8 March 2009

Retroactively, Cash becomes King ~ Hulbert

I am referring to my ranking of investment newsletters' performances. One of the things I do at the beginning of each month, once the Hulbert Financial Digest analysts complete their calculations of returns through the end of the previous month, is determine which service is in first place for performance since June 30, 1980 -- the date on which the HFD began tracking the industry.
February's results are now in, and there has been a shift at the top of the rankings. In first place for risk-adjusted performance is now Growth Stock Outlook, edited by Charles Allmon.
There's a remarkable story behind Allmon's ascension. Major players in that story include his incredible patience and discipline, along with the severity of the current bear market, which on Thursday took another 281 points, or 4.1%, off the Dow Jones Industrial Average ($INDU:6,626.94, +32.50, +0.5%) .
But even more crucial to this story is its subtext: Allmon has been almost completely out of stocks for more than 20 years. It was in late 1986, in fact, that he became convinced that stocks were becoming overpriced, a belief that in turn led him to sell almost all of the stocks in his newsletter model portfolio and put the proceeds in cash.
With only one or two exceptions, his model portfolio has remained primarily in cash ever since. It currently owns just three stocks that collectively total 11% of total portfolio value, for example; the other 89% is parked in a money market fund.
Allmon's perseverance in adhering to his high-cash position looked increasingly anachronistic during the bull market of the 1990s and the go-go years of the Internet boom, if not downright stubborn and obstinate.
But the bear market over the past year and a half has changed that. He has been creeping up in our long-term rankings in recent months, and as of the end of this past month, took over the first place position.
There's more than one irony in all this. One is that Allmon stopped selling subscriptions to his newsletter last fall, continuing to offer it only to his money management clients. The Hulbert Financial Digest normally would have stopped monitoring it at that time; but we decided for a variety of reasons to nevertheless continue tracking it, based on the copy that Allmon sends to the Hulbert Financial Digest each month.
One virtue of our continued tracking is that it provides an ongoing scoreboard for the notion that slow and steady really can win the race. The Dow was below 2,000 when Allmon built up his high cash position. Given the strength of the ensuing bull market, his overabundance of caution would seemingly have buried him in a hole so deep he could never emerge.
He nevertheless has dug himself out, courtesy of the interest earned on his large money market position, the returns on his few remaining stock holdings, and the power of compounding.
Allmon shows no signs that he might return anytime soon to the bullish camp. In his latest newsletter, he writes that "our country appears to be on the brink of the biggest financial firestorm in our 220-year history." Expressing little confidence that the government will get us out of this mess, he adds that "the trick now is to avoid being scalded in a sea of nonsense."
Of the three stocks that Allmon's newsletter portfolio currently owns, the biggest holding is Newmont Mining Corporation (NEM:38.90, -1.54, -3.8%) ; he
is forecasting "5% to 15% U.S. inflation," which will in turn lead gold bullion to trade over $1,800 an ounce.
The two other stocks that his model portfolio owns are Altria Group Inc. (MO:15.72, +0.07, +0.5%) and Phillip Morris Intl Inc. (PM:33.31, +0.36, +1.1%) .
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.


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