By Mark Hulbert
CHAPEL HILL, N.C.—The Big Lie is alive and well on Wall Street too.
I’m referring to a propaganda technique of making claims so outrageous that people think there must be some grain of truth to them. Small lies are dismissed, but big lies are believed.
Consider this bit of clickbait in my inbox that caught my eye over the weekend: “ Easily 10x your Money with this Cryptocurrency.” One reason it got my attention is that it was written by an individual who three months ago wrote a similar attention-grabbing piece entitled “100x Your Money With This Cryptocurrency.”
The particular cryptocurrency he was championing in February is 13% lower today.
For the record, I have no idea whether this individual was intentionally bending the truth. But the fact remains that no one produces long-term annualized returns in excess of percentages in the low double digits, whether for stocks or investments like bitcoin /zigman2/quotes/31322028/realtime BTCUSD -5.37% and other cryptocurrencies.
No one. To claim that producing a 10x or a 100x return is “easy” is the functional equivalent of lying—even if the claim’s perpetrators don’t intend it to be.
That’s not to say that triple or even quadruple-digit returns aren’t occasionally—very occasionally—produced. But so are jackpots in Vegas. Because strategies that have even the potential of producing short-term gains that big are extraordinarily risky, regression to the mean will inevitably and quickly bring such returns back down to earth.
Consider the evidence from my four decades of tracking the performance of investment newsletters. The accompanying chart reports the portfolio returns among monitored newsletters that are the highest over various holding periods. Over the last 12 months, the scoreboard-topping return is 248%. Extend that holding period to the last five years, in contrast, and the return at the top of scoreboard is a lot lower, at 33% annualized.
This declining trend continues as holding period lengthens, as the chart shows. By the time we’re focusing on the last 40 years, the best return is now 14.0% annualized.
Don’t think that this pattern is unique to the investment newsletter industry. Almost identical results emerge for mutual funds and hedge funds as well.
The best documented long-term return that I know of was produced by the private Medallion Fund, from Renaissance Technologies. Brad Cornell, a professor emeritus at UCLA, reports that this fund produced a 39.2% annualized return (after fees) between 1988 and 2018, in contrast to 10.0% annualized for the S&P 500 index /zigman2/quotes/210599714/realtime SPX -1.31% . That fund’s return is so much better than that of anyone else on Wall Street that Cornell has confessed to have been “dumbfounded;” he said the return is the functional equivalent of the “sun rising in the west.”
And, yet, notice that the Medallion Fund’s return that so strained credulity was “just” 39% annualized. That’s a long way from an “easy” 100x return in a cryptocurrency.
The role of youth
If you’re a baby boomer, you already know and accept these lessons. If you’re from Gen Z, in contrast, the school of hard knocks has yet to teach you those lessons too.
I devoted a column a month ago to this correlation between age and risk-taking in the latter stages of a bull market. Until the youngest investors suffer through their first major bear market, they are fearless risk takers, convinced that making money is easy. Investors of a more advanced age, who have lived through one or more severe bear markets, are older and wiser.
This contrast was borne out yet again in a recent report from GamblersPick , a website that reviews online casinos. The website surveyed 872 investors about their risk tolerance; the respondents were almost equally divided between the four generations listed in the table below. (The balance of those not reflected in the table’s percentages indicated that they were “neutral,” neither risk tolerant nor risk averse.)
|Baby boomers and older||36%||46%|
In my experience, no amount of academic education (“book learning”) can fully substitute for what gets learned from actually living through a bear market. And that means that today’s risk-tolerant younger investors will themselves someday become the old fuddy-duddies that the rest of us appear to be today.
In the meantime, they—and the market—are skating on thin ice. Though we don’t know how the bull market’s story will unfold over the next several months, we do know how it will eventually end.
It’s not a happy one.
Also from Mark Hulbert: Investors are less worried about a stock market crash — and that’s not good
Mark Hulbert is a regular contributor to MarketWatch. His Hulbert Ratings tracks investment newsletters that pay a flat fee to be audited. He can be reached at email@example.com .