Tom Madell

Newsletter provider, portfolio strategy, etf investing, fund research
Tom Madell
Newsletter provider, portfolio strategy, ETF investing, fund research
Contributor since: 2011
Hello Dan - thank you for your interesting and thought provoking comments.
While it might appear that my approach is "what has gone up, must come down (or vice versa)," it is actually far more complicated than that.
I have always felt that a given sector within the market can remain either over- or under-valued for years on end. Thus, I do acknowledge that either economic factors or sentiment can continue to drive certain stock prices in the same direction rather than reversing as my approach might suggest.
Yes, I agree that intrinsic forces in the world such as either fast or slow growth
can continue to operate in either apparently favorable or unfavorable ways, for a given sector. But growth is not always synonymous with great stock returns. For example, while health care stocks can show better growth than other sectors, that does not mean that funds investing in health care will continue to do better than most sectors. I do believe that at some point, overvaluation sets in and serves to increase the odds of lesser returns.
To continue the example, Vanguard Health Care Fund currently has a P/E ratio of 38. I would think that anyone with a knowledge of past P/E ratios would agree that this is a serious warning signal - not that the fund will necessarily crash immediately - but that based on an historical perspective, you could easily be better off investing in a fund with a lower P/E. Such a measure of overvaluation (which highly overlaps with my own 15+% for 5+ years "yardstick"), can't closely predict future returns but it certainly increases the odds of trouble ahead.
Another factor to consider is that the economy tends to run in cycles of up periods followed by down periods. Often the up cycles tend to run in the general neighborhood of about 5 years. Since we have now surpassed that average length, we are "overdue" for a down cycle. And when a down cycle begins, funds that have gone up the most tend to correct the most.
But, while my words may not be enough to convince someone of what I am saying, I offer the following evidence that my approach, similar to what you see presented in the above article and in my July 2 article at works is this:
Had one invested in my 2000, 2003, 2006, 2009, and 2012 Model Stock Portfolios and held them for the 3 following years, one would have outperformed a portfolio of low cost index funds by an amount approaching 3% per year. This, I would argue, is a record that would have been hard to beat by merely trying to figure out the fund sectors with the current fastest growth.
trend investor - see my article "Grow Rich Slowly" at
where I discuss Vanguard Health Care.
davel - You are overlooking my discussion of using hedged international funds instead if you believe that the dollar is going to continue to rise over the next 3 to 5 years.
Also, TBGVX which is included in the portfolio, is currency hedged.
TF17 - You can use your two index funds instead of my recommendations.
However, I have been publishing similar Model Portfolios since 2000 and have found that my recommendations, on average, have done better than a weighted combination of Vanguard index funds. You can look at the following article to get data on how my recent Model Portfolios outperformed just using the kind of very broad indexes you are recommending:
You might also look at my current July Newsletter for additional information which gives additional rationale for my approach
Tom Madell
Dane Van Domelen - thank you for your comment. I can expand on what's in this article by stating that the approach I'm recommending is not just if one thinks a bear market is coming.
Rather, it can be used anytime. I believe you always want to look for the most undervalued or, at least, more fairly valued, market segments when making new investments or rebalancing.
So, the approach would have worked well in late 2009 and 2010 when it appeared to me (and many) that we were embarking on a new BULL market. If you had picked the type of funds that had been most trashed
in the preceding several years (such as a small growth fund - indexed or managed), you would have been rewarded more than most other categories over the following 5 years.
So I know I can't predict and time the overall market. But I can say, and have accumulated 15 years of research showing, that your best bets are to currently favor market segments that, with a strong probability, will play catch-up and outperform over the upcoming years.
So thanks for helping me to clarify this.
Tom Madell
David - there are myriad points you make that have no bearing to what I state in my article:
- your initial comment about past performance would imply that there are
no people in the financial world/industry who can do better than average. But
I would guess that many readers of Seeking Alpha would disagree; outperformance is never a guarantee, but it is certainly possible.
