When pressed, most people say they invest in the stock market in order to produce long-term wealth. But they’re often lying.
In truth, they’re often in the stock market because they’re thrill seekers.
There’s nothing wrong with that, of course. But confusing thrill seeking with investing can be very hazardous to your wealth.
These thoughts are prompted by the publication of my firm’s latest honor roll of investment newsletters. This honor roll showcases advisory services that have produced above-average performance in both up and down markets. While these services rarely are at the top of the scoreboards when the markets are going their way, they avoid big losses when the markets go against them.
While some consider these services’ slow-and-steady-wins-the-race approach to be boring, I submit that they are likely to make you more money over the long run than those that seem more exciting at any point along the way.
What Honor Roll Newsletters Are not
To appreciate the kind of newsletter that makes it onto my honor roll, it’s helpful to focus on other newsletters that are at the opposite end of the spectrum.
One that stands out is a newsletter (no longer published) that used to invest its entire model portfolio in just a couple of options on a single company’s stock. This newsletter has the distinction of having produced the highest monthly gain of any that my firm has been tracking since 1980 (more than 1,000%), as well as having incurred the largest monthly loss (close to 100%).
No one would ever accuse this newsletter of being boring.
Even with its greater-than-a-thousand-percent gain in some months, however, the newsletter’s model portfolio still lost almost everything. That’s because you need a gain of even more than that to merely breakeven after suffering nearly-100% losses.
But the reason the newsletter’s approach is not appropriate for most investors is not just statistical. It also is inappropriate from a behavioral point of view: Hardly any investors have the patience, discipline and intestinal fortitude to stick with a strategy that is this volatile. Even if the strategy had a stellar long-term return, its bucking-bronco behavior would have thrown off almost all investors well before that long term was reached.
Statistics and Psychology
This helps us understand that long-term investment success is a matter of both statistics and psychology. If we were mechanical robots, then choosing an investment adviser or strategy could be purely a matter of statistics. But we’re human beings, subject to all the tugs and pulls of our emotions, and that’s why we must take psychology into account.
This insight has a rather ironic corollary: The strategy that makes the most money on paper may not actually make us the most money in practice. The best all-around strategy is the one that we can actually live with through thick and thin -- and that strategy might not stand out when you focus on it from a purely statistical point of view.
This is why my investment newsletter honor roll is deserving of your consideration. While the services that appear on it may not have made the most money of any of my firm’s monitored newsletters, they are ones that have both done well and don’t require Herculean determination and resilience to actually follow.
In my just-published 2020-2021 Honor Roll, just three newsletters make the grade. They are:
· Bob Brinker’s Marketimer, edited by Bob Brinker
· Investment Reporter, published by the Canadian Business Service
· Investor Advisory Service, edited by Douglas Gerlach
Full disclosure: As is the case with any of the newsletters monitored by my performance-auditing firm, these three paid a flat fee to have their returns calculated. Because this is a flat fee, I have no incentive to put them on the Honor Roll and not any of the others.
You may recall that there were six newsletters in last year’s Honor Roll -- the three listed here and three others. Those others didn’t do anything particularly wrong; Their below-average performance over the past 12 months has just caused them to come up slightly short of the thresholds to make the list.