By Mark Hulbert, CBS.MarketWatch.com
ANNANDALE, Va. (CBS.MW) — You’d better sit down before reading the rest of this column. A new academic study has found that a not-insignificant number of investment newsletters are able to successfully time the stock market.This is startling not because of its conclusion but because of its source. For several decades, it was orthodoxy in the Ivory Tower that successful market timing was impossible. No doctoral candidate dreaming of getting tenure would ever think otherwise — much less utter such a sacrilegious notion in public. While this orthodoxy has relaxed somewhat in recent years, believing in market timing remains the minority position.
Nevertheless, Alok Kumar and Vicente Pons, doctoral students in economics and finance at Cornell and Yale universities, respectively, were willing to buck this still prevailing skepticism. The pair conducted their research using the Hulbert Financial Digest’s database of market timing signals issued by newsletters between June 30, 1980, and November 30, 2001 — a period covering more than 21 years.
The study as yet is unpublished, and is instead circulating in academic circles as a working paper: “Behavior and Performance of Investment Newsletter Analysts.”
For their research, Kumar and Pons focused solely on newsletters’ market-timing recommendations. They thus ignored newsletter editors’ abilities (or lack thereof) to pick individual stocks or mutual funds.
Among the more notable of this new study’s findings about newsletters’ market timing abilities:
- The percentage of newsletters whose market timing has beaten a buy-and-hold on a risk-adjusted basis is greater than can be expected by pure chance. This was true regardless of how the researchers adjusted for risk (and they used half a dozen different formulae).
- Depending on which risk-adjustment formula the researchers used, the percentage of newsletters whose market timing beat a buy-and-hold ranges from 20.1 percent to 39.8 percent. While this by no means suggests that you can pick just any newsletter and expect to successfully time the stock market, these percentages provide a lot more hope than previous academic studies have suggested.
- The best-performing timers seem to possess a “hot hand.” That is, the timers whose performance has been the best over the previous several months continue to outperform a buy-and-hold for several more months.
- The hottest of hands emerge when performance is defined over the previous 10 months. To illustrate their potential, the researchers constructed a portfolio whose invested percentage, for every day over the past 20 years, equaled the average equity allocations of the 10 percent of timers with the best records over the previous 10 months. Over the past two decades, this portfolio’s Sharpe Ratio was 30 percent higher than that of a buy-and-hold strategy.Taking these researchers’ findings to heart, I queried the Hulbert Financial Digest’s database to find out the extent to which this portfolio would today be invested in equities. I first determined which newsletters are among the top 10 percent for market timing performance over the past 10 months, and I then averaged their current recommended percentage allocations to equities.I’m afraid the news isn’t good: This portfolio would be 0.7 percent short the market. This posture reflects the fact that currently there are slightly more bears than bulls among the best-performing timers of the past 10 months.
Mark Hulbert is the founder of Hulbert Financial Digest in Annandale, Va. He has been tracking the advice of more than 160 financial newsletters since 1980.