Don’t be misled by investment claims
If it sounds too good to be true, there are a few ways to check
“Buyer beware” is the best advice for protecting yourself against false or misleading investment claims.
Take the headline of an email solicitation I received recently for Stephen Leeb, editor of The Com
plete Investor and several other investment advisory newsletters past and present: “This Man Predicted the 2008 Crash.”
There’s nothing in the ad itself that would lead you to question this claim.
On the contrary, we’re told that Leeb “has a history of uncanny prescience” and is a sought-after expert who is regularly quoted in national publications, and has a “B.S. in Economics from the Wharton School of Business, and a Masters in Mathematics and a Ph.D. in Psychology from the University of Illinois.”
According to the Hulbert Financial Digest’s performance tracking, however, a follower of Leeb’s primary stock market timing model, known as the Master Key, lost more than 44% during the 2008 financial crisis. This track record reflects the performance of a hypothetical portfolio that was invested in an index fund when Leeb’s timing model was bullish and which earned a money market rate when he was bearish.
Particularly revealing is the advice Leeb gave to clients at the beginning of September 2008, when Lehman Brothers went bankrupt and the bottom dropped out of the stock market. The Standard & Poor’s 500 stock index shed nearly a quarter of its value that month and in the following one, constituting the worst two-month stretch of that entire bear market.
Yet, at the beginning of that two-month stretch, Leeb wrote: “For the next few weeks at least, the sun seems destined to shine on the stock market. … (S)tocks are poised for a rally. … They could even test recent highs.”
Leeb did not respond to an email request for comment, but Brenton Flynn, publisher of Leeb’s newsletters, said in an interview that the claim that Leeb predicted the 2008 crash was based on a book he wrote titled, The Coming Economic Collapse: How You Can Thrive When Oil Costs $200 A Barrel, published in 2006. Flynn conceded that the book provided more of a macroeconomic forecast than a specific market timing call but insisted I was biased because Flynn’s firm had not signed up with a company I own that audits investment performance.
In any case, the point of this column is not to pick on Leeb, since he is not alone in failing to protect clients from the 2008 financial crisis.
The first rule of thumb for protecting yourself against inaccurate claims is to believe none of them.
One good reality check comes from remembering that Warren Buffett, likely the most successful investor alive today, has produced an annualized return of “just” 19.1% in the book value of his company, Berkshire Hathaway, since the mid-1960s. I say “just” because almost all of the investment ads that come across my desk brag of returns well in excess of this.
Second, search for independent verification of an adviser’s record. Advisers aren’t always required to provide you with that data, but you’re not required to sign up with them if they don’t.
If you can’t put your hands on independent verification, then paper trade his recommendations yourself before actually investing your hard-earned assets.