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Stock-Picking Talent Or Mere Luck?

There are literally hundreds of investment newsletters these days.

Brokerage research reports have questionable value. Remember the conflict of interest scandals of 2002, when it emerged that research reports were meant to help investment bankers do deals rather than offer real financial analysis? In the resulting settlement, brokerage firms began to offer their advisors independent research as well as their own.

Smith Barney, for example, offers its advisors S&P Vista Research, Morningstar, Thomson One Analytics and Argus Research. Smith Barney also offers independent research even after it officially drops coverage of a security. But many brokers, weary of traditional sell-side research, turn to investment newsletter websites. There are literally hundreds of investment gurus out there and, of course, many are of questionable value.

Mark Hulbert, the editor of the Hulbert Financial Digest, has tracked and evaluated the results of investment newsletters in a quantitative and analytic fashion since 1980. Hulbert says it doesn't necessarily matter what strategy a newsletter pursues — there are many ways to make money — it's more important that the newsletter writer be consistent. “The common theme amongst newsletters that outperform is patience and discipline, to stick to one's approach even during those temporary times when it is out of sync with the market,” he says (for more on Hulbert, see page 79).

With Hulbert's advice in mind, and with the knowledge that our readers have clients of differing investment goals and strategies, we assembled a list of newsletters that use diverse investment styles, have risk levels ranging from high to low, and invest in both equities and mutual funds. We began by looking at Hulbert's rankings of newsletters on a 10-year risk-adjusted basis, and then, in collaboration with Hulbert, selected five letters that provide superior results.


McKee, a former broker at Merrill Lynch, began publishing the No-Load Mutual Fund Selections And Timing Newsletter in 1985 from Richardson, Texas, far from the canyons of Wall Street. About 10 years ago he started focusing on a more quantified process that examined volatility (standard deviation). He began measuring fund returns relative to other funds with the same level of volatility.

He incorporates a more subjective element of market timing and top-down outlook in his process, using some Rydex Ursa funds to hedge market exposure. “Funds that rise the most off the bottom of bear markets are different than the ones that preserve capital during them,” he notes.

At the core of his process is a methodology that ranks 800 funds. First, he breaks them into styles classifying funds as hybrid, gold, aggressive growth, small cap, mid cap, large cap, value or world growth; he has additional styles based on holdings and performance. Then he compares the risk-adjusted return within each style, buying the top 5 percent, holding any funds in the top 15 percent and selling the rest. Funds are assigned to differing styles not on the basis of the asset classes they hold, but on a dynamic risk ranking that adjusts for changes in funds' exposure over time. “The Janus Balanced fund used to be riskier,” says McKee, who argues that the fund's reduction in risk exposure over time necessitates a change in its classification.

McKee's publication offers readers a list of “buy” and “hold” rated funds in each category, as well as four model portfolios. All of his publication's portfolios take less risk than the market as a whole. Although only his aggressive growth portfolio has notched higher returns than the broad market average, all his portfolios have taken far less risk than the market and outperform on a risk-adjusted basis. Even his aggressive-growth portfolio has taken only two-thirds of the risk of the market, despite returning 407 percent over its existence, versus 296 percent for the Wilshire 5000. McKee's publication is ideal for financial planners, RIAs and reps working on a fee-only or wrap-fee platform, and interested in using mutual funds for their clients' portfolios.


Janet Brown's No Load Fund X may already be familiar to some readers — as many as 30 percent of its 14,000 subscribers are financial planners or registered reps. “The publication is pretty dense in data, and not for the uninformed reader,” Brown says, referring to the newsletter's quantitative and disciplined approach.

“Many disciplines work, but the key is sticking to one through its inevitable periods of underperformance,” Brown says. “A lot of our work is helping people find the courage to hang on. There have been periods of underperformance for short times, but we have almost doubled the S&P 500 return over 10 years, even though we outperform in only 55 percent of the months,” Janet says.

Brown breaks down ETFs and mutual funds into risk categories, then ranks them on the basis of their trailing one-, three-, six- and 12-month returns. Their returns are then ranked relative to their risk profiles before constructing a list of buy and hold rated funds. “If you want to outperform the market, you have to be different. We don't separate value from growth or domestic versus international,” says Brown, who joined the publication in 1978 after getting a stockbroker's license.

Originally calculated on a 10-key calculator, Janet and the founder of the newsletter, Burt Berry, have now built an empire, with 21 employees and over $2 billion in total assets, including separate accounts and eight mutual funds that employ the strategies of the newsletter.

This approach has led to impressive results. Brown's “Class 3-Higher Quality Stock Funds” has been published for 28 years, functioning as the newsletter's main model portfolio since 1989. Over its lifetime, “Class 3” has returned 16.7 percent annualized, versus 11.9 percent for the Wilshire 5000, according to Hulbert. While the portfolio has incurred 28 percent more volatility than the market to achieve these results, it still beats the market on both an absolute and risk-adjusted basis, an impressive feat given the length of time and the variety of market conditions encountered during that period.


John Buckingham has worked at The Prudent Speculator for more than 20 years, joining the newsletter after developing an interest in the market while studying computer science at USC. The newsletter was founded by Al Frank in 1977, and began as a report on holdings in his personal account. Since then, Buckingham has expanded the newsletter to include three new portfolios, all of which are more suitable for clients than the original portfolio, which contains a large number of positions. The newsletter now has almost 9,000 subscribers, and the firm also manages separate accounts and mutual funds.

