How to protect yourself from misleading investment claims

How to protect yourself from misleading investment claims

A bronze bull and a bear stand in front of the stock market in Frankfurt, Germany.

“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 Complete 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 [/s]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 … 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 entitled 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. In fact, none of the couple hundred advisers I monitored at that time can claim to have “Predicted the 2008 Crash” in the sense of being invested in stocks right up until the October 2007 top and then in cash for the next 16 months. The very few who were in cash throughout that bear market had been out of stocks for so long [s]that it would be inaccurate to say they “predicted” the crash.

The first rule of thumb for protecting yourself against inaccurate claims[s] is to believe none of them. That’s not because all performance claims are false, but because many of them are and I know of no way of separating truth from fiction by reading the ads themselves.

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. The question you should be asking yourself: “What are the chances that the next Warren Buffett is emailing you to sell his advice?”

Secondly, if an adviser nevertheless passes a simple smell test, then search for independent verification of his record. Many advisers also manage client accounts, for example, in which case you should ask for a summary of their clients’ actual returns over the years. 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. Most advisers allow you to cheaply subscribe to their services on a trial basis for several months, during which time you can carefully compare the results of your paper trades with what the adviser reports.



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