Individual Gurus

These blog entries consist of reviews of the performance of individual gurus based on information freely available on the web.

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Warren Buffett on Investing

Does Warren Buffett consistently keep Berkshire Hathaway in market-beating form? If so, how does he do it? In his annual letters to stockholders, he includes company performance and benchmark data and describes in general terms how he goes about investing. He sometimes shares his thoughts on the current state of and prospects for the U.S. equity market. Using the annual performance data in Warren Buffett’s 2013 letter to Berkshire Hathaway shareholders for 1965 through 2013 (49 years) and the investing approach described in his letters of 1977 through 2013, we find that: Keep Reading

Forbes Evaluates Ken Fisher’s Stock Picking

Each year, Forbes calculates the performance of columnist recommendations assuming: (1) equal initial investments in each stock pick when published; (2) 1% trading friction for each purchase; and, (3) matching benchmark investments in the S&P 500 Index for each pick with no trading friction. Because matching benchmark investments are spread across the year, the benchmark performance is not the same as the annual performance of the S&P 500 Index. In his column for the February 10, 2014 issue of Forbes, Ken Fisher reports the performance of the recommendations made in his column during 2012, as follows: “So how did I fare last year? FORBES’ statheads calculate that equal bucks bet on each stock pick from my twelve 2013 columns, less a fat 1% brokerage haircut, would have done 2% worse than if put in the S&P 500 at the same times with no haircut.” Using the data in the 16 annual performance summary columns for 1998 through 2013, we find that: Keep Reading

Guru Grades Project Milestones

As of the end of 2012, we stopped adding forecasts to the Guru Grades database and published a preliminary report on findings. As of the end of 2013, we have completed the grading of all forecasts added during 2012 and now publish a final Guru Grades report.

The final report encompasses 6,582 graded forecasts from 68 gurus, adding 123 forecasts to the preliminary study (an increment of about 2%). The final report also incorporates a few minor corrections. The relatively small number of additional grades and corrections do not materially affect preliminary findings. Specifically:

  • Terminal forecast accuracy is still 46.9%.
  • Averaged by guru rather than across all forecasts, terminal accuracy is still 47.4%.

Accuracy rates change for individual gurus involved in the 123 incremental forecasts. We have updated the detailed forecast grading for these individuals. The histogram of guru accuracies in the final report is somewhat more symmetric than that in the preliminary report.

The final Guru Grades report will remain available indefinitely as a caution to investors on: (1) the (un)predictability of complex systems such as financial markets; and, (2) the risk or relying on grades self-assigned by students of financial markets.

Mark Hulbert’s Stock Newsletter Sentiment Index

A reader suggested a review of the stock market commentary of Mark Hulbert, editor of the Hulbert Financial Digest, which tracks the recommendations of a wide range of investing newsletters. He is also a regular columnist at MarketWatch. Because Mark Hulbert uses his Hulbert Stock Newsletter Sentiment Index (HSNSI) as a principal quantitative tool in formulating his market outlook, we evaluate the usefulness of that index in predicting stock market returns rather than his qualitative commentary. HSNSI “reflects the average recommended stock market exposure among a subset of short-term market timers tracked by the Hulbert Financial Digest.” Mark Hulbert presents HSNSI as a contrarian signal for future stock returns; when HSNSI is high (low), he views the outlook for stocks as materially bearish (bullish). Using a sample of 287 values of HSNSI over the period July 2002 through September 2013 (generated by searching MarketWatch.com for “HSNSI” and its predecessor “HSSI”) and contemporaneous daily closes of the S&P 500 Index, we find that: Keep Reading