-You fail to recognize that I never stated that investors need to pick
funds that have "done well." Rather, I'm talking about funds that have
done relatively better than the market averages. That means if the
S&P index goes down say -20%, the fund that has outperformed may
have only gone down -15%.
-While you may focus on how funds do in the immediate future, most experts,
and fund investors themselves, focus on holding on to a fund over at least
a moderately long period to get the best results (and because most
people don't have the time or interest to trade frequently).
-You said five years ago investors might not have invested in equities
if they focused on the prior 5 yr. performance. True, but since you
think I said that one should only look for positive 5 yr. performers, I
wouldn't have wanted stocks. Just the opposite: Five yrs. ago, I was
recommending increasing one's allocation to stocks because stocks had
become undervalued.
-Methodology: I never said that all investors behave alike. What I said
is that when someone picks a fund as a relatively long-term holding, they
are often picking popular funds and maybe they should look for additional
reasons for picking one or more funds.
-You said "many investors are quick to jettison any investment that starts
to lose money and replace it with another on the rise." If so, why did
so many people lose so much money in the 2 bear markets of the last
decade? Most fund investors are pretty poor at market timing.
-My article is not about "distinguishing wise investors from unwise investors."
It simply states that the most popular funds picked by investors turned out
to be worse performing over a number of years than randomly picked funds.
I also see similar trends in fund selection only one year later.
MrSun - my current Model Portfolios at show that I recommend a 52.5% allocation to stocks for Moderate Risk investors and a 70% allocation for Aggressive Risk investors. So, contrary to your assertion, my position is not one of "doom and gloom."
b3player makes some good points and it's hard to argue with some of them. I suppose the majority of investors would probably agree. But the point I am trying to make is that once you have say doubled your initial investment, unless you truly have maybe a decade or two ahead before you even want to think about this money, does it make sense to expect to keep on coming out ahead? Or, is a certain amount of "greed" (I hesitate to use this word because it may be closer to a psychological block that prevents people from taking money off the table when things are going well) built into most of our psyches?
By using the casino example, I did not mean to suggest that investing is like a casino so perhaps another example would have been better, like winning a thousand dollars in the lottery after trying just once or twice, and then thinking that your odds are reasonable for that to happen again.) The example is not meant to disparage investors; it is merely to show that people who do extremely well at something that doesn't happen that often should not assume that this can keep repeating. In the case of the stock market, my research, which is pretty extensive, but doesn't cover the entire history of stock investing, shows that cycles and limits are definitely a big part of the picture even if we don't know exactly when they are going to happen.
The S&P Global Broad Market Index sector breakdown is pretty close to that of the S&P 500. (The BMI Financial sector is a little bigger as is Materials,while the Info Technology sector is a little smaller; otherwise, the differences are minor.) Have your sector-specific allocations generally enabled you to equal or better the BMI?Just curious.
It appears that some of those who have commented on my article
thus far aren't seeing my main points. These are:
-Whether you agree with his research or not, Shiller has made
a great contribution to an understanding of asset prices which
has been acknowledged by being awarded a share in the '13 Nobel Prize.
-His main contribution was to show the role of psychological
factors in distorting asset prices over the LONG TERM.
-I publish a free Newsletter that for 14 yrs has relied quite a bit on helping investors recognize when fund/ETF prices are distorted. (Its track record is excellent as judged by Model Portfolio performance and its constantly increasing readership.)
-While Shiller is to be recognized, unfortunately, his recent statements on the stock market have not proven accurate.
-Buffett's quote suggests that when people are piling into (as
they are now) or out of stocks, one should be a contrarian.
-Both of these experts, though, are presently making comments that seem to take both sides of where stocks currently are.
-Buy and hold investors may suffer angst if stock prices go down
considerably, EVEN THOUGH these holders may eventually turn out OK. (And psychologically, it is hard to hang on when stocks drop considerably and people see their life saving disappearing.)
