September 2011

I don’t mean to pick on Jeff Macke. His daily videos on Yahoo’s Breakout are no worse than what passes for financial journalism in much of the media. Recently , I took Mr. Macke to task for advising investors to engage in the discredited notion of market timing. That got me an invitation from his producer to appear on his show where we could debate “this controversial topic.” I declined, but offered to debate him in any impartial forum. No response. The perils of market timing are not controversial for anyone who is familiar with the data. Only brokers and actively managed mutual funds tout their expertise in predicting random and unpredictable markets. There really is nothing to debate. I thought nothing could be worse advice for investors than Mr. Macke’s call to time the markets. Unfortunately, I was wrong. Previously, Mr. Macke invited Simon Baker to give his views on buy and hold investing. Mr. Baker, a hedge fund manager, believes John Bogle, the founder of Vanguard, is a remnant of the past. Baker believes buy and hold is “a relic of a bygone era when the economy was stable and consistent growth was the norm.” In its place, Baker suggests retaining his firm to manage your assets. He believes he has the ability to tell you when to jump in and out of the markets. He isn’t afraid to tell his clients to go to cash when necessary. How does he do this? It’s simple. He uses the “Blue Buy” indicator. “Blue Buys” are apparently triggered when 90 percent of the basket of 4,000 stocks his firm follows are below their 15-week moving average. They are not there yet, but Baker advises investors to “get their checkbooks ready.” Sadly, some investors will find this compelling and follow his advice. If the “blue buy” signal was so clear and easy to implement, perhaps Baker could explain why 65 percent of active fund managers fail to beat their benchmark in any one year, and 95 percent fail to do so over a ten year period. Surely, these well-compensated fund managers from top business schools are capable of running a “blue buy” analysis of their own. Mr. Baker runs a hedge fund. Apparently, his fund has done well recently, but what about his fellow hedge fund managers? A study ( PDF ) by Burton G. Malikel and Atanu Saha found that every major category of hedge fund (eleven categories) on average failed to provide a higher risk-adjusted return than the S&P 500 from 1995 to 2003. Only emerging markets provided a higher unadjusted return than the S&P 500. Were these sophisticated hedge fund managers unaware of the “blue buy” calculation? Buying and holding a globally diversified portfolio of low management fee stock and bond index funds in a suitable asset allocation has served investors well for the past 83 years, including the past decade. Depending on the amount of exposure to stocks, those who followed this strategy had annualized returns ranging from 4.5 percent to 9.2 percent for the misnamed “lost decade.” The decade was “lost” only to those who had 100 percent of their assets invested in the S&P index. If you were one of these investors, you should “lose” your broker or advisor. Mr. Baker may have made some lucky calls, and Mr. Macke may be eager to anoint him as the next stock guru. Don’t be fooled. We have seen it before with many others, whose subsequent returns placed them in the same dust bin to which Mr. Baker wrongly assigns John Bogle. Yahoo’s Breakout could be a powerful vehicle for information that would empower investors, by providing sound investing advice, supported by reams of academic data. Instead, it is yet another example of financial pornography that is a forum for self-appointed investment savants, peddling luck as skill. Mr. Macke’s audience deserves better. Dan Solin is a Senior Vice President of Index Funds Advisors (ifa.com). He is the author of the New York Times best sellers The Smartest Investment Book You’ll Ever Read , The Smartest 401(k) Book You’ll Ever Read , and The Smartest Retirement Book You’ll Ever Read . His new book, The Smartest Portfolio You’ll Ever Own , was released in September, 2011.The views set forth in this blog are the opinions of the author alone and may not represent the views of any firm or entity with whom he is affiliated. The data, information, and content on this blog are for information, education, and non-commercial purposes only. Returns from index funds do not represent the performance of any investment advisory firm. 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