Institutionalized Deception
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  1. Figures Don't Lie but...
  2. The Recovery Fallacy
  3. Limiting Losses is the Key
  4. The Potomac Guardian Example
  5. Conclusions


Some of you may remember the radio spots some years ago by Eddie Chiles, CEO of the Western Company. His brief commercials would often contain a phrase borrowed from the 1976 movie Network: "I'm mad as hell and I'm not going to take it any more." Right now, I feel somewhat the same way. While I'm not quite as angry as Mr. Chiles, I am concerned that investors continue to be subjected to misleading arguments that favor "buy-and-hold" investments over "actively managed" strategies, even though we've had two major bear markets in this decade alone.

This is especially true now that the market is again moving upward. Wall Street is making a big deal of the fact that the stock market has rebounded from its March low. What they don't tell you is that most of this rebound was needed to just erase the losses incurred in the early months of the year, not to mention losses incurred in 2008.

Even worse is that these misrepresentations continue to be made by many of the big brokerage and mutual fund firms that are intent only on keeping investors' money tied up in their products. Likewise, many in the financial press have also continued to pass on these faulty arguments in the name of prudent advice. It's time to realize that Wall Street's conventional wisdom is designed to have you do what's best for them, and not necessarily what's best for you!

What irritates me even more is that these same buy-and-hold outfits continually preach that it is "impossible to time the stock market." I beg to differ! In the pages that follow, I'm going to show you a professional money manager that has successfully timed the stock market for over a decade, with an average annualized return of 9.13% versus the S&P 500 return of 4.26% over the same period. So don't tell me it's impossible to time the stock market! As always, I must add that past performance is no guarantee of future results.

This week, I'm going to challenge one of the most prevalent buy-and-hold arguments that I consider to be most misleading. I have written about this in the past, but I think it is important to keep spreading the word about buy-and-hold studies and marketing materials that are repeatedly designed to tell only half of the story. The half they tell you is how it hurts you to be out of the market on the good days. The half they don't tell you is how difficult it is to recover from large bear market losses. What else is new?

Figures Don't Lie but...

Proponents of buy-and-hold present a variety of very misleading arguments when attempting to counter the advantages of active investment management strategies. While the statistics that they provide are usually accurate in and of themselves, they are spun together into a web of deception in an attempt to keep unwitting investors in the promoters' funds and/or brokerage accounts.

For example, those who offer buy-and-hold strategies have recently started referring to them as "diversification" rather than Modern Portfolio Theory, asset allocation, etc., etc. The obvious implication is that if you're not using one of these buy-and-hold methods, your portfolio is not diversified. Hogwash!

By adding active management strategies, you can actually increase diversification by adding different investment strategies and not just a variety of investment asset classes. Plus, if you look at the history of bear markets, it's in the buy-and-hold programs where diversification often breaks down as previously uncorrelated investments all start going down together in a declining market. I'll bet you haven't seen this disclosed in any traditional mutual fund advertising.

Another example of this type of deception goes something like this excerpt from an article I found on a prominent brokerage firm's website:

"...Bull market returns tend to be front-loaded, with the bulk of returns accruing to the earliest months of the rally. Being late to the party can mean the birthday cake is half eaten by the time you arrive. For example...The first 12 months of the average bull market has provided more than 40% of an entire bull market's price appreciation, yielding on average 45% for investors..."

While the statistical return figures quoted in this excerpt appear to be true, I have a number of problems with the implications of this statement. The first problem is that it doesn't explain that the 45% average gain after the end of a typical bear market may not even get you back to break-even after the bear market losses you've just incurred. Unfortunately, many investors mistakenly believe that a 45% gain will erase a 45% loss, but it won't.

For example, the 45% average gain mentioned above will cover a portfolio loss of only about 31%. In other words, if your investment portfolio lost 31% of its value, it would take a gain of 45% just to get you back to break-even. So what would it take to get back to break-even if you had a loss of 45%? Doing the math, we find that $10,000 incurring a 45% loss drops to $5,500. To gain the $4,500 back, the investor would need to earn a return of over 80%!! This is another tidbit of information you're not likely to find in Wall Street's glossy marketing materials.

Here is a table showing various levels of loss and the gain it would take just to get the portfolio back to where it started:

Amount of Loss

Return Required
To Break Even





















The moral of this story is that avoiding large losses can be just as important (actually more so, as I will discuss below) than holding investments so that you don't miss out on subsequent gains.

Gary D. Halbert, ProFutures, Inc. and Halbert Wealth Management, Inc.
are not affiliated with nor do they endorse, sponsor or recommend the following product or service.