On the other hand, my article says nothing about
-PE/10 (CAPE)
-Market timing
-Trading or investing short term

While people may want to legitimately discuss what is not part of my article, hopefully others should recognize that these topics aren't my topics.
It is because people read so much of what they want to into things (such as stock prices or articles about investing) that aren't objectively there, I think this in a way helps demonstrate that many people will not be able to accurately read the currently overvalued condition of the stock market.
American in Paris & Pampano Frog:
You guys are reading things into my article that I never mentioned.
First is the notion that I am talking about Shiller's CAPE measure. However, my article does not make any reference to it, or any specific measure that he might use.
Rather, the article is about his view that behavioral economics in general is a better way to understand long-term price direction than merely latching on to certain economic variables. In fact, the CAPE itself is merely another type of economic variable that is adjusted to try to make it more predictive.
So, let me emphasize that I take no position on whether the CAPE is any good. My approach is very different although I do believe the behavioral economic approach is more realistic than just assuming all prices are essentially unpredictable (and rationally based).
My article uses Shiller's own statements, for one, that the market is not "that overpriced" right now. This means to me that it is somewhat overpriced, but not extremely so. This is also what the Bloomberg TV host who interviewed him talked about at length after the interview.
If Shiller would disavow the contents of my article, he would have to disavow his own quoted statements made on live TV. But he would (and certainly should) feel uncomfortable with the content of my article. I tend to doubt he based his interview statements solely on his CAPE measurements, but in any case, in spite of his pre-eminence in academia, his own media-based calls on the market which he has been sure enough to make in interviews, have probably led many investors to make the wrong decisions.

Second, neither Shiller nor I believe in market timing (nor is it ever endorsed in this article either). This is about doing a little better by avoiding buying and even trimming down at historically very high points, along with not selling at very low points. I personally have done quite well for well over a decade following such a strategy which belies, for me at least, the statement that it does no good to make some portfolio adjustments on that basis.
heartky - you can see my recommended Portfolios' recent performance, along with additional comments, at
(see bottom of article)
Here is a summary:
Oct. '12 Model Portfolios
Our Portfolio's Return: 22.1%
S&P 500 Index's Return: 19.3%
Portfolio Outperformance: +2.8%
Our Portfolio's Return: -1.0%
Benchmark Idx (AGG): -1.7%
Portfolio Outperformance: +0.7%
Oct. '10 Model Portfolios (Annualized)
Our Portfolio's Return: 15.0%
S&P 500 Index's Return: 16.3%
Portfolio Outperformance: -1.3%
Our Portfolio's Return: 3.9%
Benchmark Idx (AGG): 2.9%
Portfolio Outperformance: +1.0%
Oct. '08 Model Portfolios (Annualized)
Our Portfolio's Return: 9.6%
S&P 500 Index's Return: 10.0%
Portfolio Outperformance: -0.4%
Our Portfolio's Return: 5.6%
Benchmark Idx (AGG): 5.4%
Portfolio Outperformance: +0.2%
hw102 - International funds, such as VGK that focus on Europe still look relatively attractive for the next mo. or so; however, without a serious correction of 10-15% they are on the path of overvaluation.
Regarding VWO, emerging markets are still working off the excesses that began in 2009; over the last 3 yrs., they have been
on a downward trend. It would appear to me that these excesses need to be further removed. VWO might not be technically overvalued yet, but it appears unattractive to me.
As far as I am concerned "overvalued" is a relative term with no one agreed upon definition. But I use these terms to mean that according to my research, sectors that go up in price a great deal for a long time, such as these two (and most other ETF categories right now) will tend to underperform over periods of as long as the next 5 years. But things can change if there is a significant drop in prices, making them more attractive once that happens.
Dividends will add to the returns shown in the article. They should be close to the same for the two approaches except that if one has more shares, as in this comparison, they will have more dividends.
