How business, doctors and journalists prey on your food anxieties I

WAlL STREET IRREGULAR
H<strong>and</strong>icapping
the letters
Mara Hulhvr. is edior
e; tne Alexardria, Va .-
based Hu/bert
Pmancrar Digest .
a montGly serv~ce
:hat monitors the
reriornance of
InVestnentadVNsOfy
etters .
Is SUPERIOR L.'~sT rsRFORUASCE bc' an imestment
adviser ana'assurance of titture superinr
performance? Has the holder of ~esterdae's
hot h<strong>and</strong> got a good chance of holding hot
h<strong>and</strong>s in the future? Yes! That fact emerees
clearlv fiom mv just-completed sun e% of investment
letter performance oser the entire 15
years tlte Hrdbe ;t Finaracial Dijsrt has monitored
the industn .
J1v findine flies in the face of the st<strong>and</strong>ard
academic argnment that performance is r<strong>and</strong>om
. If that were true, pou could more or less
ignore past records chen pidcing a mut tal tund,
an imestment ad~iser or a nmrket letter . Dog
rodav would not necessarily mcan dog tomorrow
. In fact, it might be better to go with the
dogs because regression to the mean ~till e% entuaily
gi~e the leaders their comeupnance .
My new data provide a strong statistical
basis for believing that going with the %rinners
makes good im-estment sense . Not all Inngterm
winners have continued to beat the market.
but the spread bctw'een their average performance
<strong>and</strong> the areragc performance of the
losers has continued .
One reason some obseners fail to detect
this relationship between past <strong>and</strong> fimue oerformance
is this : It depends crucially on how the
past is defined . Focus on the short-term, <strong>and</strong> the
relationship disappears altogether-thc good,
the b'ad <strong>and</strong> the indifferent are indistinguishable
short term . This holds true fur quartcrlc <strong>and</strong>
even yearly performance . Remember *,his the
next time you get an investment letter tdvertisement
that attempts to capitalize on a short-
2rni high ranking in the xEO.
<strong>How</strong> manw aears of past performance are
needed in order to increase ~-our chances okfutnre
succes_c- Five is a minimum, <strong>and</strong> ten is e% -en
better . Mc research sho%es that the letters that
shine over flw- <strong>and</strong> ten-~ear periods arc likeh° to
continue to do weil, While those that do badlr iu
these periods are more likeh' to continuc to do
badh . Intagine yourselfin the shoes ofan itwestor
st'ho, in mid-1990, is pickin*an adaise_ to follow
for the ti~e ~ears from theu until toden . Ho%~
best could you hare used the ten N ears of performance
ratings then in the trFn databasc?
You'd be happiest todatif N-ou had : sed all
ten t,cars of performance data then asailable to
separate winners irom losers . If in mid- 1990
you had im-estcd with dte ten-% ear market beaters,
Vou'd have made an acerage of 13-2%
compounded bN noNN , cersus 12 .3% for the stock
market itself You'd ha~e made just4 .1°6 bo,
imesting in the ten-N ear market laggards .
What would hat'e happened if in mid-1990
you Itad picked fice-,,ear \\ inners rather than
ten-% ear uinners? You %could h .ne made
10 .0% compounded, relsus 8 .3% bv incesting
~rith the tiN e-N car losers . Note that this 10 .0°/ato-8
.3%o diP}ercntial issmailet-than [ha 13 .2%-
to-4 .1% dif'tcrential fur ten vears .
Or cou could have _flonc ~cith the three-vear
t~inners . If cou had, cou Would ha%e gained a
10 .3i, compounded reuun ocer Ihe next fi%e
t•ears, Nersus 8 .8%a for in .'esting ~% ith tlu threet•ear
losers . In ot9ler uards, going uith rite
direc-%,ear markct bcaters oulr mareinalh~ increases
tnur odds offuture success~ ~
Condusion : Go uith the ten-rear winners .
Take Nt'i_th a grain of salt thingslike the Wall
Sn~eet jarn,naPs rcporting ofshort-term muutat
fund uerformancc, where one ciac oftheirfuedav
reporting c%•cle is de%oted to performance
oN °er the last 20 trading davs <strong>and</strong> anothcr to the
last 65 trading dat•s .
Who are the ten- ear «inners in the HFD
sueepstalces? In tu'st place is trpi Rdpicw (edited
b~' Louis \arellierl, tthich produced a 902°'~
return through mid-1995, versus a 268% total
return for the Wilshire 5000 index , In second
place is tlte Cilif'rnnia Technology Stock Letter
(edited b~\-Iichael Slurphv <strong>and</strong> Lissa Morganthulerl,
«ith a 440% remrn ; <strong>and</strong> in third
place is the Cbrsi-fisz (edited bv Dan Sullit,an),
10111 :129 1"%~ re*.urn . Rounding out the top h\z
tor perfurmance ocer the last decade are nro
published b~b-tartin Z~ceig : the Zvrip Forecast
Here are the top five ~
investment letters over the p
past ten years-<strong>and</strong> that's ~
long enough to really count. c
<strong>and</strong> the Zirciq Per'frnrrnnnce Ratinns Report, yA
«ith gains of 27s%r <strong>and</strong> 272%, respcctiseh . ~
Though the Ztteig letters' gains appc'ar to be .~
onhmodastk ahead aftiie markcr, this is deccp
tive : The~ts-erc produced with 23% <strong>and</strong> 29%
less % olatilin(or risk) than thc market itself-a
srinning comitination . M
Forbes. August 14, 1995 187
http://legacy.library.ucsf.edu/tid/agf97d00/pdf