Monday, December 29, 2008 2 comments ++[ CLICK TO COMMENT ]++

Getting the macro call right and ending up with a disastrous portfolio

You can see why value investors such as Warren Buffett don't spend too much time making macroeconomic predictions. It's quite easy to be correct with the macro call yet end up with poor investment returns. Part of the reason is the inability to nail the timing. The other, obviously, is poor asset selection.

An example of what I'm talking about is the International Harry Shultz Letter, which is some obscure newsletter that has posted a disastrous 70%+ loss. I wanted to highlight this letter, not because I have any strong negative opinion of the letter itself. Rather, there are a few important observations.

But over the past 12 months through November, Schultz is down a heart-stopping 76.05% by Hulbert Financial Digest count, vs. negative 36.68% for the dividend-reinvested Dow Jones Wilshire 5000.

This loss has wiped out Shultz's strong post-2000 run, when he benefited from the gold and commodities boom. Now, over the past 10 years, the HFD shows the letter achieving an annualized loss of negative 8.73%, even worse than the negative 1.16% annualized loss for the total return DJ-Wilshire 5000.

And it's an unpleasant arithmetical fact that even future triple-digit gains (which aren't impossible) will not dig Schultz out of this hole.
(But, if you're a new investor starting at the bottom, who cares?)

The reason I pick Schultz: the extraordinary prescience he showed in predicting what he called a "financial tsunami" well over a year ago. See Oct. 19 column.


I don't have access to either the letter in question or the Hulbert Financial Digest, which tracks newsletters, so I have no idea what is actually contained in the suggested model portfolio. If I had to guess, based on some articles about this letter over the years, I would imagine it was heavily overweight junior gold mining and oil companies, with a bias towards foreign holdings. Needless to say, the US$ rally has clobbered many, with many likely posting 20% or 30% loss from the US$ appreciation alone (some of the worst, of course, are the commodity currencies such as the Canadian dollar, Australian dollar, and so on.)

So the first thing to keep in mind is that currencies can make or break your portfolio. This is doubly so for 'super-charged currencies' which are those that rally sharply due to some macro trend (e.g. commodity currencies due to commodity bull market in the last 8 years; US$ in the late 90's due to dot-com bubble; select Asian currencies during the mid to late 90's.) The unfortunate thing is that the currency collapses precisely when your macro case, and hence your portfolio, falls apart. For instance, investors in the Asian Tigers in the 90's did not just lose money off bad bets in Asia but also lose a huge chunk on currency losses. Similarly, right now, commodity investors paid a big price, first when commodities collapsed, and, second, when the commodity currencies also fell sharply. (Currency moves may be reverse but sharp moves, such as the recent appreciation of the US$ and the Yen may signal a new macro trend.)


The second thing to realize is that you can lose huge gains in a short period of time. Vetern investors are probably aware of this but newbies, such as myself, never put enough thought into this. The International Harry Shultz Letter had huge gains going into the year--shouldn't be a surprise if he was overweight materials, energy, and gold--but is down so much that it won't recover even if you post a few spectacular returns (unless you dollar-cost-average.) As recently as September, it seems to have posted a 17.82% annual return in the last 5 years versus 7.85% for Dow Jones Wilshire 5000. Right now, it is -8.73% versus -1.16% for the Dow Jones Wilshire 5000 over the last 10 years (not sure abou 5 years.) That's a huge swing. The up-to-September numbers are Warren-Buffett-like returns; the current returns are, well, the less said, the better.

An implication of the above point--I think everyone already knows this--is that it is very difficult to tell skilled investors unless you look at the long-term. The letter in question posted 17%+ per annum for 5 years and many would have considered the letter writer to be talented. Yet the collapse seems to indicate otherwise. Bear markets are what separates the best from the rest, so we'll get a good idea of who is truly talented once this bear runs its course. I am still uncertain of a some of the investors I refer to in this blog, and whom many others hold in high regard, such as William Ackman, Jim Rogers, and so on.

It should be noted that commodities, which really have little to do with subprime mortgages, or bad credit, are one of the hardest hit. Either we are seeing extreme irrational selling, or we are seeing the bursting of a bubble. I think it's the latter but my opinion isn't strong enough for me take a position (besides, I got burnt with my bearish commodities bet over the last 2 years so once is good enough :( )

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2 Response to Getting the macro call right and ending up with a disastrous portfolio

December 29, 2008 at 4:11 PM

HSL used to be one of the biggest newsletters in terms of circulation, and was among the most (if not the most) expensive. I've never subscribed, or followed him closely.

I'm familiar with someone in the circulation marketing business. And he said having a successful newsletter and being a successful investor are two different things.

December 30, 2008 at 2:43 PM

I think you nailed it. The problem with many newsletters seems to be that their success depends more on marketing than on investing skills. I have never subscribed to any newsletters (tried a few trials a few years ago though) and my opinion is that it ultimately comes to the individual investor.

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