The Recovery Fallacy

There's a flip side of this buy-and-hold fairy tale that I also need to address. As noted above, buy-and-hold adherents use the statistics showing that much of a bull market's gain is concentrated in the first 12 months to convince investors to stay invested at all times. Going to cash, they say, will prevent you from taking advantage of the outsized returns that often occur during the early months of a new bull market.

However, this argument is bogus unless you decided to move to cash at or near the very bottom of the market. Had you chosen to move to cash sometime before the bottom, you could actually miss some of the early bull market gains and still be better off than had you stayed in the market.

You see, to get the maximum benefit of the average 45% gain in the first year of a new bull market, you must be invested at the very bottom of the market. About the only way to do this is to have followed the buy-and-hold advice of staying invested at all times. So, to get the full value of the 45% average upside, you would likely have had to endure the pain of the entire bear market's downward ride. OUCH!!!

Common sense, however, tells you that if you exited the market sometime before the actual market bottom, you could afford to miss out on some of a new bull market's early gain and not be any worse off.

To provide an example, I documented six times when market analysts, journalists, talking heads, etc. incorrectly predicted an end to the current bear market over the past year or so. By comparing where the markets were when these "false bottom" calls were made to the actual lows at the market close set in March of 2009, we can see that timing the market isn't necessarily a bad thing if it allows you to avoid losses.

The most recent dip in the S&P 500 Index took it down to 676 at the close on March 9th and the Dow Jones Industrial Average (Dow) closed at 6,547 on the same date. Compare that to the stock market levels on the dates of these selected bottom callers:

  • In January of 2008 with the Dow at 13,265, well-known perma-bull Abby Joseph Cohen predicted a reversal in the Dow and that it would be at 14,750 by the end of the year.
  • On March 17, 2008 with the Dow at 11,972, some analysts declared a "Bear Stearns Bottom." CNBC guru Jim Cramer declared that the bear market had been tamed.
  • On July 31, 2008, Jim Cramer again predicted that the Dow's July 15, 2008 low of 10,962 would be the market bottom. As Cramer put it, "Bye, bye bear market."
  • On October 9, 2008 with the Dow at 8,579, professional stock trader Tony Oz declared that the market was near a significant bottom.
  • On November 20, 2008, the Dow posted a new low of 7,552, which prompted some analysts and investors to again declare that the bear market was dead. However, the Dow eventually broke through the 7,552 low on February 27, 2009.
  • Finally, many investors thought that the New Year (accompanied by a new president) would somehow bring about a "hope" rally in the stock markets. It didn't. At the end of 2008 the Dow stood at 8,776, yet it continued to fall even further until closing at 6,547 on March 9th, its lowest level yet during the current bear market.

If nothing else, the above list shows that some very smart analysts with extensive experience in the stock market can be very, very wrong when it comes to calling the market bottoms. However, it's likely that any of these market gurus would have told you that getting out of the market on these dates would be the worst time to do so, since they expected the market to reverse course and go higher.

Limiting Losses is the Key

My purpose in noting these predictions of "false bottoms" is to illustrate what would happen should an investor ignore buy-and-hold advice and get out at exactly where Wall Street might consider it to be the worst possible time – when the "experts" were saying a market bottom was in. You may think I'm being a contrarian, but this analysis will show you why Wall Street never mentions how much more you might lose if you're not, in fact, near the bottom of the market when you decide to cash out.

Take the first bottom call from the list when Ms. Cohen predicted a market bottom in January of 2008. The Dow ended up falling an additional 6,718 points after this inaccurate prediction. This drop represents a 50.6% reduction in the value of the Index and, using the mathematics of gains and losses discussed above, will require a gain of over 102% just to get back to break-even.

In other words, investors who moved to cash in January of 2008, despite an expert opinion that the market had hit bottom, could stand to miss out on the first 102% of a new bull market's gains before they would be worse off financially than had they not gone to cash at all. Do you think that this investor might recognize that a new bull market is under way sometime before the markets post gains of 102%? I think so, especially if he is using a professional active money manager as I will discuss later on.

The table below shows a similar analysis for all of the "false bottom" dates from the above list. The results reflect how much further the market fell after the experts' calls, and how much return you could have missed in the early stages of a market rally and still not have been harmed:


Dow Position

Additional Loss to March '09 Low

Gain Required to Break Even

January 1, 2008


6,718 (50.6%)


March 17, 2008


5,425 (45.3%)


July 15, 2008


4,415 (40.3%)


October 9, 2008


2,032 (23.7%)


November 20, 2008


1,005 (13.3%)


January 1, 2009


2,229 (25.4%)


The most obvious lesson to be learned from this analysis is that going to cash during a bear market may not be as dangerous to your portfolio as the far from accurate buy-and-hold crowd promises. As the above table represents, the potential to lose more money before an actual market bottom effectively debunks the idea that missing out on early market gains in a renewed bull market is a reason to stay invested. Obviously, this doesn't work if you actually do get out at the actual bottom of the market, but that's a hard call to make.

