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Norman Fosback’s Performance?

| Last Updated: October 15, 2009 | Posted in: Calendar Effects, Individual Gurus

A reader asked: “Do you have any data and/or analysis of Norman G. Fosback’s performance?”

Norman Fosback discusses two investing systems on fosback.com: (1) Fosback’s Fund Forecaster; and (2) The Seasonality Timing System.

Regarding Fosback’s Fund Forecaster, the offeror states:

“Mr. Fosback’s system to beat the system starts with a scientific computation of each fund’s One-Year and Five-Year Profit Projection, the best forecasts of its future performance. Next, the system determines each fund’s Risk Rating, which tells you at a glance its relative risk of loss compared to every other fund. Then Mr. Fosback integrates each fund’s Profit Projections and Risk Rating to determine its appropriate Action Advice. The funds with the highest Profit Projections in a particular Risk Rating category earn a ‘Buy’ recommendation, and the funds with the lowest Profit Projections in the same risk group are marked ‘Avoid’. The very best funds are awarded ‘Best Buys’ and require your immediate investment attention. Finally, Fosback combines the best-of-the-best into specific recommended Model Portfolios, designed for investors and traders with different growth and income goals, ranging from ultra-aggressive growth to conservative income.”

There is not enough information in this description to support testing of the concept, and no Model Portfolio performance data. There is some relevant and publicly available formal research on mutual funds, such as:

“Mutual Fund Stock Selection vs. General Market Timing?”

“New Funds Outperform (Again)?”

“Stock Picking or Industry Picking?”

“The Morningstar Mutual Fund Rating System Works?”

The net of such research suggests that selecting mutual funds for future outperformance may be possible but is probably difficult. See the Mutual/Hedge Funds category for a broader sweep of research.

Regarding the Seasonality Timing System, the offeror states:

“…the Seasonality System identifies a handful of buy and sell points each month that are combined into a continuous trading program, alternating positions in equities – generally index mutual funds – and money market positions – usually money funds. In other words, portfolios are invested in the stock market during prospectively bullish periods and in the money market during periods expected to be neutral or bearish. Of course, only after the fact can we know for sure which periods in the market really were bullish, neutral, or bearish. But the Seasonality System gives us a keen insight into the probable answers – in advance. …a big advantage of the System is that the bullish periods account for less than a third of all market trading days. This enables an investor to keep his or her investment in risk-free money market securities more than two-thirds of the time.”

Again, there is not enough information in the description to support testing, and no system performance data. However, past columns by Mark Hulbert at MarketWatch offer insight to Norman Fosback’s seasonality approach:

In “Timing System Gone, Not Forgotten” from 2003, Mark Hulbert lists Norman Fosback’s past timing system rules:

  1. “To exploit positive seasonality around the turns of each month: Buy at the close of the third-to-last trading of each month, and sell at the close of the fifth trading session of the following month.
  2. “To exploit positive pre-holiday seasonality: Buy at the close of the third-to-last trading day prior to exchange holidays, and sell at the close of the last trading day before a holiday.
  3. “Exceptions: If the holiday falls on a Thursday, sell at Friday’s close rather than Wednesday’s. Also, if the last day before a holiday is the first trading day of the week, don’t sell until the day after the holiday. Finally, never sell on the first trading day after options expire; instead wait an extra day.”

According to Mark Hulbert, these rules derive from Normal Fosback’s work in the mid-1970s and the “model proceeded to have the best long-term risk-adjusted return of any the Hulbert Financial Digest has followed.” Mark Hulbert followed up in 2006 (“It Worked Again”) and 2007 (“Making Lemonade out of Lemons”) to report that the basic method continues to work.

See also various relevant research summaries from the ” Calendar Effects” category, such as:

“Stock Returns Around Labor Day”

“Turn-of-the-Month Effect Persistence and Robustness”

“Trading Around Option Expiration Days”

“Turn-of-the-Month Effect in Rising and Falling Markets”

“Stock Returns Around New Year’s Day”

“Stock Returns Around Christmas”

“Stock Returns Around Thanksgiving”

“The Turn-of-the-Month Effect”

The net of this research is that there may be anomalies associated with the above rules that are exploitable over many iterations (subject to worries about data snooping bias and wildness of return distributions per “The Demon’s Drudgery”).

Fosback’s Fund Forecaster Model Portfolio performance data/assumptions and Seasonality Timing System performance data/assumptions would be useful to those considering subscriptions to Norman Fosback’s service.

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