A Consumer Guide to Pundits: Window Dressing
Traders frequently discuss the process of "window dressing" by fund managers. According to this theory, which seems to describe some market behavior, the managers want their quarter-end or year-end portfolios to show that they currently own stocks that have done well. They also want to reduce exposure to stocks that have done poorly. Investors perusing their current holdings will see a list of stocks that look good.
How Can This Work?
Since investors can check the fund performance, this method should not work — at least in theory. We suppose that it has some impact or it would not be so widely followed. One effect is that the "dogs" get even worse at quarter end and the winning stocks look even better.
The system depends upon how investors interpret data. Skill is required.
Some Portfolios are Beyond Help
Peter Brimelow of MarketWatch reports results from Mark Hulbert, who monitors the performance of financial newsletters. His article, The 10 Worst-Performing Letters of 2007 is very interesting reading. Readers should check out the entire article, but a key point is the variability of the list. Some of the writers move rapidly from the Bottom Ten to the Top Ten, or vice-versa. A method that does not seem to be working in one year may be very successful in the next. Investors must be prepared for this.
Especially notable in the results is Fred Hager, who has been in the bottom ten for three consecutive years. (Follow the link to see Hager’s own performance assessment). This follows a 2004 result where he had a return of 150%! This is exactly the situation we described in discussing diversification and what is needed to reach the "long run" with one’s theory. Fred Hager is widely quoted in Barron’s and by many bearish market commentators. You will see his name in commentaries on technology for the coming year. Readers must carefully evaluate the broadly-themed arguments.
We have sharply disagreed with the Hager approach, recommending and holding long positions in Research in Motion (RIMM), Apple Computers, Inc. (AAPL), Microsoft, Inc. (MSFT), Oracle (ORCL), and Intel Corp, (INTC). We retain all of these positions as we enter 2008.
Pundit Window Dressing
As we read the market recommendations for next year we are struck with the window dressing quality of the comments. As you read or watch experts on financial television you will see a consistent pattern of advice — avoid financial stocks, avoid consumer stocks, avoid anything linked to housing. Look to foreign markets, energy, etc.
These pundits get a free pass on past performance! Unlike the fund managers, it is difficult to track how these talking heads have actually done. They are telling you what worked last year, not what will make money for you next year.
Pundits without a track record lack accountability. It is something to think about as you plan for 2008.
“Especially notable in the results is Fred ********Hager********, who has been in the bottom ten for three consecutive years. (Follow the link to see Hager’s own performance assessment). This follows a 2004 result where he had a return of 150%! This is exactly the situation we described in discussing diversification and what is needed to reach the “long run” with one’s theory. ***************Fred Hager is widely quoted in Barron’s and by many bearish market commentators.************** You will see his name in commentaries on technology for the coming year. Readers must carefully evaluate the broadly-themed arguments.”
No doubt, honest mistake here, but IMO it is important to get basic factual stuff correct otherwise it potentially detracts from the credibility of the rest of the argument.
You are mixing up Fred Hager with Fred Hickey who also writes a tech-oriented newsletter. It is Fred Hickey who leans bearish and tends to be quoted by bearish commentators. Arguably, Fred Hager is a rose-colored glasses tech permabull. Does his past 3-year record have any implications for the bull case? Probably not.
Incidentally, his performance (Fred Hager) seems to be highly tied to the fact that he is basically a gunslinger taking huge risks with heavy use of LEAP options which means a highly leveraged portfolio. Get a few stock picks really right and overall performance will be great, and if you don’t overall performance will suck because of the time decay on the options. I personally run a separate aggressive trading portfolio that makes heavy use of LEAP options but going in I know this is close to gambling and only appropriate for a ***very small*** percentage of one’s overall assets.
On a different note, it might be interesting to discuss something that is actionable in terms of making money in the next 12 months. I’d love to hear your bull thesis on RIMM, as I have been looking at RIMM myself for a long trade after seeing how strong the recent results and guidance were. I’m trying to get a better sense of where they are in the product adoption lifecycle. It seems like the potential market for the Blackberry is still very large. I don’t see this as buying an “undervalued” stock but riding the growth/momentum for as long as it might be there, and it they can beat estimates and up guidance for at least another 4-6 quarters the stock can keep moving up.
I don’t pay attention to these experts. Since I swing trade, I look only for the trend on the charts. The rest for me is superfluous.
Mike-
Thanks for your comment on ‘the two Freds.’ Needless to say I agree completely with the need for accuracy.
I do not subscribe to the investment letters of either Fred — Hager or Hickey. I think I read recommendations and comments from both, but I admit that I was not impressed and did not pay much attention.
My main point here is that most of those appearing in the media do not have a real record. I hope that point is clear and that the links to Hager’s record and his own site are clear.
I have no opinion about Fred Hickey’s record, since I have no data about it.
If I have incorrectly associated Fred Hager with bears, I’m sorry! I hope that the link to his site will let everyone see his record and explanations.
I was trying to show that pundits do not have a clear record while fund managers and bloggers (like me) are subject to checking.
Once again, Mike, thanks for pointing this out.
Jeff
Mike-
You make a comment about “actionable stock choices.” That is a fair comment and question.
I am a registered investment advisor with various programs. Before making any specific stock recommendations, I get to know my client, needs, risk tolerance, etc. While I hope to share a lot of useful information about investing on “A Dash” it is not about actionable investments. Since our individual programs have returned more than double the S&P for ten years, we encourage people to get in touch with us. The site is not about advertising. I probably need marketing lessons!
While I appreciate your comment, I am following a clear policy. I discuss stocks and sectors only when they illustrate a more general point I am trying to make. I hope you understand.
Like you, I was looking for an entry point in RIMM. On one of the recent dips Ryan had instructions to buy for clients, “not held” when the stock got near 100. He pulled the trigger at around 102, near the low of the day. He is extremely good at these decisions!
In the post, I tried to show examples of other specific stocks I have highlighted. I skipped some of our top energy choices, which also worked well.
To summarize, I am trying to educate without providing specific advice. I am always open to suggestions about how to do this better.
Thanks,
Jeff
“To summarize, I am trying to educate without providing specific advice. I am always open to suggestions about how to do this better.”
Good point. My mistake. I had forgotten there are probably compliance issues involved with discussing specific ideas. I know Random Roger has made this point on his blog, and has had to watch what he posts and or delete comments that can be construed as specific recommendations. Kinda sucks though because I’d love to hear your thoughts on RIMM. As I’ve mentioned previously, I am a RIA myself so I like talking about specific ideas.
I absolutely agree about pundits often not having a clear track record. Another trick I’ve seen, is pundits repeatedly referencing a single call they got really right where the rest of their track record is dismal.
One thing about Hager’s track record that speaks to me is the necessity of having consistent results year after year after year. Anybody can have a single massive outsized year by making a few huge bets that go right with the help of Lady Luck, but it is the “long run” that demonstrates the efficacy of a particular investment process/system.