Buckingham's team of nine uses the Factset Research database, a professional tool with annual subscription fees around $30,000, to filter a universe of more than 6,000 companies based on low price-to-earnings ratios, low price-to-sales and other fundamental variables. They look to initiate positions at a significant discount to their target price and then hold for an extended period of time — the most current portfolios in the newsletter have average holding periods of more than four years, making this newsletter ideal for clients who want to hold individual equities and qualify for long-term capital gains status. This publication can also be used for gleaning individual investment ideas — the newsletter contains picks of varying size and asset classes. Many of the picks are small and mid cap, and tend to start on the value side of the asset style box.

Buckingham's portfolios are volatile, ranging from 50 percent to 123 percent more volatile than the market over their life spans, and have incurred drawdowns of greater than 20 percent in the bear market of the past year. But the editor remains upbeat, highlighting bullish corporate insider behavior, and a buy list for the newsletter that ranks as one of the largest in 31 years of publications.

When asked what to buy now, Buckingham stresses the importance of diversification, and offers a list of names including Yamana Gold (AUY), Anglo American (AAUK) and Nucor (NUE) in commodities; Terex (TEX), Eaton (ETN) and General Electric (GE) in manufacturing; Nokia (NOK), Seagate (STX) and Silicom (SILC) in technology; Goodyear Tire (GT); D.R. Horton (DHI) and Jakks Pacific (JAKK) in consumer durables; Aetna (AET), Syneron Medical (ELOS) and Forest Labs (FRX) in health care; Supervalu (SVU), Walgreen (WAG) and Nordstrom (JWN) in retail; and JPMorgan Chase (JPM), Hartford Financial (HIG) and Capstead Mortgage (CMO) in financials.

His top pick is Chesapeake Energy (CHK), one of the largest natural gas producers in the U.S. It trades for 11 times forward earnings and six times cash flow with a savvy CEO/co-founder who may be the most active share-acquiring executive in corporate America.


Vahan Janjigian's path to newsletters did not begin with a stint as a registered rep like many other investment newsletter editors. After earning an MBA at Virginia Tech and then a Ph.D. in finance, Vahan was teaching at Boston College, a subscriber of the Forbes Special Situation Survey for several years before he became editor of the publication. He also writes a blog,

Each issue contains a single stock recommendation, analyzed in great detail on a fundamental, financial and technical basis. The staff includes Wally Forbes, Steve Forbe's uncle, Vahan, and two equity analysts. Amongst them they boast three CFA charter holders — a good background for the publication's rigorous discounted cash flow valuation methodology.

With only one new name each month, the publication's buy list is thus highly concentrated, with roughly 10 stocks to 15 stocks recommended at any given time. SSR will look at companies of all sizes, and is currently recommending both behemoths like Johnson & Johnson (JNJ) at $200 billion market cap and Jos A. Bank Clothiers (JOSB), a small stock by any definition, with just about $540 million market cap. The letter has a mid-cap blend approach. The publication has been doing well despite the challenging market environment, gaining 11.3 percent in the 12 months through August, and it is ranked number one in the 2008 calendar year. He doesn't trade often, and holding periods can be three to five years.


The Investment Reporter, edited by Marc Johnson and based in Canada, has a track record dating back to 1941. Since 1991 it has included both U.S. and Canadian stock recommendations, making it suitable for clients with a strong interest in North American investing or a fondness for the natural resources companies that are common to many Canadian listed equities.

The newsletter holds a short list, often less than 10 names at a time. The newsletter's “conservative” list of Canadian stocks has returned 13.9 percent per annum since 1984 versus 11.2 percent for the DJ Wilshire 5000; the “average risk” U.S. stocks list has returned 13.8 percent from 1992 through August versus 9.3 percent for the DJ Wilshire 5000. Although the U.S. list took 67 percent more risk than the market as a whole, it still outperforms on a risk-adjusted basis, making it best suited for higher risk accounts.

Marc has been following the market since the age of 14 and uses a bottom up, value-oriented approach that focuses on cash flow growth, dividend sustainability and capital expenditures. He considers technical analysis in determining entry points, and usually holds stocks for extended periods — often as much as five years. The focus is on large cap, dividend paying names. The letter often focuses on those industries that pay dividends most frequently: finance, utilities, consumer products and services, and manufacturing and resources. The natural resources category is a large one on Canadian exchanges, but these names can be vulnerable. “The TSX Venture Exchange has many speculative stocks. We stay away from such stocks,” says Johnson, noting that other Canadian markets include such well-known companies as Barrick Gold (ABX), the world's largest gold producer, and Potash Corp. of Saskatechewan, a high- flying stock listed in both the U.S. and Canada.


Five investment newsletters using diverse investment styles with varying levels of risk, that score well, according to Mark Hulbert.

Portfolio Composition
Newsletter Editor Contact Info % Long % Short % Cash Number of Avg Securities Held in 2008 Portfolio Volatility Over 12 months* 10-Year Total Return 10-Year Risk adjusted return (return /SD)
No-Load Mutual Fund Selections and Timing Stephen McKee (800) 800- 6563 36.1 11.1 52.8 5 80% less 73.50% 0.14
No Load Fund X Janet Brown (800) 763-8639 100 - - 7 28% more 231.90 0.15
The Prudent Speculator John Buckingham (877) 817- 4394 105.6 - - 132 9% more 230.10 0.13
SSR Vahan Janjigian - 100 - - 132 48% more N/A (5 yr. return is 149.5) N/A 0.34 (5 yr.)
Investment Reporter Marc Johnson (800) 430- 1897 92.3 7.7 8 9% more 175.90 0.15
DJ/Wilshire 5000 n/a 44.20 (5 yr. 45.9) 0.12 ( 5 yr. 0.15)
*compared to DJ/Wilshire 5000
Source: Hulbert Financial Digest
TAGS: Equities
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