Investment Newsletters Prior Bear Markets: A Poor Guide to Future Newsletter Performance By Mark Hulbert The stock bear market that be- gan in October 2007 has been such a traumatic event in the lives of so many investors, that it is likely to dominate investment decision-making for years to come. Whether that’s a good thing, however, is an open question—I’m not so sure that it is. That’s because performance in bear markets is a poor guide as to how an adviser or strategy will perform over the long term. And this is true not only because the stock market historically has had an upward bias. It’s also because performance in one bear market is a poor guide to returns in subsequent bear markets. The Data I support these bold claims with reference to the Hulbert Financial Digest’s database of investment newsletter performance. That database, of course, contains returns independently calculated by the Hulbert Financial Digest (HFD), using its standard methodology. Key elements of that methodology include executing all model portfolio transactions on the days that subscribers could actually act on the newsletters’ advice, and debiting transaction costs such as bid-ask spreads and discount brokerage commissions. In addition, if a newsletter has more than one portfolio, then the HFD calculates a composite reflecting the average of its several portfolios, including those that may have been discontinued over the years. Let’s begin the discussion with the data in Table 1, which lists the top 10 newsletters on the HFD’s monitored June 2009 list based on their performance during the 2007–2009 bear market. On average, these 10 newsletters produced a 4.3% annualized return during this bear market—in contrast to a 38.7% annualized loss for the overall stock market, as represented by the Dow Jones Wilshire 5000 total return index. Now focus on how these 10 newsletters have fared historically. Over the last five and 10 years (through April 30), these newsletters on average are well ahead of the market—which is not surprising given the extent of their market-beating performance during the recent bear market. But notice that, even given their impressive returns in the recent bear market, they on average are behind the overall market for performance over the last 15 years and last 20 years. This pattern is not limited just to the top performers in the most recent bear market. Take a look at Table 2, which lists the top 10 performing newsletters during the 2000–2002 bear market. Once again, these newsletters are ahead of the market over the last five- and 10-year periods, but they are behind a buy-and-hold position for performance over the last 15and 20-year periods. Furthermore, many of the top performers in the 2000– 2002 bear market did not acquit themselves very well in the 2007–2009 bear market. In other words, top performance during the 2000–2002 bear market was not a guarantee of performing well in the subsequent bear market. Lastly, take a look at Table 3, which lists the 10 newsletters with the best performance over the 10-year time period that ended with the stock market high in March 2000. Perhaps 11 Table 1. Top 10 Newsletters in the 2007–2009 Bear Market Newsletter 2007–2009 Bear Market* Peter Eliades’ Stockmarket Cycles 23.4 Stealth Stocks Daily Alert 7.5 Yamamoto Forecast (The) 6.2 P. Q. Wall Forecast, Inc. 5.0 On the Money 2.7 Martin Weiss’ Safe Money Report 2.5 Stealth Stocks 2.3 National Investor (The) (1.4) Growth Stock Outlook (2.4) Growth Fund Guide (2.6) Average of Above 10 Newsletters 4.3 DJ Wilshire 5000 Total Market (w/divs)(38.7) 5 Yrs Performance Through 4/30/2009 (%) 10 Yrs 15 Yrs 3.0 na 10.9 1.8 1.0 0.7 3.4 10.2 3.0 8.7 4.7 (2.0) 3.2 na na 1.4 4.4 na na na 3.4 9.3 4.3 (1.6) 1.6 na na (3.7) na na na na 5.0 4.2 1.8 6.5 20 Yrs 4.2 na na na na na na na 5.2 4.9 4.8 7.6 Contact 800-888-4351 800-524-4832 808-877-2690 www.pqwall.com 