Pundit Window Dressing

by: Jeff Miller

Traders frequently discuss the process of "window dressing" by fund managers. According to this theory, which seems to describe some market behavior, the managers want their quarter-end or year-end portfolios to show that they currently own stocks that have done well. They also want to reduce exposure to stocks that have done poorly. Investors perusing their current holdings will see a list of stocks that look good.

How Can This Work?

Since investors can check the fund performance, this method should not work -- at least in theory. We suppose that it has some impact or it would not be so widely followed. One effect is that the "dogs" get even worse at quarter end and the winning stocks look even better.

The system depends upon how investors interpret data. Skill is required.

Some Portfolios are Beyond Help

Peter Brimelow of MarketWatch reports results from Mark Hulbert, who monitors the performance of financial newsletters. His article, The 10 Worst-Performing Letters of 2007 is very interesting reading. Readers should check out the entire article, but a key point is the variability of the list. Some of the writers move rapidly from the Bottom Ten to the Top Ten, or vice-versa. A method that does not seem to be working in one year may be very successful in the next. Investors must be prepared for this.

Especially notable in the results is Fred Hager, who has been in the bottom ten for three consecutive years. (Follow the link to see Hager's own performance assessment). This follows a 2004 result where he had a return of 150%! This is exactly the situation we described in discussing diversification and what is needed to reach the "long run" with one's theory.

Fred Hager is widely quoted in Barron's and by many bearish market commentators. You will see his name in commentaries on technology for the coming year. Readers must carefully evaluate the broadly-themed arguments.

We have sharply disagreed with the Hager approach, recommending and holding long positions in Research in Motion (RIMM), Apple Computers, Inc. (NASDAQ:AAPL), Microsoft, Inc. (NASDAQ:MSFT), Oracle (NYSE:ORCL), and Intel Corp, (NASDAQ:INTC). We retain all of these positions as we enter 2008.

Pundit Window Dressing

As we read the market recommendations for next year, we are struck with the window dressing quality of the comments. As you read or watch experts on financial television you will see a consistent pattern of advice -- avoid financial stocks, avoid consumer stocks, avoid anything linked to housing. Look to foreign markets, energy, etc.

These pundits get a free pass on past performance! Unlike the fund managers, it is difficult to track how these talking heads have actually done. They are telling you what worked last year, not what will make money for you next year.

Pundits without a track record lack accountability. It is something to think about as you plan for 2008.