By Marc Hubert
“Slow and steady” can be boring, but it can also win the race for investment success
Outperforming the stock market is a boring thing. I’m not talking about what it feels like to beat the market over the long term, which is exhilarating. I’m talking more about the process it takes to get there.
Strategies that you can actually follow through thick and thin will rarely be the performance leaders in any given year. Instead, they deliver on the decidedly unexciting promise of simply being above average performers most years.
This is perhaps the most important investment lesson I take away from my annual investment newsletter honor roll. Other newsletter services will appear more frequently at the top of performance dashboards for quarterly or annual returns. But these other services will also appear more frequently near the bottom of other quarterly or annual rankings.
While these other services offer excitement, too often their subscribers end up throwing in the towel. So even when these other services produce excellent long-term returns, and some do, few subscribers will have achieved them.
That’s why above-average newsletter services that you can live with in any investment environment are more likely to lead to long-term success. To use a baseball analogy, the player most likely to help a team win the World Series is someone with great on-base percentage, as opposed to someone who homers a lot but hits often. That’s even though fans are much more excited about a home run than a hit.
Honor Roll Methodology
To identify newsletters that are consistently above average, I separated their track record over the past two decades into what was produced in bull markets and in bear markets. Only newsletters that beat the market on both counts made my honor roll. (A fuller description of how I built the honor roll is available here.)
You may be concerned that the criteria I used to construct the honor roll are too lenient, as being above average hardly seems like a barrier. It’s actually quite a high bar when applied to both bull and bear markets. Over the years that I’ve built my honor roll, only about 10% of counselors scouted make the rank.
For anyone who argues that following simply above-average advisors dooms you to mediocre returns, consider the performance of honor roll newsletters over the past 15 years. To calculate the honor roll track record, I constructed a hypothetical portfolio that each year was divided equally among the ballots on that year’s honor roll.
This hypothetical portfolio then “invested” in the model portfolios of these ballots for the following year, after which it would reallocate among the honor roll ballots of the following year. Over the past 15 years, this portfolio has done 1.2 percentage points better than a comparable non-Honor Roll newsletter portfolio – with significantly less volatility or risk.
Performance or excitement?
Even though Honor Roll newsletters have proven on average able to beat non-Honor Roll newsletters with less risk, it is true that many investors are looking for more excitement than “slow and steady wins the race”. There is nothing wrong with a desire for excitement. You just need to be clear about what you are looking for.
To illustrate the importance of correctly recognizing the need for excitement, think of Theo Epstein, who pioneered the disciplined, data-driven approach to assembling the roster of a baseball team known as the to analyse. Epstein stepped down two years ago as president of baseball operations for the Chicago Cubs because he recognized that while his data-driven approach had been successful, it had made the game boring. “Executives like me, who have spent a lot of time using analytics and other metrics, have unwittingly negatively impacted the aesthetic value of the game and the entertainment value of the game,” Epstein said.
The honor roll approach I advocate in this column is the investment arena equivalent of Epstein’s boring, data-driven approach to baseball.
Full disclosure: Each of the newsletters whose returns are audited by Hulbert’s performance tracking company paid a fixed fee to have their returns calculated. This package means that Hulbert has no incentive to put certain newsletters on the honor roll and not others.
Mark Hulbert is a regular MarketWatch contributor. His Hulbert Ratings tracks investment newsletters that pay a fixed fee to be audited. He can be contacted at [email protected]
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