Tuesday, June 29, 2010
Commentary: Top adviser over last 30 years is largely in cash right now
Slow and steady wins the race.
And I mean really slow — and really steady.
That is the inescapable conclusion that emerges from the Hulbert Financial Digest's three decades of tracking investment advisers' performance. Believe it or not, the adviser at the top of the rankings over those 30 years has been largely in cash for more than a decade.
The adviser in question is Charles Allmon, whose advisory service is called Growth Stock Outlook. As of the close of trading on Wednesday of this week, the Hulbert Financial Digest will have tracked his performance — along with the industry in general — for exactly 30 years.
To be sure, we won't know for certain Allmon's final place in those rankings until then. But with just two days remaining of the more than 10,000 since mid 1980, he is in first place for risk-adjusted performance among advisers for whom Hulbert Financial Digest data extend back that far. So the odds in his favor look good.
Which is nothing short of remarkable, since for more than 20 years Allmon has allocated the bulk of his model portfolio to cash. It currently owns just four stocks that collectively amount to 20% of total portfolio value, for example; the other 80% is parked in a money-market fund.
One powerful investment lesson to draw from Allmon's experience has to do with the virtues of discipline and patience. Many counted Allmon out during the 1990s, when his high-cash position looked increasingly anachronistic.
But the last decade changed all that, as advisers that previously ranked more highly than Allmon became casualties — first to the bursting of the Internet bubble, and then the credit crunch and associated bear market between 2007 and 2009.
The perspective necessary to appreciate Allmon's achievement is foreign to the great bulk of investors whose investment attention span is measured in months, if not weeks or days.
An ancillary investment lesson to be drawn from Allmon's approach is the power of compounding. This has been especially important in recent years, when his cash position has earned virtually no interest whatsoever. But the few stocks he owns have continued to perform well, especially on a total-return basis, since many have tended to pay handsome dividends — stocks such as Altria Group Inc. (NYSE: MO - News), Bristol-Myers Squibb Co.(NYSE: BMY - News), and Philip Morris International Inc. (NYSE: PM - News).
As a result, he's produced returns that — while not huge in any absolute sense — are at least decent, and which are impressive relative to the market itself.
Over the last three years, for example, according to the Hulbert Financial Digest, Allmon's model portfolio has produced a 3.0% annualized return, in contrast to minus 8.1% for the overall market.
One thing that Allmon's approach does not offer is lots of excitement, however. So you probably won't be tempted by conservative approaches such as Allmon's.
But it's not fair to say that his approach is completely devoid of excitement, either — though Allmon's sense of excitement may be different than that of the usual investor. Take the thousand-point mini-Crash which happened on the afternoon of May 6, an otherwise traumatic event that Allmon calmly surveyed from the comfort and safety of an 80%-cash position.
"I can tell you that those 20 minutes of hyper market activity ... were the most exciting of my over 50 years as an investor," Allmon wrote in his most recent issue. "The 22% Dow decline in a day in 1987 was an orderly affair by comparison."
Normally an opponent of government intervention in the marketplace, Allmon apparently is making an exception when it comes to eliminating the likely causes of May's mini-Crash: "Could this be the time to eliminate big-time professional gamblers who obviously believe they operate in a private market casino with computer-driven trading, devoid of human interference? All of Wall Street, and the American public numbering millions of investors, have much to lose should this recent phenomenon become the norm."