800-772-5789 800-844-1773 800-524-4832 www.nationalinvestor.com 301-654-5205 605-341-1971 All returns are annualized. *B ecause the HFD’s performance database contains monthly returns, this bear market was defined to begin October 1, 2007, and end February 28, 2009. not surprisingly, given that this 10-year period was so bullish, these newsletters on average have not produced stellar returns over the last five- and 10-year periods (through April 30). On the other hand, over the last 20-year period these newsletters on average beat the market, coming out well ahead of the average for newsletters that came out on top during either of the last two bear markets. The Bottom Line Given our recent trauma, most of us would readily accept a Faustian bargain to retroactively give up much of Table 2. Top 10 Newsletters in the 2000–2002 Bear Market Newsletter 2000– 2002 Bear Market** 2007– 2009 Bear Market* Performance Through 4/30/2009 (%) 5 Yrs 10 Yrs 15 Yrs 20 Yrs Peter Eliades’ Stockmarket Cycles 15.9 23.4 3.0 3.2 1.6 Growth Fund Guide 10.8 (2.6) 8.7 9.3 4.2 Investment Quality Trends 10.7 (39.8) (2.1) 4.5 7.6 Blue Chip Investor (The) 6.7 (38.3) (3.4) 0.5 5.5 F.X.C. Newsletter (The) 6.6 (31.5) 0.5 2.8 6.4 Coolcat Explosive Small Cap Growth Stock Report 5.7 (10.5) (5.5) 11.4 na Growth Stock Outlook 3.6 (2.4) 3.0 3.4 5.0 Buyback Letter (The) 3.6 (37.5) (0.9) 4.1 na Superstock Investor 2.3 (25.3) (2.1) 1.9 4.4 Investors Intelligence 2.1 (18.2) 1.6 2.6 4.2 Average of Above 10 Newsletters 6.8 (18.3) 0.3 4.4 4.9 DJ Wilshire 5000 Total Market (w/divs) (20.7) (38.7) (2.0) (1.6) 6.5 Contact 4.2 4.9 8.7 na 7.8 800-888-4351 605-341-1971 866-927-5250 na 5.2 na 3.9 5.3 5.7 7.6 559-875-0613 301-654-5205 888-289-2225 800-894-3424 914-632-0422 800-392-0992 All returns are annualized. *Because the HFD’s performance database contains monthly returns, this bear market was defined to begin October 1, 2007, and end February 28, 2009. **Because the HFD’s performance database contains monthly returns, this bear market was defined to begin April 1, 2000, and end September 30, 2002. 12 AAII Journal Investment Newsletters Table 3. Top 10 Newsletters Over 10 Years Through March 31, 2000 Newsletter 10 Years Through 3/31/2000 5 Yrs Louis Navellier’s Emerging Growth 27.2 Prudent Speculator (The) 23.5 Timer Digest 23.1 Oberweis Report (The) 22.1 Medical Technology Stock Letter 21.4 Chartist (The) 21.0 No Load Fund*X 19.9 Cabot Market Letter 19.7 BI Research 17.9 Fidelity Monitor 17.3 Average of Above 10 Newsletters 21.3 DJ Wilshire 5000 Total Market (w/divs) 18.5 (7.8) (3.4) 1.3 (8.1) (25.4) 4.6 (0.9) 3.5 (20.2) (0.2) (5.7) (2.0) Performance Through 4/30/2009 (%) 10 Yrs 15 Yrs 20 Yrs (2.9) 7.6 0.4 5.6 (5.2) (1.1) 5.2 0.9 (1.2) 2.8 1.2 (1.6) 4.2 14.2 8.0 5.8 (3.7) 5.8 11.2 5.9 2.6 6.5 6.1 6.5 8.6 13.1 10.3 10.4 0.9 8.9 10.8 6.2 6.3 9.5 8.5 7.6 Contact navelliergrowth.investorplace.com 877-817-4394 800-356-2527 800-323-6166 510-843-1857 800-942-4278 800-763-8639 978-745-5532 www.biresearch.com 800-397-3094 All returns are annualized. our bull market returns in order not to have lost so much in the bear market. But the data do not suggest that this is a rational trade-off. If history is any guide, you will be better off going with newsletters that have the best long-term returns, even if that means incurring sizeable bear market losses. It appears that it is more important to perform well during the bull markets than it is to perform well during the bear markets. In other words, the best thing we can do for our portfolios might be to forget that this bear market ever happened—as difficult a task as that might otherwise be.  Mark Hulbert is editor of the Hulbert Financial Digest, a newsletter that ranks the performance of investment advisory newsletters. It is published monthly and is located at 5051B Backlick Rd., Annandale, Va. 22003; 703/750-9060. June 2009 13