Investment-letter ups 'n downs. Heavy-hitting advisers one year may strike out the next
Babe Ruth was not only a home-run king, he also struck out more than any other player of his time. And scanning the list of the top-performing investment newsletters of 1985 (according to Mark Hulbert), one wonders: Where are last year's home-run kings? In 1984, the Option Advisor took the No. 1 spot, with an incredible 95 percent gain when the overall market barely budged. In '85, the same newsletter struck out consistently. The Option Advisor portfolios lost 27.5 percent on average, finishing near the bottom of a heap of 74 advisers tracked by the Washington-based Hulbert Financial Digest.
Also going from riches to rags: the Granville Market Letter (down 78.8 percent on average) and the International Harry Schultz Letter (a 3 percent gain on average). Meanwhile, the 1985 winner rose from the previous year's ashes. The McKeever Strategy Letter rode the volatile commodity, foreign-exchange, and stock-index-futures markets to achieve a 99.3 percent gain.
In fact, the only letter to finish in the top 10 both years was B. I. Research, in South Salem, N.Y. Adviser Tom Bishop could not be reached for comment.
The inconsistency of the top finishers is due in part to the high level of risk inherent in their methods, says Mr. Hulbert. It also demonstrates how difficult it is to put together a strategy that consistently outperforms the market average.
Last year 18 newsletters beat the 31.7 percent rise of the Standard & Poor's index of 500 stocks (with dividends reinvested monthly). Or to put it another way, 75 percent of the newsletter mavens Hulbert follows did worse than the overall market. ``Historically, that's about average,'' Hulbert says.
With that in mind, check out the performance of the Prudent Speculator, published in Santa Monica, Calif. Under Al Frank's steady hand, this portfolio garnered sixth place last year, with a gain of 62.2 percent. But more impressive, this newsletter holds Hulbert's No. 1 position based on performance for 51/2 years.
Since June 30, 1980, the Prudent Speculator's model portfolio (which is Mr. Frank's own personal portfolio) has risen 372.4 percent, compared with a 141.2 percent rise in the S&P 500.
Frank, who also manages some $25 million for individual clients, comes from the Benjamin Graham school of value-hunters. He sticks to issues on the New York Stock Exchange and only buys stock ``50 percent undervalued -- according to our valuation criteria.'' Once he finds a very undervalued stock, Frank gains a significant kick from his picks by fully margining his portfolio.
His three guiding rules for investing: ``First, do your homework -- find the undervalued issue. Second, be patient [he holds stock an average of three to five years]. Third, diversify.'' He holds 117 stocks in his $850,000 portfolio, with no more than 5 percent in any one stock.
Frank remains quite bullish about the market. So much so that in last year's dramatic rally he sold only ``a handful'' of stocks. ``I'm very positive for at least the next six months. Stocks may rise another 20 percent or more on average.''
Another notable bull is Louis G. Navellier, publisher of the OTC Insight. Hulbert says this relatively inexpensive ($100 annually) newcomer to his survey bears watching. The El Cerrito, Calif., newsletter placed fourth in '85, with an average return of 66.3 percent on nine portfolios. Even the weakest of the nine did so well that if it were an individual newsletter it would have bested all but six of the 74 newsletters Hulbert tracks.
Mr. Navellier says he is nothing more than ``a quantitative analyst -- a technician with a computer.'' His ``hot wired'' Macintosh computer screens 1,100 over-the-counter stocks. Each month the computer recommends about 100 stocks on the basis of such criteria as risk, volatility, and strength relative to the market. Another program diversifies the portfolios ``to give the best possible return for the least amount of risk.''
OTC Insight has been published for five years, but last year was the first that Navellier set up model portfolios. He enjoys the stock letter but says his bread-and-butter work is computer stock analysis for institutional clients.
``We know what risk is and we calculate it,'' Navellier says. ``And we've found that a lot of medium- to low-risk stocks do well relative to, even regardless of, the market.''
In generalizing about last year's top finishers, Hulbert says, ``Clearly, the technology sector has emerged again as a profitable place to be.'' But Michael Gianturco finds that observation too broad. Yes, his Houston-based High Technology Investments letter scored a 77.1 percent rise in 1985. But most of that was made in biotechnology stocks and by buying put options on falling issues.
``There never was a general upsurge in technology,'' Mr. Gianturco says. ``And I don't see any particular signs of strength in the high-tech sector now.'' He uses an IBM PC to choose stocks on a fundamental basis, then sells on technical signals from the computer.
He is not afraid to sell the entire portfolio if the computer indicates he should. Last year, after making sizable profits, he took an all-cash position twice and then bought some puts or calls. At present he is in cash only. ``I don't invest heavily in options, but when we're in cash, frankly, the newsletter can become boring.''