In the Perspective section I more or less accuse Mark Hulbert of promoting what I call the title of this section. However, he is one of the leading purveyors of "anti-gibberish" in that he provides solid information to help investors evaluate how well advisory newsletters and services do regardless of what they claim. Shortly after the Wall Street Journal article I discussed above, on October 3 he had a post in the Barron’s online Hulbert of Markets titled Newsletter Returns: Be Skeptical. He discusses three claims by well known publishers and shows how they are misleading or incorrect.

The first claims that for "seven years running" it recommendations have had an annualized return of 145%. When Hulbert asked the publisher how he came to that figure, he was told the average gain per trade was 19.7% with an average holding period of 74 days. That does annualize to 145%, but it is an example of gibberish, numbers that are correct, but also misleading and potentially harmful to investors.

One problem is the assumption that one would be fully invested in all of the recommendations, some of which are for options purchases. Those can yield very high percentage gains, but also risk losing much or the entire purchase amount. No prudent speculator would do that.

More importantly, the use of average returns can be very misleading. Hulbert provides a simple example of two trades. The first triples, so the return is 200%. The second loses every thing for a -100% result. The average of the two is a positive 50%. Reinvesting the proceeds of the first trade into the second results in a total loss, not making 50%.

(In mathematical terms, the 50% is the arithmetic mean or what is normally meant by average. However, investment returns should be computed using the geometric mean. Unless all of the values involved are the same the geometric mean will always be less than the arithmetic one. In the example, a whole lot less, -100% vs. +50 %.)

The second gibberish instance comes from a publisher who makes numerous appearances on financial TV programs. The claim points out that starting with $5,000 and making 10% every month will result in over $150,000 in three years and $1.5 million in five years. That rate of return compounds to 214% annually, more than tripling the initial investment, so those figures are correct given the assumption of 10% a month.

That does not seem impossible. How often does one see a stock go from, say 50 to 55, in a few weeks? The hard part is finding such stocks and avoiding the ones that go down or not up very much. When Hulbert asked the relatively new service being promoted for its results, it received a list of 22 positions that had been closed this year. He said that some, but not all, had made at least 10%. More importantly, only one had been held for less than a month, and the average holding period was almost a year. Even more to the point, how could a subscriber know which recommendations were going to have profits of 10% or more? The implication that a subscriber had any chance at all of turning $5,000 into well over a million in five years is pure gibberish.

Hulbert’s third instance is about a long-time service that his newsletter has tracked since 1980. The current lead person took over from his father in 1992 and claims the service is the top-ranked risk-adjusted market timer according to Hulbert’s service. Not so. Hulbert points out that the newsletter ranks in 21st place over the 32 monitored over the period starting in 1992. The publisher did not respond to a request for comment.

Hulbert points out that Warren Buffett’s long-term return is 19.7% annualized. Since he is one of the best, if not the very best, investors, claims that returns of well over 100% annual can be sustained are highly suspect. I like to ask why someone who can really make 145% or 214% a year consistently would bother spending the time and money to attract subscribers. Why not just enjoy the fruits of one’s brilliance? Or as the old saw goes, "if it sounds too good to be true, it is."

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