MarketWatch featured an interesting story a few days ago with the intriguing title “Getting it right and still losing.” Let’s look at some highlights:
Sometimes you can’t win for losing.
Just ask Harry Schultz. Or Howard Ruff. Or Jim Dines.
All three advisers, each of whom has been editing an investment newsletter at least since the 1970s, have built their investment careers by questioning conventional wisdom’s trust in the soundness of the financial system. Not surprisingly, all three have been vociferous champions of gold and other precious metals.
You’d think that they would have cleaned up over the last year, since the disintegration of the financial system in recent months is almost exactly what they have been warning us about for decades.
But you’d be wrong.
Of the 181 newsletters on the Hulbert Financial Digest’s monitored list, these three advisers’ newsletters are in 173rd, 175th, and 176th places for year-to-date performances through October 31, with losses ranging from minus 64.9% to minus 70.0%.
How can this be?
The easy answer is that these advisers didn’t put into their model portfolios the securities that would benefit from the financial collapse that they envisioned.
But that’s not a very satisfying answer. Why didn’t they construct their model portfolios around investments that would rise when the rest of the financial world was going down?
The answer, as I see it, has to do with how difficult it is to forecast when a collapse will actually take place. It’s one thing to know that the financial system is shaky, and quite another to forecast when it actually will crumble. And these advisers would have lost even more over the last several decades had they bet aggressively on a collapse every time they thought that one was imminent.
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In fact, it turns out to be surprisingly tricky to construct a portfolio to profit from an anticipated collapse. You can’t just own securities that will skyrocket during such a collapse, for example, since they will lose huge amounts during the months and years you wait around for that collapse to occur.
There are several things wrong with the approach these advisors have taken. While it’s fine to question conventional wisdom’s trust in the soundness of the financial system, that does not mean that, when a disaster strikes in that area, the bias you have towards gold and precious metals will be the answer.
Actually, I think it’s very shortsighted to be convinced that a certain asset class will benefit from a financial collapse no matter what the circumstances. With that kind of a narrow view, it’s not surprising to see YTD losses ranging from 64.9% to 70%. I fail to understand how investment newsletter writers with 30 years experience can lose that kind of money unless, as I mentioned many times before, a sell stop discipline is something they have never heard of.
The next point is that of forecasting many reporters focus on. Forecasting, while being a well paid job on Wall Street, is issuing an educated guess at best. It’s downright silly to use such a guess as a foundation for making any investment decision. Sure, I have a personal view of the future as well, but in no way does it influence my trend tracking decision making process.
To me, it’s simply incomprehensible how people in the investment newsletter business can suggest putting money on the line based on forecasts without any sound principles designed to protect capital in case the forecast is wrong. Advisors with such a big ego need a dose of humility, which was dished out big time this year—let’s hope the message got through.
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Ulli thanks for keeping me and my family on the sidelines. Look forward to your daily updates and the day when I can reenter the market once the TTI gives us the go ahead……Snoobers
Try to read your blog each day & I get your weekly fund tracker. Seems like Hulbert needs you on his monitored list.