"A man's got to know his limitations"

I suppose that I am as tuned in to the information age as the next fellow.… And yet, I am more and more impressed with my own ignorance.… The more I learn, the more I become aware of how much I ought to know but don't.…

I don't say these things to brag about my ignorance. I believe that most people are as ignorant as I am, although they may not know it.… So, what are we to do about this ignorance? The first answer to that, of course, is that I don't know.

This humble and somewhat humorous bit of writing appeared in the Wall Street Journal in 1993. It was written by Herbert Stein, an economist who had risen to become chairman of the Council of Economic Advisers under Presidents Nixon and Ford.

I found it a refreshing confession from someone of his stature, and made a copy so I might stay mindful, as I attempt to teach others, of how relatively little I (as well as all the other so-called investing and economic experts) know and how important it is that I rely on the biblical principles God has given us.

Our ignorance of the future is staggering. Unfortunately, admitting to this is a professional handicap when you're in the investment newsletter business where subscriptions are sold on the premise that the editor has unusual predictive skills which you can use to your great profit.

I was recently reminded of Herb Stein's self-deprecating admission as I was reviewing the annual investment newsletter performance report from The Hulbert Financial Digest (HFD). This publication, a subscription service of Marketwatch.com, tracks the recommendations of 190 investment newsletters and calculates the performance their subscribers would have experienced if they followed each newsletter's recommendations.

(A quick note: HFD's calculation includes every portfolio a newsletter publishes. In SMI's case, that means our "HFD performance" is based on the average of eight portfolios — four for Upgrading and four for Just-the-Basics. The reason HFD includes four for each is that our quarterly reports to our readers include portfolios ranging from 100% stocks to 40% stocks/ 60% bonds. Thus, our performance as reported by HFD is not representative of our flagship all-stock Upgrading portfolio.)

I know this is "shop talk," but I thought you might find some of my observations from the 2010 report of interest.

• Of the 190 newsletters which HFD follows, only 72 have been around long enough to establish a 15-year track record. There's a lot of attrition when newsletters fail to deliver on their marketing promises. We're glad to be among the survivors!
• Of those 72, a mere 28 have outperformed the market over the past 15 years. Our 7.6% average annual return (based on the average of the eight portfolios and therefore weighted down by a heavy bond component) compares surprisingly well to the 7.0% turned in by the Wilshire 5000. The 10.1% by our all-stocks Upgrading portfolio compares even better.
• Seven of the 72 lost money during the 15-year period. How they stay in business is a mystery to me. The worst of the seven, which specializes in options, lost 7.9% per year — that's a cumulative loss of more than 80% of one's capital!
• Four of the 72 newsletters specialize in market timing. Two of them beat the market; two of them trailed it. Interestingly, one of the two that outperformed the market managed to do so despite keeping his subscribers fully invested during the 2007-2008 bear market. I've told you timing is a difficult undertaking; even the specialists have spotty records.

Unlike the vast majority of investment newsletters, SMI has prospered despite making no pretense that we know what the future holds. Acknowledging our limited vision is simply another biblical principle we follow: "You who say, 'Today or tomorrow we will go to this or that city, spend a year there, carry on business and make money.' Why, you do not even know what will happen tomorrow" (James 4:13-14).

Life is uncertain. How critical, then, that we look to God for clarity and guidance, not just in our finances but as a way of life: "If any of you lacks wisdom, you should ask God, who gives generously to all without finding fault, and it will be given to you" (James 1:5).

Austin Pryor has three decades of experience advising investors, and is the founder of the Sound Mind Investing newsletter and website. Austin lives in Louisville, Kentucky, with Susie, his wife of 46 years. Two of his sons, Andrew and Matthew, work with him at Sound Mind Investing. A third son, Tre, is a Realtor® in the area.

• SMI Editorials page
• Easy-as-1-2-3 page 
• SMI Performance History
• SMI's Fund Upgrading Strategy
• SMI's Just-the-Basics Strategy
• The Realities of Market Timing

Related Articles

SMI Editorials page

Easy-as-1-2-3 page 

SMI Performance History

SMI's Fund Upgrading Strategy

SMI's Just-the-Basics Strategy

The Realities of Market Timing

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