Not talking about always. But the data is what it is for the 13.5 years examined.
Whenever one is doing a lot of selling, it always make sense to do it in a tax-deferred acct. You are correct in that it is better to pay taxes as further down the road as possible. But I don't have such computations available.
Assuming his strategy is similar, but not identical, there is one big consideration: the data cited stops in May 2009. However, as a result of the 5 purchases my approach generated in 2007-2008, and which only really become very profitable by the end of 2009, you can't consider the analyses similar.
The link to the 2 fund portfolio is at
It says nothing about rebalancing so I assume it wasn't.
jjsefton - not to quibble too much but a) there were 5 corrections in 1987 when you count the 24% one as two 10% ones b) if one followed the strategy as described they would have added 150% to their acct. in '87 (5 x 30%) at the very beginning of a 13 year rise which sounds like a good move to me. c) you are correct that after the 3 more purchases in 89-90 (also early on), there would have been no more for 7 yrs. But, every time you sold, you were making very big profits - it's not like you were failing, you were just trying not to be greedy. d) There were several more buys later in the decade that also turned out very profitable for several years. e) However, all the sales one would have made during that 7 years of price rises were probably smart in light of how badly the market performed for buy and hold investors in the next decade.
So, without actually testing how the strategy performed during those 13 years, we can't say anything for sure. I suggest either you or another reader crunch the nos. as I did to get an accurate answer.
jjsefton - Good question - I haven't computed that but I am including a link which shows that there were many 10%+ corrections in that period during which you would be buying more shares of the S&P 500. Whether your sales at ea. 25% gain would have hurt your performance using the strategy, one would have to go thru the calculations and see. But eventually, your sales would have paid off as the index did poorly from 2000 on. As I said, the strategy might not always pay off if the market just went up & up.
Gary - good question. Raising interest rates might not hurt a high yield bond fund as much as other types of bond funds. High yield funds tend to correlate somewhat with stock prices. So, so long as stocks tend to do well, likely this fund will do well too. Perhaps stocks will not suffer much when rates first rise because it will show the economy is getting better. The same may be true for HYG.
The returns were as shown a few days ago by clicking on the Performance tab on for SPY under Trailing Total Returns. I used the returns shown for the price as opposed to the NAV. As of yesterday's close (5/29), the figures were 26.3, 17.2, and 5.6.
I don't know why one would try to "calculate" these on your own since they are so readily available on morningstar and other sites.
This pertains to the comment by mjs_28s.
The idea of comparing the two periods was derived from an article and video at
You are correct in pointing out that the two 50+ mo. periods had different base starting points. However, the Bloomberg article, which I referenced on my own website version of this article (the seekingalpha version is usually shorter for editorial reasons), was merely pointing out that the 50 mo. period starting in early '96 looks like a mirror image of the 50 mo. period starting in '09. That is, as you can see in the still of the video, the two graphs are highly similar and both show the exact 26.2% gain for the S&P 500 index.
The reason for bringing this comparison up was to show how much the market has gained over a little more than 4 yrs and to suggest that perhaps investors should keep this in perspective. On the other hand, another article that I also referenced in the longer version of this article on my website shows that the bull market that ended in '00 actually climbed 582% starting from Dec. '87 - see So, clearly, while there was the similarity I, at and pointed out, these were indeed two different stories when you look at the much longer-term picture.
I hope the significance of all this is not lost by you: while the current market is not apparently overvalued, the current stretch of good performance without an intervening bear market is one of the longest in nearly a century. Investors should be cautious but I don't think they should be scared off - yet.
Yanni - there is likely to be no significant difference since they both almost exactly replicate the return of the same index, although Fidelity's fund is slightly cheaper. But if you invest a min. of 10K with the Vanguard fund's Admiral Class, it is cheaper even than Fidelity's fund.