The next most obvious realization is that it might be possible to maximize returns and minimize losses if you could move out of the market early in the bear market, and then move back into the market fairly soon after the bull market begins. That way, you'd not only benefit from avoiding losses, but also from participating in the outsized gains early in the bull market. Actually, this concept is the driving force behind the active management strategy known as "market timing."

However, attempting to time the market on your own can be dangerous, since making the wrong move at the wrong time could actually expose you to more losses than a buy-and-hold strategy. That's why we recommend that you depend upon professional money managers with time-tested systems with the potential to get out of bear markets as early as possible and avoid big losses, and then get back in when conditions suggest a renewed uptrend. These strategies can help you to control the emotions associated with investing on your own.

The Potomac Guardian Example

The best way for me to illustrate the value of professional active management is by way of example using one of our recommended actively managed investment programs. My company has been offering the Potomac Guardian managed account program since 1996, and it has shown to be a consistent performer over that time. While past performance can't guarantee future results, this investment has provided a much smoother growth line than the benchmark S&P 500 Index.

Potomac's Guardian Program essentially ignores Wall Street's admonitions to refrain from timing the market. Potomac has developed a proprietary strategy that moves gradually to cash or a hedged position when their system detects a greater level of market risk. This gradual pace helps Potomac keep from being "whipsawed" by quick up and down spikes in the market, while also maintaining a market exposure should a downward trend prove to be temporary.

Since Potomac's Guardian Program defies Wall Street's conventional wisdom, let's compare its performance to that of the unmanaged S&P 500 Index during the 2000 – 2002 bear market. We'll assume an investment of $1,000 at the beginning of the bear market and actual month-end performance data from April of 2000 through September of 2002. Note that our analysis is for comparison purposes only since you can't invest directly in the S&P 500 Index.

Over this time period, the amount of money deemed to have been invested in the S&P 500 Index dropped from $1,000 to $562.54, a loss of 43.75%. Over the same time period, the Potomac Guardian program grew from $1,000 to $1,004.80. Potomac actually made a modest profit in the 2000-2002 bear market when an S&P 500 buy-and-hold strategy incurred a devastating loss of almost 44%. You can clearly see from this analysis why I recommend proven active management strategies over Wall Street's buy-and-hold mantra.

However, Wall Street's argument isn't that large losses won't happen from time to time; rather that you need to stay in the market to participate in the gains that come about during the early months of a new bull market. Therefore, let's see how the S&P 500 Index performed as compared to the Potomac Guardian program in the 12 months following the market bottom in early October 2002.

From October 2002 through September 2003, the S&P 500 Index gained a whopping 24.4%. Since the Guardian Program moved back into the market gradually, it produced a gain of only 9.33% over the same 12 months. So, buy-and-hold wins, right?

Not so fast! As I mentioned above, we have to factor in the mathematics of gains and losses. To get a true comparison, we need to see what happened to the hypothetical values of our sample accounts in the 12 months following the bear market of 2000 – 2002.

As noted, the value of $1,000 invested in the S&P 500 Index in April 2000 would have shriveled down to only $562.54 by September 2002. However, this investment benefited from the 24.4% accumulated gain over the 12 months following the bear market. Doing the math, we see that the S&P 500 Index account grew from $562.54 to $699.80 over that one-year period. Not bad, but still far short of the original $1,000 investment.

The Potomac Guardian account, however, didn't lose money during the bear market, retaining a value of $1,004.80 and underscoring the importance of avoiding losses. During the subsequent 12 months, the Guardian account gained 9.33%, growing our example account balance to $1,098.55 at the end of September, 2003. Remember, the Potomac numbers are based on actual performance net of fees and expenses, while the S&P 500 Index numbers do not include any management fees.

Thus, the S&P 500 Index investment had a greater percentage gain after the end of the bear market, but Potomac retained a higher dollar value. Since most grocery stores don't accept percentages as payment, what really matters is your MIP (money in pocket) at the end of the day. So here's a tough question: Which account would you rather have?

Wait a minute! I can already hear the buy-and-hold devotees becoming defensive, saying that I am misrepresenting the case for active management by cherry picking a time period. I'm not sure how they could say that, since I used the 12-month example from a buy-and-hold article, but let's humor the buy-and-hold advocates for a while longer. After all, they've had a hard decade considering we've had two major bear markets in less than ten years.

