Value Added


5 Surprising Secrets of Investing

Steven Goldberg

For many years, Sheldon Jacobs edited a top-ranked fund newsletter. His new book reveals his surprising methods.



We all know the secrets of fund investing: Pick funds based on long-term returns, keep costs down, diversify your investments widely, and don’t try to time the market.

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But Sheldon Jacobs has a new book out that questions these long-held beliefs -- and other conventional wisdom.

Jacobs is well worth listening to. He edited The No-Load Fund Investor newsletter from 1979 until he sold it in the mid 2000s. The authoritative Hulbert Financial Digest ranked Jacobs’s letter number one for risk-adjusted performance for the 15 years ending in 2006. (Risk-adjusted performance looks not only at raw returns but also at a fund’s volatility.)

At 81, Jacobs has just written a new book, “Investing Without Wall Street: The Five Essentials of Financial Freedom.” The book is especially provocative, in part because, in retirement, Jacobs has nothing to lose by being totally honest.

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Here are the five most interesting and controversial points he makes in his book and elaborated on in a recent interview:

Pick funds based on relatively short-term performance.

When Jacobs selected funds for his newsletter, he looked at performance over three months, six months, one year and three years. He recommended the funds with the best returns over those periods. Jacobs considered risk because he separated his funds into aggressive growth, growth and growth-and-income categories.

But he totally ignored long-term returns. “It’s pointless to look at ten years of performance,” he writes. “There’s just too much irrelevant ancient history.”

My take: Momentum can work in picking funds. Jacobs’s record underscores that. But longer-term returns have value, too. (See My 9 Rules for Picking Winning Mutual Funds.)

Employ a few market-timing moves.

Jacobs doesn’t think you should try to predict the markets yourself, but he does think you should consider hiring someone to do it for you. Plenty of investment newsletters offer market-timing advice. The Hulbert Financial Digest is the best source for ratings of timers. A one-year subscription costs $59.

Jacobs urges readers to search for timers who ignore short-term moves and focus on longer-term trends. “The fewer the timer’s calls, the better,” he says. And he cautions against following more than one timer. Subscribing to two is a good way to drive yourself nuts.

Most important, Jacobs suggests avoiding drastic timing moves. Don’t, for example, go from all cash to all stocks in one fell swoop. Instead, if you’re, say, 60% in stocks normally, cut back to 50% in stocks when your timer turns bearish.

My take: I’m not sure that any timer can beat a buy-and-hold strategy on a long-term basis. But I like the way Jacobs recommends using a timer. In fact, it’s what I do for clients.

Who’s good? My current favorite is James Stack, editor of InvesTech Research, in Whitefish, Mont. A one-year subscription costs $175 . (For insights from Stack, see 3 Reasons the Bull Market Will Continue.)

Think outside the Morningstar style box.

Morningstar divides stock funds into nine categories -- by the size of the companies a fund invests in, from large to small, and by investing style, from growth to value. Looking at U.S. stock funds over ten years, Jacobs found that correlations among the nine style boxes were extremely high. Over that period, the style you favored would hardly have mattered much.

Says Jacobs: “I think the biggest benefit of this strategy [allocating among style boxes] is that it gives investment advisers the opportunity to justify their fees by forecasting which styles will be the best performers.”

My take: There’s a fair amount of truth to Jacobs’s criticism. But I think there’s money to be made by investing in areas of the stock market that are undervalued. Currently, I have a significant overweighting in the stocks of large companies, particularly large growth companies. They look cheap relative to their history.

Jacobs thinks most people can do well without an adviser. Instead of spending your money on one, you should simply invest your stock money in a broad-based index fund, such as one that invests in the entire U.S. stock market. That, of course, gives you the entire style box. He also recommends buying a small-company index fund to beef up the small-cap exposure in the total-market fund, because small-company stocks have outperformed big-company stocks over the long term.

Foreign stocks don’t diversify away any risk.

Jacobs isn’t against foreign stocks, but he notes that they tend to move in lockstep with U.S. stocks, particularly in bear markets. “The purpose of owning foreign stock funds is to invest in good foreign companies, not for diversification,” he says.

My take: Agreed. (For some international ideas, see Blue-Chip Stocks On Sale Worldwide.)

Index, but use “fundamental indexing,” too.

In addition to recommending traditional index funds, Jacobs favors putting some money into fundamental index funds. Traditional index funds weight stocks based on their market value (share price times number of shares outstanding). Fundamental index funds weight holdings based on basic factors, such as a company’s sales, profits, cash flow or book value (assets minus liabilities).

Jacobs notes that fundamental indexing was a bust in the 2007-2009 meltdown because funds that practiced that strategy tended to be more value-oriented than traditional index funds, and value strategies performed horribly during that market. Investors interested in fundamental indexing should consider PowerShares FTSE RAFI US 1000 ETF (symbol PRF), an exchange-traded fund.

My take: Look, I don’t agree with everything in this book. But it offers some real wisdom. Even if you’re a long-term, buy-and-hold investor, you can learn a lot by reading Jacobs. He did a superb job as a newsletter editor, and he has a lot to teach investors.

Steven T. Goldberg is an investment adviser in the Washington, D.C. area.


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