Of course, there is never a guarantee of making 8 to 10% a year. Results vary from year to year from high to low.
Hmmm ... I think reading an investment article is a little like looking
at a inkblot - people are going to interpret what they see in different
In my article, the chart near the bottom, which I call a summary, has two main variables - expense ratio and fund performance as compared to an index. The two main examples discussed are Fidelity Contra and Pimco Total Return, which in both cases I suggest that an investor own because they have been able to outperform and more than make up for their higher
expenses. Therefore, if you read my article and come to the conclusion that I am focusing too "much on cost only," that is your prerogative. But an objective reading would suggest that I am focusing on both cost and finding funds that are worth their extra cost.
I don't want to seem like I think I am the either the greatest investor or the greatest writer, but it seems to me that it is a common problem that US investors often just won't listen or remain open to input when someone gives them a different opinion; they just keep to their prior beliefs, it seems, no matter what is presented to them;
this I believe is to their own detriment.
Comments on others' comments -
MadMilo - the surprise is that it is not always all about expenses as
many of the ETF adherents try to claim. There are now possibilities
out there with extremely low expenses, fees, and taxes.
As far as good returns are concerned, I have also seen a lot of
ETF adherents bashing mutual funds for bad performance especially over the last half decade. Well, this relates to comments above to Snoopy1 -one can't expect any category of stock investments to do well, including ETFs, if almost all the overall market is performing badly. I suppose an exception might be bear market funds that bet on the market falling - but they have actually done among the worst of all over the period.
Anthony Grossi - with mutual funds, one has the option of reinvesting
divs and cap gains (it is not automatic). According to the prospectus
for some of the Vanguard ETFs, it depends on the brokerage where Vang. ETFs whether reinvestment is available. (The Vang. brokerage apparently will reinvest dividends, but not cap gains.) So, one would need to check with any brokerage they planned to hold an ETF in to see whether reinvestment is or isn't possible.
Jerbear - Perhaps you should read my article more carefully. I pointed
out the average cost of all mutual funds and suggested that the lower
cost ones and often ETFs were a better way to go, when possible. If an employer offers a highly expensive selection of funds in a 401(k), employees need to complain and try to get more reasonable funds; of course, they may have the option of not participating in the plan, or perhaps just keeping the investment in a money market fund that can't possibily have the fees you describe. Yes, let the buyer beware, but explaining how to get the lowest expenses and searching for outperforming funds in spite of expenses was the purpose of my article, nothing more; vote with your feet by getting out of the high cost funds.
At the Vanguard brokerage, they offer PTTRX at .46 expense ratio for a minimum 25K investment, not a million.
I agree with you in terms of what "should have been possible." I don't want to argue about this but all I'm pointing out is due to the apparent fear factor, most investors, fund and hedge fund mgrs have not been able to excel "in reality"
mainly because no matter what stocks one picked, there was little of the expected advantage of one set of picks over another. Bill Miller is a great example of one with a legendary record as are many others. It all about the math of highly correlated stock movements. Even for myself I had an excellent record of outperforming in the first half of the decade, but I haven't been able to beat the S&P 500 for a number of years now.
I base my assertion on a simple observation. If you look at the following results from all mutual funds covered by morningstar at
you will see that over the last 5 yrs, there has been hardly any
variation in the average returns betw. different categories of US stock funds. While obviously there still have been a small no. of mgrs. that have beaten the trend, the huge majority of all the thousands of funds have all been "clumped together" in returns.
It was not this way before the fin. crisis - then, there were big
differences in performance depending on which particular categories a mgr. chose, assuming he/she had such flexibility in his/her charter to pick large vs small, growth vs value, sectors, etc.
