EDITOR’S NOTE:  Wall Street is filled with highly paid and highly educated workaholics focused on beating the market. Many of them publish newsletters with specific advice, but more often than not, that advice doesn’t do the job. Why? 

For 30 years, Mark Hulbert has been studying and reporting on the frequent failures and occasional successes of the recommendations of investment newsletters. Mark is editor of the Hulbert Financial Digest, which tracks investment newsletters and their recommendations.  He is a speaker, an author and a columnist for MarketWatch.com and The New York Times.

Paul Merriman recently interviewed Mark Hulbert for a Sound Investing podcast. This article contains excerpts from their discussion that starts with gold and commodities and ends with experts who don’t seem to trust their own views.


PAUL MERRIMAN: We just finished one of the best decades ever for investors in gold, but the newsletters that made recommendations on gold did very poorly. When I was studying your report on all these newsletters, I used the Vanguard Precious Metals and Mining Fund as a reference point. It was an inexpensive way to get the returns of this segment, and the fund rose at a rate of 17.8 percent a year in the past decade. The average for the group of gold advisory newsletters was only 5.4 percent. And, one actually lost 12.1 percent a year! Why is that, Mark?

MARK HULBERT:  In 2002, that was the year that gold prices took off, after a 22-year bear market in gold, almost without interruption. Many people, of course, had long since lost faith in gold. Those who still believed in gold in 2002 regarded the rising prices that year as just another “sucker’s rally,” and many of them remained skeptical of the rally all the way up.

This illustrates something we hear all the time on Wall Street, a bull market likes to climb a “wall of worry.” In 2002, this was a textbook illustration of how little enthusiasm there often is at the start of a major bull market. Here’s another example: In 1974, there were very few people who believed in stocks, and, of course, that is when the stock market took off.

They say the best time to buy is when there’s blood running in the streets. That’s how the truly great fortunes are made, by people with the courage to do that. But investors don’t do that. I know very, very few people who actually go out and put their hard-earned assets on the line when they see blood running in the streets.

PAUL MERRIMAN: What I’m hearing you say, Mark, and correct me if I’m wrong, is that even when people understand what they “should” do, in reality they don’t do it.

MARK HULBERT: That’s right. There are plenty of people who subscribe to newsletters and then don’t do what the newsletters tell them to do, like rebalancing. They start second-guessing, saying to themselves: “Yes, that sounds like a good idea, but you know what? This time I don’t think it is. I think stocks are going to continue their run so I’m not going to rebalance my stocks down to whatever their assigned weight should be.” And, because of that, they don’t get the returns of the newsletter portfolio.

I’ve also seen newsletters suspend their own strategies.  Almost without exception when a newsletter second-guesses its own discipline, it ends up worse off because of the second-guessing.

I tested this for the year 2009 on the newsletters I follow that trade in and out of the market on a short-term basis. For each newsletter I created a parallel portfolio that “froze” into place whatever they were invested in at the start of the calendar year.

At the end of the year I compared the results of the “frozen” portfolios to the results these newsletters achieved with their trading. If a newsletter is adding value, it should do better. But even in a year like 2009, with the market’s extraordinary reversal in March, on average the frozen portfolios did better.

Almost everybody started 2009 with a very bearish attitude.  All somebody had to do in order to beat the market was to reduce that bearishness by a slight amount as this big rally in the U.S. stock market took off. But on average, these newsletters did not do that. In March, they saw the start of a rally, but they didn’t believe in it.

PAUL MERRIMAN: Obviously, there can be a very big gap between knowing what you should do as an investor and actually doing it. I’ve spent a great deal of my career teaching people to understand what they should do. I’ve probably been less successful in getting them to always do those things.

Once again this points to what I think is the tremendous value of having a good advisor who will make sure you do what you’ve decided to do, even when you don’t feel like it.

Mark, thanks again for being on our show.

Editor’s note: Paul’s full interview with Mark is available in audio form at SoundInvesting.com.

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