Following Gurus Is Not A Strategy
“It has always seemed to me the height of damfoolishness to trade on tips. I suppose I am not built the way a tip taker is. I sometimes think that tip takers are like drunkards. There are some that can’t resist the craving and always look forward to those jags which they consider indispensable to their happiness. It is so easy to open your ears and let the tip in. To be told precisely what to do to be happy in such a manner that you can easily obey is the next nicest thing to being happy – which is a mighty long first step toward the fulfillment of your heart’s desire. It is not so much greed made blind by eagerness as it is hope bandaged by the unwillingness to do any thinking.” – Reminiscences of a Stock Operator
In January 2015, one of the most prominent investing gurus of our time held a widely-publicized conference call. On the call he stated unequivocally that that U.S. equities have never rallied seven years in a row, and that we’ve just entered year seven of the current bull market.
His implication was clear: a down year and severe correction were imminent.
A colorful chart indeed and the media had a field day reporting on it. There was only one minor problem: the data within it was wholly inaccurate.
The truth: the S&P 500 Index (total return) had experienced 8 consecutive positive years from 1982 through 1989 and 9 consecutive positive years from 1991 through 1999.
Perhaps unsurprisingly, the prediction didn’t pan out. The S&P 500 would finish higher in 2015 and is up thus far in 2016, on pace for its 8th consecutive positive year.
Now, let’s assume the data in the chart was correct and the S&P 500 was tied for the record number of consecutive positive years. Would acting on that fact alone by shorting the market have been a wise decision?
Not particularly. To quantify that conclusion, though, we need to go back to 1928 and attempt to replicate such a strategy over time.
Had one attempted to the short the S&P 500 every time it matched a prior record in terms of consecutive positive years and held that short until there was a positive calendar year, they would have underperformed a buy-and-hold of the S&P 500 by 3.6% per year. (Note: this ignores transaction costs, fees, and taxes after which the gap would have been even larger).
Underperforming by 3.6% per year adds up over time: a $10,000 investment in the S&P 500 would grow to over $31 million versus $1.6 million for the “betting against streaks” strategy.
Which is one of the many reasons why, when it comes to gurus, you would be wise to understand that their prognostications and tips are not for your benefit. It is their job to entertain and gain attention; it is your job to ignore. You must do your own work in this business and find an asset allocation plan and strategy that you can stick with over time. Following a guru is not a strategy.
“The next several years will be one of the most difficult periods we’ll face in our investing careers. This is a time for preservation of wealth.” – Guru, August 2010
Outcome: The next several years would produce some of the highest risk-adjusted returns for a 60/40 portfolio of U.S. stocks and bonds in history.
“Though I rarely go public with specifics on stocks, I think the Standard & Poor’s 500, which is now over 1300, will hit 500 in the next couple of years.” – Guru, February 2011.
Outcome: The S&P 500 finished higher in 2011 and over five years later has not come close to the 500 level, hitting a recent high of 2193.
“Look, I don’t know whether the market will suffer $10 billion or $30 billion in defaults, but the actual amount doesn’t matter. There will be a panic at the margin, and muni bonds from the highest-rated on down will plummet, in part because other sorts of investors tend not to step in.” – Guru, February 2011
Outcome: Muni bonds (MUB ETF) finished up 13% in 2011 and 5% in 2012. They continue to hit new all-time highs in 2016.
“The housing market is dropping . . . and about to go to a new low. I think we’re looking at some type of echo in the credit crisis coming up here. That’s what I’m afraid of.” – Guru, May 2011
Outcome: There was no echo in the credit crisis and housing prices have risen sharply over the past few years (case-shiller national index is now within 0.6% of its July 2006 high).
“This is a bad time to be deploying money into risk assets. If you have a dollar-cost-averaging program, you certainly should turn it off for the time being.” – Guru, January 2012
Outcome: The S&P 500 would rise 16% in 2012, 32% in 2013, 13.5% in 2014, 1.4% in 2015, and is up 8% YTD. Guru has yet to recommend turning your dollar-cost-averaging program back on.
“Returns in 2012 were really better than they deserved to be. I am not sure I would advise taking a lot of risk right now. U.S. equities offer a poor risk-reward tradeoff and investors stand to lose more in equities than in an intermediate-duration bond fund.” – Guru, January 2013
Outcome: The S&P 500 would rise 32% in 2013, its best year since 1997. The Vanguard Intermediate-Term Bond Fund finished down 3.4% in 2013.
“About everything that tends to characterize the vicinity of a top in the equity market seems to be in place. If you want to speculate, I would be on the long side of the gold miners.” – Guru, January 2014
Outcome: The S&P 500 would rise 13.5% in 2014. Gold miners would finish the year down 12.4%.
“I hope it [Oil] does not go to $40, because then something is very, very wrong with the world, not just the economy. The geopolitical consequences – to put it bluntly – terrifying.” – Guru, December 2014
Outcome: Oil would fall to as low as $26. The world did not end and the U.S. economy remains in an expansion.
“The last six consecutive up years were 1898-1903, and a severe bear market followed; 2014 marked the sixth year of the current bull market.” – Guru, January 2015
Outcome: As noted above, the data was wrong (S&P has been up as many as 9 years in a row) but regardless, 2015 was a positive year and there was no severe bear market.
“Do not buy a junk bond index fund. You’re going to end up selling at a loss as they get more and more populated with distressed energy and mining issues.” – Guru, January 2016
Outcome: High Yield bond index funds would rally over 15% since to new all-time highs. The distressed energy and mining issues have rallied over 50%.
“If you’re going to do something in emerging market equities, my recommendation is to short them. They may fall a further 40%.” – Guru, January 2016
Outcome: Emerging Market equities have since rallied over 30%.
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This writing is for informational purposes only and does not constitute an offer to sell, a solicitation to buy, or a recommendation regarding any securities transaction, or as an offer to provide advisory or other services by Pension Partners, LLC in any jurisdiction in which such offer, solicitation, purchase or sale would be unlawful under the securities laws of such jurisdiction. The information contained in this writing should not be construed as financial or investment advice on any subject matter. Pension Partners, LLC expressly disclaims all liability in respect to actions taken based on any or all of the information on this writing.
CHARLIE BILELLO, CMT
Charlie Bilello is the Director of Research at Pension Partners, LLC, an investment advisor that manages mutual funds and separate accounts. He is the co-author of four award-winning research papers on market anomalies and investing. Mr. Bilello is responsible for strategy development, investment research and communicating the firm’s investment themes and portfolio positioning to clients. Prior to joining Pension Partners, he was the Managing Member of Momentum Global Advisors and previously held positions as a Credit, Equity and Hedge Fund Analyst at billion dollar alternative investment firms.
Mr. Bilello holds a J.D. and M.B.A. in Finance and Accounting from Fordham University and a B.A. in Economics from Binghamton University. He is a Chartered Market Technician (CMT) and a Member of the Market Technicians Association. Mr. Bilello also holds the Certified Public Accountant (CPA) certificate.
You can follow Charlie on twitter here.
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