Vanguard funds (including three of mine at paulmerriman.com).
Every one of these 12 Vanguard portfolios was profitable (their performance ranged from 4.5% to 6.9%, with the average 6.1%), and only one underperformed the Wilshire 5000.
Value Line Investment Survey deserves a bit more mention, partly because it is so well known and has so many followers. Value Line, an independent investment research and financial publishing firm based in New York and founded in 1931, describes its newsletter as “The Most Trusted Name in Investment Research.”
The letter tracks approximately 1,700 publicly traded stocks in over 99 industries.
For the past 15 calendar years, Mark Hulbert tracked 11 Value Line equity portfolios. Their returns ranged from 0.2% to 7.7%, averaging just 3.4%. Despite the company’s vast resources of money and talent, its newsletter recommendations were below average in performance.
I could go on, but here’s a final point I find pretty interesting: In the period under examination here, Treasury bills yielded 1.8%. Of all the newsletter portfolios that Hulbert followed, one in seven didn’t even do that well.
The sad news is that we no longer have the Hulbert Financial Digest to keep tabs on newsletters. But the good news is that we now know we really don’t need HFD to keep teaching us the same lesson: Leave the newsletters behind and hitch your wagon to index funds, pardner.
For more, check out my latest podcast, “Ten must-know lessons from Hulbert Financial Digest.”
Richard Buck contributed to this article.