Will try to cover comments thus far in a single comment:
To jweissman - thank you for the comment. Don't think your
question is true - for ex., see
comparing the Vang. REIT fund with the ETF - virtually exact same
To Lucas Krupinski - It seems you are saying the same thing as I
state in my article which is: Low fees are great, but there are
some managed funds that seem to consistently beat the indices by
a large enough amt. to make them better to own. One of them is
PTTRX which has been far more profitable than a bond market index. So I guess I disagree with David Swensen - I have owned PTTRX for many, many years, and didn't have to do a ton of research to find it. And, incidentally, I personally pay more attention to Gross's advice on bonds than stocks; after all, he is a bond
fund mgr. and is competing against stocks.
To Snoopy1 - I agree that one can't be sure if a mgr. will continue
a good track record, and most can't, and that index funds usually
outperform most of the time. But, I don't think it follows that
there aren't a small no. mgrs. that are exceptional and that it
is impossible to find them. I guess Buffett is an example.
As to your 2nd comment, I personally have identified 10 funds
I think will outperform over the next 5 years - see
A problem over the last 5 yrs. is that due to the financial crisis,
almost all types of stocks have performed similarly. Therefore, managers have found it extremely hard to beat an index. But that is not always the case. Between say 2002 and 2007, it was somewhat easier to find the type of stocks that would outperform.
To andres17 - agree with your comments. But, of course, when you
pay an expense ratio, it's not just to profit a manager. You are
getting a service - someone, or a whole team, to research and provide presumed expertise on the best investments. I admire people who can do without a manager and their expense, but this is not easy work since you are "competing" with all the professional investors out there who work full time studying stocks. I believe it is
harder for an "ordinary" person to beat the markets than an
experienced and well trained mgr.
To ogd - yes, thank you for providing this info which I did not mention. My article could have been longer and more detailed but I wanted to keep it to a reasonable length. I believe there is more info on what you are describing on Vanguard's website and they take the bid-ask spread into account where they compare ETFs' to funds' costs.
To jconger- I do not think most index funds have the cash cushions although many managed funds do. I do not know much about CEF (closed end funds) but I believe they have some issues of their own.
To WKMA - I, personally, would rather invest my money with professional managers than to try out my own pet approaches, for the most part. So, I can't really comment on your approach.
There was preliminary data of this nature - see
The dialogue is thought provoking and I appreciate both of
your inputs. Here are a few more points I would like to make:
1. Obviously, people have different investing approaches, and if you
are comfortable with yours, or Hussman's, I am not going to try to
tell you my approach is inherently better. I originally
invested in Hussman's fund because he obviously was very knowledgeable and he seemed to be a good choice for doing well even in a down market environment which I also foresaw during those mid-decade years. But the fact that even though he appeared
correct in his warnings during the 07-09 bear market, he couldn't
even outperform since then seems to show that his method is weakish. That is, if half the time you are right and half wrong, the net may be close to 0, which has been true in his case.
2. Eric, I forgot to answer your earlier question about which I would
invest in if I had to go to prison for a decade, an ETF or a hedged
fund? My answer is neither if you are talking about an either or choice. I have my investments in many different types of funds, including in Hussman's (for now) and that's the key for me. I wouldnt trust any one manager or style of investing as an all or none bet. (I'm very glad I only have a little bit in HSGFX because it is perhaps the only fund I own that I have lost money on even though I have owned it for almost 7 years.)
3. My strategy is not at all trend following. It advocates more heavily allocating in those asset categories that are among the worst performing areas. While this is not a guarantee of good performance ahead, it helps to avoid and even suggests selling categories that are going along the way that makes most
investors get onboard. I do agree that most investors are very
bad at getting in and out in a productive way. And trying and succeeding in any investment strategy is one of the hardest things for anyone to do successfully.
4. I have recently recommended that investors pick from among what I would consider some (but not all) of the best funds I have come across - the list includes VFINX and bond funds:
Each of these non-VFINX funds has outperformed VFINX by a wide amt. over the last 10 years and most have had the same ongoing mgr. Given these proven performances, why would I stick with Hussman whose track record over the period has been much