Be careful jumping on bandwagons

By DAVID MOON, Moon Capital Management
March 4, 2007

The number of people willing to do what it takes to win is pretty small. But a lot of us want to hang out with the winners, wear their jerseys, see their movies and ride their bandwagons.

And buy their investments.

Be careful, however, how you define winner. It's not always going to be the person who won the most recent race.

Barron's estimates that there are up to 1,000 newsletters peddling financial advice of some sort to the investing public. Since 1981, the Hulbert Financial Digest has been tracking the performance of the recommendations of investment newsletters, helping investors differentiate between the talented and the tainted.

Sadly, however, I'm afraid that some people use the data in the wrong way.

A look at the most successful newsletters of the 21 years preceding 2002 helps prove the point.

Hulbert compiled a list of the best-performing investment newsletter in each year from 1981 to 2001. If you had owned the stocks or mutual funds recommended by each of the winning newsletters each year, your average annual rate of return would have been 126.44 percent. Over these 21 years, a $10,000 starting investment would have grown to be worth more than $284 billion. (Yes, that's with a 'B'.)

It's hard to get much better than that.

It's also hard to perfectly time the purchase of an investment. But what if you were close? Surely that's possible.

How would you have fared if you missed the absolute best timing by only twelve months, but still managed to pick the best-performing newsletters?

You wouldn't expect to do as well as if you had started following each newsletter at the beginning of its championship season, but you might still expect to do pretty darn well, wouldn't you?

Guess again.

The average return of the newsletters in the 21 years following the year in which each was the top-performing newsletter was a devastating minus 31.4 percent a year.

If you had started with $10,000 and adjusted your investments each January on the basis of the advice offered by the previous year's best-performing investment newsletter, in 21 years your nice nest egg would have been worth a whopping $3.65.

You would have lost more than 99.9 percent of your original investment.

Two newsletters made the top performers list twice during those 21 years. But if you had missed either of the two great years for one of them, the Granville Market Letter (up 367.9 percent and 89.4 percent), you would have been able to jump on the bandwagon in each of the subsequent years just in time to lose 70.1 percent and 31.9 percent.

It's a lot easier to pick the winners of a horse race if you wait until after the race is over before placing your bet. But by then, the bet is worthless.

Why do so many people choose their investments that way?

David Moon is president of Moon Capital Management, a Knoxville-based investment management firm. This article originally appeared in the News Sentinel (Knoxville, TN).

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