How to Gauge Newsletter Expectations

11/07/2011 2:49 pm EST

Focus: MARKETS

Mark Hulbert

Senior Columnist, MarketWatch

Mark Hulbert of the Hulbert Financial Digest discusses what he thinks are reasonable expectations for a newsletter’s performance, and how long a track record is meaningful.

Mark, I know you follow a lot of newsletters. Did any newsletter see this recent move and volatility coming?

Well, if you want to say, did anyone catch the exact top on April 29 and anticipate exactly the correction—or bear market, depending on you perspective—in early August, no. No one exactly predicted it down to the day. That’s, of course, an unrealistic expectation, but some came closer than others,for sure.

What should an investor have as a reasonable expectation of a newsletter?

Well, I think—and of course, I may be biased because this is what we do for a living—I think you need to look at the track record over long periods of time. It’s unrealistic to expect that any advisor will catch every turn. That’s just unrealistic.

If you go into the markets expecting your advisor to do that, you are going to be disappointed. It will probably mean that you’ll end up doing things that are too risky and you’ll end up regretting it.

Rather than doing that, the realistic expectation of what is possible with an advisor, and that is only determined by looking at records over a long period of time. I must say, if you’d asked me that question in 1980, when I started following advisors, I would have said, "How long is the long term? Five years."

I said, “that’s enough.” I am afraid five years is not.

It turns out that I have applied a number of rigorous statistical tests to our data and tried to see, is five years long enough to differentiate somebody who has a truly a good record and genuine ability? Versus somebody who has just luck.

Unfortunately, five years is not enough to separate the—to use a hack-made phrase—to separate the men from boys.

So…

You’d need, I’d say now, I think has to be at least ten and probably closer to 15 years of data. Now, that seems harsh, because a lot of advisors out there haven’t been around for 15 years.

Right.

They said, "What are we supposed to do?" My response is, well, first my job is not to make you happy. But secondly, it may be that I’ll say to a new advisor, "You may be the next Warren Buffett, but you may also be the next disaster."

From our point of view, at the Hulbert Financial Digest, I try to help the individual investor. It’s important to know what the statistics, what the odds will tell you, before you decide to risk your hard-earned assets.

What are the odds telling you right now? Anything?

Well one way of slicing and dicing the data is to look at the top-performing advisors over that long period of time that I had mentioned.

One thing we do is, we have a new service called Hulbert on Markets, where every week I take the top-performing advisors over the long term. I pick a 15-year period and I look and see what they are saying, and then I contrast that with what the worst performers over a 15-year period are saying.

Right now, the best long-term performers are more bullish for the intermediate term, not for the very short term necessarily. We are saying next six to 12 months, they’re significantly, markedly more bullish than the worst performers.

On the theory that the past winners are more likely to be right than the past losers, that would suggest that perhaps that what we saw in late July and early August may be more of a correction rather than the beginning of a bear market. Again, these things are not guarantees by any means, but that is what the top-performing advisors are telling us.

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