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Strategies & Market Trends : Gorilla and King Portfolio Candidates -- Ignore unavailable to you. Want to Upgrade?

To: John Powell who wrote (26462)	6/18/2000 3:33:00 PM
From: tekboy	Respond to of 54805

OT For your student... nytimes.com New York Times June 18, 2000 STRATEGIES The Tortoises and the Hares, in a Dead Heat By MARK HULBERT Do Internet-based newsletters have better investment records than those of the stamp-and-post variety? It's easy to see why investors would want an advisory service that can deliver advice to them instantly over the Internet. Newsletters that travel through the regular mail seem old-fashioned and ill-equipped to deal with modern, whipsawing markets. My response: Don't worry whether a service delivers advice via the Web. It has no discernible relationship to performance. I reached this conclusion after separating into two categories all the advisory services I monitor -- those that use the Internet to communicate with their subscribers and those that don't. To include performance history for years before e-mail and the Web, I also included in the first camp services that rely on faxes, phone hot lines, and other means of quick communication. For the nearly 20 years from mid-1980, when I started monitoring the newsletter industry, through April 30 of this year, services in the quick-communication group produced a 10.9 percent annualized return, versus 10.5 percent for the regular-mail group. The difference is small enough that the results could be called a statistical dead heat. My study took into account the fact that some advisers have switched in recent years from an exclusive reliance on the mail to quicker communication mediums -- their performance before the switch was credited to the second group, their performance after the switch to the first. Such services make particularly good illustrations. Consider BI Research, edited by Tom Bishop, who inaugurated a telephone hotline at the beginning of 1996 and more recently began communicating with subscribers via e-mail. I calculate that for the 12 years through 1995, during which Mr. Bishop relied solely on regular mail, his advice produced a 14.2 percent annualized return -- half a percentage point behind the Wilshire 5000. For the four-plus years since then, his advice has produced a 15.2 percent annualized return, 7.1 points behind the Wilshire. So while BI Research has had a slightly greater return after shifting to quick access, relative to the broad market, its performance has been much worse. Why doesn't a newsletter's ability to communicate quickly with subscribers improve performance? My guess is that the advisers' ability to make virtually instantaneous modifications to their model portfolios can tempt them into self-destructive actions. An example of such behavior would be selling winning securities too soon. All investors, of course, are vulnerable to this tendency, known among behavioral researchers as the disposition effect. But being able to communicate instantly with subscribers is likely to heighten the temptation, which can have especially damaging results in a bull market. I suspect that an intraday price spike is more likely to prompt a sale of a solid, long-term holding if an adviser relies on the Web to reach clients. On the flip side, Web-based letters may also be likely to exit the market too soon. Researchers have found that advisers tend to become more risk-averse as their perspective becomes shorter-term -- a tendency called "myopic risk aversion" by Richard Thaler, an economics professor at the University of Chicago and Shlomo Benartzi, an accounting professor at the University of California at Los Angeles. An example of the effect: Investors who are restricted from changing the asset allocation in their retirement plans more than a few times a year tend to be more heavily invested in equities than those who can alter it daily. Myopic risk aversion probably helped those advisers who used quick communication during the spring correction in stocks. But because the market should outperform other asset classes over time, the tendency should eventually cause their returns to be lower than they would be otherwise. Of course, investors shouldn't automatically dismiss a service because it is Web-based. Rather, the lesson here is that one's odds of success are not much influenced by Web sites, fax services and hot lines. Internet revolution or not, the key to picking an adviser is a good long-term record. Mark Hulbert is editor of The Hulbert Financial Digest, a newsletter based in Annandale, Va. His column on investment strategies appears every other week. E-mail: strategy@nytimes.com.