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Mark Hulbert
May 3, 2011, 12:01 a.m. EDT
By Mark Hulbert, MarketWatch
CHAPEL HILL, N.C. (MarketWatch) "” Monday was a case study in how difficult it is to beat the market.
The overall stock market fell in response to news of Osama Bin Laden's death, for example, even though many had expected it to soar. And many of those individual shares that weren't supposed to do well on Monday, did.
Take two model portfolios that were created a decade ago in the wake of the 9-11 attacks, whose goal was to profit from fears of terrorism. The first, called an "Anti Terrorist" portfolio, was created by Mark Skousen, editor of an advisory service called Forecasts & Strategies. The second, with the similar name "Anti Terror" portfolio, was the brainchild of Alexander Green of the Oxford Club service.
Though these two portfolios no longer exist (Skousen ended his in 2010, Green a year earlier), I checked to see how the investments last held by these erstwhile portfolios would have performed on Monday. Since the death of the world's most famous terrorist is just the opposite of the terror against which these portfolios were trying to hedge, one would have expected these investments to fall.
But not one of these lost ground on Monday. Their average gain was one half of one percent, in contrast to a 0.2% loss for the S&P 500 index /quotes/comstock/21z!i1:in\x SPX -0.18% . Not a huge margin of victory, to be sure, but not bad for a day's work.
This result is not just a fluke either. Consider how these portfolios performed following the March 11, 2004, Al Qaeda terrorist attacks on the subways in Madrid "” when they should have roared ahead The average security these portfolios owned fell by 0.7% in the day's trading following those attacks.
There are 600 million people on Facebook, including Rex Crum, but notably absent was Osama bin Laden, who opted out of phone and Internet service. For those opting in, social media were prominent channels for reacting to his demise.
I don't mean to single out Skousen and Green, who are in good company. Remember two weeks ago, when Standard & Poor's cut its ratings outlook on U.S. debt from stable to negative? Virtually everyone expected Treasurys to fall in price, but they didn't "” actually rising handsomely for the day. ( Read my Apr. 19 column. )
Or take equity-oriented hedge-fund managers who focus on what is generally known as "risk arbitrage" or "event-driven investing." They not only find it notoriously difficult to anticipate the events that are supposed to impact the markets, they sometimes also end up losing money even when they correctly forecast those events. In the end, they often fail to beat a simple buy-and-hold.
Consider the performance of hedge funds in the "event-driven" category, as calculated by Hedge Fund Research Inc. Over the last year (through March 31), according to the firm, the average fund in this category has produced a gain of 10.7%, in contrast to a 15.5% total return for the S&P 500 index.
I fully realize that, journalistically, it would be far more compelling to devote a column to some newfangled system that its creator "guarantees" will beat the market. The myriad such come-ons that my inbox receives every day are testament to the attraction of such claims.
But the truth of the matter is that, boring and depressing though it may be, few such claims ever are fulfilled.
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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Mark Hulbert is editor of the Hulbert Financial Digest, which since 1980 has been tracking the performance of hundreds of investment advisors. The HFD became a service of MarketWatch in April 2002. In addition to being a Senior Columnist for MarketWatch, Hulbert writes a monthly column for Barron's.com and a column on investment strategies for the Journal of the American Association of Individual Investors. A frequent guest on television and radio shows, you may have seen Hulbert on CNBC, Wall Street Week, or ABC's World News This Morning. Most recently, Dow Jones and MarketWatch launched a new weekly newsletter based on Hulbert's research, entitled Hulbert on Markets: What's Working Now.
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