Jason Zweig, a financial journalist for the Wall Street Journal, has done an excellent job exposing flawed data in an investment newsletter co-owned by financial advice author Suze Orman and money manager Mark Grimaldi.
Zweig fact-checked Grimaldi’s claim that his newsletters were awarded a number 1 ranking from Hulbert Financial Digest. Mark Hulbert, the publisher of the digest, disputes this claim. Grimaldi remains steadfast in his view and is quoted saying: “I’ll say that to my grave.” Orman is apparently unmoved by Hulbert’s position. She is reported to have “adamantly” told one reporter (on two occasions) that the newsletter was rated number 1 by Hulbert.
Here’s what’s lost in this heated controversy: What’s the value of investment newsletters?
One study looked at the performance of 237 newsletters over the 1980 to 1992 period. The study found no evidence that newsletters can time the market and that “very few” of them beat the S&P 500 index according to the measures studied. More significantly, it found that “winners rarely win and losers often lose again.”
Competing for the top prize issued by Hulbert seems to be a dubious goal. On May 15, 2008, Hulbert wrote a blog comparing the stock market outlooks of the best and worst market-timing newsletters. According to Yahoo Finance, on that date the Dow Jones Industrial Average was 12,660.
Hulbert undertook the challenge of predicting the future direction of the markets, based on the track records of these newsletters. He noted that the top performing newsletters over various time periods (ranging from five to twenty years) recommended higher allocations to stocks than the lesser performing newsletters. He observed that this difference in average recommended exposure to stocks between the “market beating” and “market laggard” newsletters had increased in three of the four time periods measured in the past two months, indicating strong bullish sentiment by the outperforming newsletters.
After assessing this data (and with some qualifications), Hulbert rejected the views of the lower performing newsletters that were bearish on the market and were recommending a lower allocation to stocks. He observed that it would strike him as “a low probability bet” to assume that newsletters that were laggards over many years are now “uncharacteristically, going to be more on target with their forecasts than the timers whose market timing calls over the years have added value.”
On March 9, 2009, the “low probability bet” paid off. The Dow closed at 6,546, its lowest point since April 15, 1997.
Instead of endorsing a newsletter which attempts to predict random and unknowable events, Orman should be focusing on issues of proven importance to investors. She could start with low expenses. A fund with low expenses has a higher expected return than a comparable fund with higher expenses.
Grimaldi is the poster child for running a fund with high fees. According to one report, he charges a management fee of 1.63 percent for his Sector Rotation Fund, which invests in exchange-traded funds. In stark contrast, the average expense ratios (which reflect management fees charged by the fund) for exchange-traded funds managed by Vanguard are only 0.17 percent.
It’s bad enough that Orman is endorsing a newsletter with questionable data. It’s worse that her endorsement may encourage investors to believe that newsletters have any predictive value.
Orman has given away more than 50,000 copies of Grimaldi’s newsletter, which costs $63 a year. She is quoted as saying she is “proud to be able to provide our newsletter to people who are looking for solid financial advice.”
Giving away this newsletter is no defense for Orman. It’s still too expensive.
Dan Solin is a senior vice president of Index Funds Advisors. He is the New York Times bestselling author of The Smartest Investment Book You'll Ever Read, The Smartest 401(k) Book You'll Ever Read, The Smartest Retirement Book You'll Ever Read, and The Smartest Portfolio You'll Ever Own. His new book, The Smartest Money Book You'll Ever Read, was published on December 27, 2011.
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