After decades of editing the Hulbert Financial Digest, Mark Hulbert is now debunking financial advisers’ guesses. • His Hulbert Sentiment Indices show that gurus who make predictions are so often wrong that, in many cases, you can profit by doing the exact opposite of what they say. Save your money and don’t put your faith in expensive market-timing newsletters or consultants.
• My goal is to help the more than 100 million households in the US, Canada, and other countries that hold 401(k), IRA, and similar savings accounts. Using 21st-century financial breakthroughs, you can enjoy market-like returns and more — without your portfolio ever crashing. See my Muscular Portfolios summary.
If there’s any expert who knows which advisers can predict the market and which cannot, it would be Mark Hulbert. For 36 years, from 1980 through 2016, he edited the Hulbert Financial Digest, a monthly newsletter that ranked the investment advice people received from other newsletters. The findings were grim.
Despite the newsletters’ often-outlandish claims, Hulbert proved that most financial advisers can’t beat the market. Taking the long view, he studied 36 gurus who had published newsletters for an entire 34-year period from 1980 to 2014. Only 3 of the 36 (8%) delivered a better return than the S&P 500. Good luck trying to pick in advance which three those would be!
One of Hulbert’s biggest contributions to debunking the predictive-guru myth is his work on “performance chasing.” This term means finding the one advisory newsletter whose buy and sell signals produced the greatest gain in one calendar year, and then following that newsletter’s signals in the next calendar year.
Over a 23-year period, Hulbert showed that chasing performance would have given your portfolio a 32.2% loss annualized. During the same period, the Wilshire 5000 index — a collection of virtually every US stock, big and small — returned +13.1% annualized. Performance chasing would have reduced your $100,000 portfolio to only $13 after 23 years. Strategy hopping can be very costly indeed!
Proof that financial advisers are contrary indicators
The Hulbert Financial Digest ceased publication in February 2016, several years after it was purchased by Dow Jones & Co. A primary service of Hulbert’s business today — besides the columns he regularly contributes to the Wall Street Journal, Barron’s, MarketWatch.com, and elsewhere — is producing the Hulbert Sentiment Indices. HSI is not a printed publication but an email bulletin that’s sent to subscribers once a week or once per market day, your choice.
To calculate his indices, Hulbert subscribes to as many investment newsletters as possible. Each adviser instructs readers to take long or short positions in the broad US stock market, the Nasdaq Composite, bonds, or gold. Many such advisers direct their followers to switch from 100% long to 100% short. However, Hulbert requires only that a newsletter can swing at least 50 percentage points either way. For example, an adviser who advocates a Nasdaq exposure that can be 50% long to 100% long would qualify.
The joke is that the advisers, as a group, exhibit so much human wrong-headedness that you can sometimes make money doing the opposite of what they say. When the advisers are especially bullish on stocks, for instance, the Dow Jones Industrial Average is very likely to drop.
At his HulbertRatings.com site, Hulbert currently charges $20 per month for the weekly version of each of his four rating systems. The five-day-a-week version costs $50 per month. Subscriptions are sharply discounted for those who make one-year commitments.
Let me be clear: I’m not recommending that you go out and buy an HSI subscription. In this four-part column, I plan to reveal how the indices work on the DJIA, Nasdaq, bonds, and gold — and just how ridiculous the numbers make financial advisers look. I personally believe that a simple asset-rotation system using low-cost index funds is the most profitable strategy for most investors (and can be followed free of charge; see my summary). But you can make that decision on your own, once you’ve seen how bad most high-priced gurus really are. (Disclosure: Hulbert has favorably mentioned my new book, Muscular Portfolios, in his MarketWatch column, but I try to stay objective when reviewing his data.)
Profit by staying out when advisers are most bullish
Figure 1. A theoretical investor was better off switching from the Dow to bonds whenever advisers were the most bullish on equities. So much for expensive financial advice!
In early 2017, Hulbert graciously allowed me to research his numbers going back to July 2000. The asset that will probably interest the largest number of readers is the famous Dow 30 — also known as the DJIA. I’ve analyzed Hulbert’s indices in Figure 1, shown above.
Hulbert calculates a simple average of the advisers who recommend being long or short US equities. Every Monday evening, this reading could in theory be as low as –100 (everyone is short) or as high as +100 (everyone is long). But the average Dow exposure of the advisers in practice ranges between approximately –36 and +82.
The graph in Figure 1 uses DIA, an exchange-traded fund that tracks the Dow. The image shows the return to an investor who gets out of DIA when advisers are highly bullish on the Dow. Here are the rules my analysis used for an imaginary follower of Hulbert’s Monday evening emails:
- When the average adviser’s Dow exposure is over 60.7, sell DIA on Tuesday’s close and switch to a 10-year Treasury ETF, such as BIV.
- When the advisers are less bullish — i.e., the reading is 60.7 or below — buy DIA.
- If DIA’s total return is up from the Monday close four weeks ago to today’s Monday close, ignore any “sell” signals and retain the previous week’s position.
- If DIA’s total return is down in that four-week period, ignore any “buy” signals and retain the previous week’s position.
The latter two rules implement what’s called a “purified” sentiment indicator. When the Dow has been up in the past four weeks, remaining in the Dow for the next week is likely to be profitable, no matter what the market timers are saying. The same is true in reverse when the Dow has been declining.
Hulbert explains why a “purified” sentiment index would work. In a telephone interview during my analysis, he remarked: “A high sentiment index reading means one thing if the market has been going up, and quite another if the market has been pulling back.”
Why use a Dow-tracking ETF? Why not one that tracks the S&P 500? The answer is that the Dow consistently outperforms the S&P 500, as quantified in my summary. And the Dow arguably works better than the S&P 500 with the HSI signals.
The upside-down advice of the market gurus
Figure 1 shows that you can’t rely on sentiment indices as a market-timing panacea. For example, the four-part rule described above kept an investor exposed to the Dow’s 50% losses during most of the crash of 2007–2009. That was a heart-attack level of decline that many people couldn’t tolerate.
If an investor was an unfeeling robot, however, and could remain invested even in the grip of widespread panic, the sentiment index made a big difference. The investor who got out of DIA when the advisers were the most bullish would have made 7.86% annualized, after subtracting trading costs. A buy-and-hold investor would have made only 6.41%.
The improvement was meaningful, even though the sentiment rules caused only 1.1 portfolio changes per year, on average. Additionally, the investor would have been out of the market only 7% of the time.
How was this performance enhancement accomplished? The answer is shocking. Whenever the advisers were so bullish that their average exposure was in the top one-tenth of the readings, the Dow actually went down an average of 0.14% in the following week. (The week was between one Tuesday close and the next.) In other words, the periods when the advisers were the most certain of their rightness were the weeks when their advice was the worst.
I hope you see how ridiculous it is to follow a guru’s expensive, emotionally based recommendations on the market. What kind of a world do we live in when the average adviser is the most bullish when the equity market is about to go down?!
It’s a world where a lot of financial sharpies make a lot of money charging high fees to gullible investors. Let this be a warning to you: Those who claim to have a crystal ball in their hands may actually just have some of your money in their pockets.
In the next three parts of this column, we’ll see how the Hulbert Sentiment Indices work — or don’t work — on markets like the small-cap Russell 2000, bonds, and gold. You may be very surprised!
• Parts 2, 3, and 4 appear on Dec. 20, 25, and 27, 2018.
With great knowledge comes great responsibility.
—Brian Livingston
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