The Timing Value of John Hussman’s Market Climate Assessments

Do quantitatively-driven mutual fund managers such as John P. Hussman, Ph.D, president of Hussman Investment Trust, successfully time the stock market? He describes his market timing approach as follows: “The key elements in evaluating securities and market conditions are ‘valuations’ and ‘market action.’ Each unique combination of these conditions results in a distinct Market Climate, with its own profile of expected return and risk.” His investment approach, as applied to funds such as Hussman Strategic Growth (HSGFX), is to “align our investment position with the prevailing Market Climate and shift that position when sufficient evidence of a Climate shift emerges.” Does this fund demonstrate good market timing? Using weekly dividend-adjusted returns for HSGFX during 11/21/00 (the earliest available) through 7/26/13 (660 weekly returns), along with contemporaneous weekly returns for the S&P 500 Index and the Russell 2000 Index as benchmarks, we find that: Keep Reading

A Few Notes on The Little Book of Market Myths

In his 2013 book The Little Book of Market Myths: How to Profit by Avoiding the Investing Mistakes Everyone Else Makes, author Ken Fisher, chairman and CEO of Fisher Investments, “covers some of the most widely believed market and economic myths–ones that routinely cause folks to see the world wrongly, leading to investment errors.” His hope is that “the book helps you improve your investing results by helping you see the world a bit clearer. And I hope the examples included here inspire you to do some sleuthing on your own so that you can uncover still more market mythology.” Some notable points from the book are: Keep Reading

Explaining Warren Buffett’s Performance

Is Warren Buffett’s track record explicable and replicable? In the August 2012 draft of their paper entitled “Buffett’s Alpha”, Andrea Frazzini, David Kabiller and Lasse Pedersen model Warren Buffett’s exceptional investing performance based on replicating the exposure of the publicly traded holdings of Berkshire Hathaway to six factors. Four of the factors are those commonly used to explain stock returns: market return, size, book-to-market ratio and momentum. The other two factors are betting-against-beta (buy low beta and avoid high beta) and quality (profitable, growing, dividend-paying). Using monthly stock returns and balance sheet data for a broad sample of U.S. stocks and quarterly Berkshire Hathaway SEC Form 13F holdings during 1976 to 2011, along with open-end active mutual fund performance data during 1980 through 2009, they find that: Keep Reading

Jim Rohrbach’s Disagreement with Review of His Technical Timing Approach

In a series of emails, Jim Rohrbach, president of Investment Models, Inc., expressed disagreement with the findings of “Jim Rohrbach’s Technical Timing Approach” and requested removal of the review. So that readers can assess the basis of his request, here are the verbatim  emails, with raw links replaced by descriptive links: Keep Reading

Arora Report Performance Review

A subscriber suggested review of the Arora Report trading performance. According to the offeror, this performance derives from application of the “ZYX Change Method”, which “is the culmination of over a quarter of a century of experimentation in developing fundamental, technical, and quantitative models as well as implementing gray boxes to execute the models in a variety of market conditions. …The method consists of six screens to be applied in a specific order and trade management guidelines.” In describing the performance data, the offeror states: “Every closed trade since inception in 2007, without exception, is included in the following performance record. …Typically, these stocks have enough liquidity to easily enter or exit large sizes.” Using the data for all 211 closed trades and other information on the Arora Report site available as of the end of May 2012, we find that: Keep Reading

John Maynard Keynes: Star Investor?

Was John Maynard Keynes, famous for contributions to macroeconomic hypotheses, a superior investor? In their March 2012 paper entitled “Keynes the Stock Market Investor”, David Chambers and Elroy Dimson evaluate the investment philosophy, strategies and performance of John Maynard Keynes based on his discretionary trading for the King’s College endowment (and, by similarity, for his own account). A key performance measure they apply is buy-and-hold abnormal return (BHAR), defined for each security as the geometric difference between the security’s cumulative total return over a specified interval and the cumulative beta-adjusted return on the market over the same interval. They combine BHARs for individual securities by averaging (equal weighting). Using King’s College endowment annual investment reports (including lists of holdings) and transaction records (567 buys and 387 sells) for portfolios managed at Keynes discretion for fiscal years 1924 through 1946 (ending in August), along with associated security prices/dividends and estimated UK market index levels, they find that: Keep Reading

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