Almost never, in my experience, does a newsletter editor quit while he’s ahead. So it’s a big deal when one does.
That’s why I’m devoting this column to interviewing Teal Linde, editor of The Linde Equity Report. Earlier in September he published his final issue, despite being in the select group of newsletters that have beaten the market over the long term. For the 20 years through Aug. 31, according to my Hulbert Ratings performance auditing service, Linde’s stock portfolio has produced a 14.2% annualized return, versus 9.3% for the S&P 500. These returns, which reflect reinvested dividends, are plotted in the accompanying chart.
For the record, you should know that Linde in recent years has been one of the newsletter editors who have paid a flat annual fee to have their returns audited by Hulbert Ratings. Because Linde paid the same flat fee that every other monitored newsletter editor paid, there was no incentive to report such good performance for his newsletter.
The following is an edited version of my interview with Linde earlier this month.
Hulbert: Why quit now?
Linde: My investment approach is more suited to private clients, given their much longer duration in receiving our advice. The success of my strategy depends highly on capturing the huge gains of the occasional stocks that achieve spectacular profits. Outliers like these don’t come along every day. Too many newsletter subscribers are only around for a year or two, and therefore miss out on these outliers that emerge once every several years.
Is there anything unique about your approach’s reliance on outliers?
I don’t think so. Almost every long-term outperforming newsletter or portfolio has a handful of massive winners largely responsible for its outperformance. This detail is overlooked by most investors because they focus on average performance, when in fact the averages are skewed higher by outliers.
Can you give an example?
Consider small-cap stocks, which researchers have shown to have outperformed mid- and large-cap stocks over the long run—on average. But this small-cap advantage is particularly dependent on the performance of relatively few massive outliers. Most small caps actually are mediocre performers, or worse. In fact, on a median return basis, small caps underperform mid- and large-cap stocks. This helps to explain why so many investors are left disappointed when investing in small-cap stocks.
How would you describe your approach?
I look for great companies trading for a fair price. I define “great” companies to be those with the most compelling business models. A strong business model could be a function of oligopoly, duopoly status, market dominance, a powerful brand, or the network effect. Similar to cooking with the highest quality ingredients, with a superior business model it’s hard to go wrong. A strong business model enables companies to achieve higher rates of return on their reinvested profits, which spurs above average rates of organic revenue and earnings per share growth, which results in an outperforming share price over time.
Are you a follower of Benjamin Graham, the father of value investing?
Not really. Graham focused on buying dollar bills for 50 cents. I’d rather pay $1.20 for a dollar bill that’s growing 20% annually for many years, especially since 50-cent dollar bills aren’t as prevalent today as they were when Graham was writing.
Who would you say are your advisory mentors?
One at the top of my list is Peter Lynch, the manager of Fidelity’s Magellan fund during its heyday in the late 1970s through to 1990. Spread across a wall in my office is Lynch’s famous quote: “The person who turns over the most stones wins!” My newsletter’s publishing schedule was monthly, and I recommended just one new stock in each issue. That schedule allowed me to turn over a lot of stones in coming up with that one stock pick.
Is that all there is to it?
At the level of investment philosophy, yes. But the real work of investment analysis is what one does to put a philosophy into practice. Two advisers can follow the same philosophy and yet come up with different stocks. I really do think it comes down to which adviser is willing to turn over the most stones to find the best opportunities. And if you’ve done your homework, then you can really possess long-term conviction in your stocks. With such conviction, if your stock suffers a short-term stumble, your instinct will be to buy more, not to sell.
A lot of today’s advisers publish more frequently than monthly, or at least have the ability to communicate advice to clients between issues. Were you hampered by not having that ability?
On the contrary, my performance benefitted by not having the ability to change my advice at the drop of a hat. My publishing schedule imposed a discipline that prevented me from even thinking about selling a stock between issues. More often than not, I found that the stocks that I impulsively wanted to sell had recovered by the time I was writing the next issue of my newsletter.
What’s your view about market timing?
I am not a fan. In my experience, clients who sell out when the market is falling almost never buy back in at a lower level. The market looks scarier even lower, so they’re more determined to stay in cash. Instead I prefer to remain fully invested, but with a diversified portfolio that can take advantage of bear markets by switching out of stocks that have held up well into shares of compelling companies that have severely sold off. Such stocks offer far more upside on a market recovery.