${Html.ActionLink("My MarketWatch", "index", new { controller = "composite", area = "section", page = "my" })} | !{Html.ActionLink("Sign out", "LogOff", new { area = "User", controller = "Account" }, new { id = "signOutLink" })}
Welcome, ${UserDisplayName}
Log in
Become a MarketWatch member today
Mark Hulbert Archives | Email alerts
May 16, 2012, 12:02 a.m. EDT
Want to see how this story relates to your portfolio?
Just add items to create a portfolio now:
Create Portfolio or Cancel Already have a portfolio? Log In
By Mark Hulbert, MarketWatch
CHAPEL HILL, N.C. (MarketWatch) "” Following a winner is often a losing strategy.
That ironic result traces to what all too often happens to a winner after he wins: His success goes to his head, leading to overconfidence. Especially after several wins in a row, he becomes dangerously prone to doing something really stupid.
If that sounds like a good description of what happened at J.P. Morgan Chase /quotes/zigman/272085/quotes/nls/jpm JPM +1.26% , it's because it is. After the bank emerged virtually unscathed from the 2008 financial crisis, it would have taken saint-like restraint on the part of CEO Jamie Dimon to not downplay luck's role in that success and not overestimate his own genius.
Fast forward through his, and his bank's, overconfidence over several years, and we shouldn't at all be surprised by the multi-billion-dollar trading loss that now tarnishes his, and its, reputation.
Let's call this overconfidence followed by a fall, for want of a better title, the Dimon Principle.
J.P. Morgan's James Dimon faces shareholders less than a week after disclosing a $2 billion-plus trading loss, but he escapes the annual meeting with relatively few questions about the "egregious error." Photo: AFP/Getty Images.
The Principle applies to more than just CEOs of big investment banks, of course. It also applies to investment advisors, where success leads to increasingly risky investment decisions.
Consider a hypothetical strategy that each year followed the model portfolio "” among the several hundred tracked by the Hulbert Financial Digest "” that had the best record in the previous calendar year.
Over the last two decades, this go-with-the-winners strategy has produced a 23.0% annualized loss. For all intents and purposes, of course, that's a complete and total wipeout.
Perhaps the most colorful historical example of overconfidence in the advisory world comes from Joe Granville, editor of the Granville Market Letter. After successfully predicting a stock market top in January 1981, and having his picture appear on the front page of the New York Times, Joe became "” how shall I put it "” overly impressed with his abilities.
And for several months it looked like he could do no wrong, with each of his increasingly bold predictions turning out to be right. This led him to do even more silly things, like trying to predict when earthquakes would occur. He even argued that he deserved the Nobel Prize in economics for unlocking the key to the stock market.
Then came the bull market in 1982, which Granville utterly failed to foresee. Unwilling to believe that he could be wrong, he stubbornly stuck to his bearishness for several years after that great bull market began. As a result, his newsletter is today near the bottom for performance over the last several decades.
My rendition of the Dimon Principle doesn't mean we should go with the adviser with a terrible track record, I hasten to add.
Instead, it means that we shouldn't automatically avoid an adviser with a great long-term record who is coming off a bad quarter or two. On the contrary, we may want to even prefer such an adviser "” since his recent subpar performance is more likely to lead him to have a healthy dose of humility and make him less likely, relative to an adviser who is coming off an unbroken string of successes, to do something stupid.
Click here to learn more about the Hulbert Financial Digest.
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.
Germany will blink, and won't let Greece exit euro
Asia stocks dive as Greek political crisis deepens
How Facebook could clobber LinkedIn
Gold drops ahead of Greek meetings
Greek worries hit Europe banks, resource stocks
The real Dimon Principle
Master limited partnerships: High yield, big risks
USA Today's Kramer: "?I love the brand'
For now, Obama and Romney turn away from economy
Mark Hulbert is editor of the Hulbert Financial Digest, which since 1980 has been tracking the performance of hundreds of investment advisors. The HFD... Expand
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. Collapse
Media Web
USA Today's Kramer: "?I love the brand'
Money and Power
Obama and Romney turn from economy
Your Portfolio
MLPs offer high yields, and big risks
Tech Investor
Facebook IPO, you're no Google
Read Full Article »