Chasing Performance
Hulbert Financial Digest, which has been tracking the recommendations of investment newsletters for 21 years, has issued its latest rankings of the best and worst performances of 2002.

The best ones are stunning. Among stock newsletters, the winners include The International Harry Schultz Letter, up 61 percent last year. Yamamoto Forecast was up 51 percent, and Ruff Times’ recommendations were up 43 percent. Among mutual fund newsletters, Growth Fund Guide was up 17 percent, Futures Hotline/Fund Timer was up 10 percent and Gerald Appel’s Systems gained 6 percent.

Those numbers may look tempting to investors frustrated with their own returns from last year. But if you’re thinking about leaping on the bandwagon of one of last year’s hot newsletters, I hope you’ll at least read this article before you do.

In the table below, you’ll see each year’s most successful newsletter, going back to 1981, along with each winner’s subsequent one-year performance.

Mark Hulbert has tracked what would have happened if every year an investor put his or her money into the prior year’s top performing newsletter.

The results aren’t pretty. Over the past 21 years, the result would have been an annualized loss of 31.4 percent a year. In the real world, that’s equivalent to investing $10,000 in January 1981 and finding that all you have left at the end of 2002 is $2.32.

Hulbert also looked back 16 years, to the start of 1988, and identified the 10 most successful newsletters since then through 2002. Their average annualized return was 14.3 percent.

Unfortunately, your chances of picking those 10 newsletters, out of all those that Hulbert tracked, would have been close to zero.

Many people “shop” for guidance by attending investor conferences. Paul Merriman has spoken at national and regional investment conferences for many years, and he’s heard presentations from quite a few popular speakers. I asked him for some names, then we looked up their 15-year track records as reported by Hulbert. The following annualized returns, which cover the period 1988 through 2002, suggest that it takes more than a great speaker to make a successful newsletter portfolio.

• John Dessauer, Investor’s World: 7.9 percent.
• James Dines, The Dines Letter: 1.3 percent.
• Joe Granville, The Granville Market Letter: -11.9 percent.
• Michael Murphy, California Technology Stock Letter: -7.4 percent.
• Louis Navalier, MPT Review: 15.3 percent.
• Howard Ruff, The Ruff Times: 2.7 percent.
• Bernie Schaeffer’s Option Advisor: -5.4 percent.
• Harry Schultz, International Harry Schultz Letter: 4.3 percent.
• Jim Stack, Investech: 4.5 percent.

Every one of these editors is an entertaining, persuasive speaker who inspires confidence before an audience. But among these nine, only Louis Navalier beat the Dow Jones Industrial Average, which was up 14.1 percent in this 15-year period. None of the other eight came even close to matching the performance of the Standard & Poor's 500 Index (up 11.4 percent). And seven of the nine couldn’t even match the 5 percent annualized return of Treasury bills.

I hear one message loud and clear from Hulbert’s research: Chasing performance doesn’t work. If investing really were that easy, all the big institutions would do it.

The best academic research we know of indicates that 97 percent of the long-term return of any portfolio is determined by its asset allocation, the selection of what types of assets make it up. Only about 3 percent is determined by the choice of specific investments.

Ironically, investors typically focus 97 percent of their attention on trying to identify the best stock, the best fund, the best guru or the best newsletter – a quest that determines about 3 percent of their performance – while they spend almost no time on asset allocation – which makes 97 percent of the difference.

The smartest investors concentrate on what makes a difference: asset allocation. Our advice: Follow their example. Work on getting your asset allocation right and keeping your costs as low as possible.

By Richard Buck