The buy-and-hold groupies might protest that I didn't show what happened after September 2003. Since the S&P 500 Index produced a gain of two-and-a-half times that of the Guardian Program in the 12 months following the bottom of the 2000 – 2002 bear market, they might reason that future years would allow the S&P 500 Index to catch up to Guardian. That's a logical conclusion. Logical but wrong.

Below, I have listed the actual performance numbers for both the S&P 500 Index and the Potomac Guardian program picking up at October 2003 and going through September 2007, which marks the month-end closest to the market peak reached in early October 2007:


S&P 500 Return

S&P 500
Accum Value


Accum Return

Value at Sept 2003





Oct - Dec 2003 Return





2004 Annual Return





2005 Annual Return





2006 Annual Return





Jan - Sept 2007





So, while the S&P 500 Index spent most of its time getting back to break-even, the Potomac Guardian Program was busy building wealth on a risk-managed basis. This also illustrates that, while Potomac moves back into the market gradually, once it is fully invested it can match or even beat market index returns. Obviously, there's no guarantee that they can always do so.

And just in case you're curious, the Potomac Guardian Program has significantly limited losses in the most recent bear market cycle. From the market peak in October of 2007 through June of 2009, Guardian had annualized return of -5.27% versus the S&P 500 Index's -23.32%. This again shows the value of having a program that can play defense as well as offense.

From its inception in June of 1996, Guardian has produced an annualized return of 9.13% through June of 2009, net of fees and expenses. Over the same period of time, the S&P 500 Index has an annualized gain (including dividends) of only 4.26%. If you accumulate these returns over the entire period, you will find that the S&P 500 Index would have grown a one-time investment of $100,000 into $172,558. Meanwhile, the Potomac Guardian Program would have produced a nest egg of $313,748 over that same period of time. That's a difference of $141,190 in favor of Potomac. Such is the value of successful active management strategies. Again, which account would you rather have? (Past results are not necessarily indicative of future results.)

As a moderate-risk investment, the Potomac Guardian program may be suitable to a wide variety of investors who seek asset growth with an eye on capital preservation. At my company, we consider Guardian to be a "core" holding, meaning one that may be suitable for a wide range of investment goals and risk tolerances.

It is also important to note that the results above are net of Potomac's 2.5% annual management fee and any expense loadings in the mutual funds they use. Yes, in my example an early Guardian investor would have paid higher fees with Potomac than in a low-cost index fund, but that investor would have had over $140,000 more MIP at the end of the day. Yet again, which would you prefer?

Gary D. Halbert, ProFutures, Inc. and Halbert Wealth Management, Inc.
are not affiliated with nor do they endorse, sponsor or recommend the following product or service.


Are you mad yet? Well you should be! Major financial services firms have fed you a steady stream of misinformation about the benefits of active management as opposed to buy-and-hold strategies. And now that two consecutive bear markets have decimated investors' portfolios, Wall Street is still singing the same buy-and-hold song. Hopefully, this time it's a funeral dirge.

It seems clear to me that if buy-and-hold was actually superior to market timing or other active management strategies, Wall Street could make the case without using deceptive or misleading studies and analyses. But they don't – primarily because more and more studies are showing that successful active management strategies such as market timing CAN beat buy-and-hold portfolios.

At the end of the day, what really matters to most investors is the value of their accounts when they need their money. A double-digit historical return over a 75-year time horizon doesn't do you much good if the value of your investment dives 50% just at the time you need your money for retirement, a college education, etc. The siren song of buy-and-hold strategies is that you'll be OK if you just hold on. Many Baby Boomers who took that advice are now facing retirement with a smaller nest egg and not much time for buy-and-hold's empty promises to catch up.

If you would like to check out an actively managed program that can move in and out of the market, I suggest you take a look at the Potomac Guardian Program. While future performance can't be guaranteed, Guardian's actual results spanning the bursting of two asset bubbles and subsequent bear markets not only speaks well for that program, but also helps to disprove Wall Street's buy-and-hold mythology.

To get more information about the Guardian Program, including detailed performance information and a description of Potomac's trading methodology, give one of our Investment Consultants a call at 800-348-3601 to discuss this investment in more detail and ask any questions you may have. You can also click on the following link to access our online request form. This will allow you to request a packet of information to be sent to you via first-class mail. Or, visit our website at to access this information. Also be sure to read the Important Notes following my signature below before deciding to invest.

And remember, Potomac is only one of the actively managed investment strategies we recommend. We have several other professionally managed investment programs that also have very positive risk-adjusted returns as compared to Wall Street's buy-and-hold mantra. Maybe it's time you take a look and consider adding some of these programs to your portfolio.

Finally, we are sponsoring an online webinar featuring the Potomac Guardian Program on August 6th at 1:00 PM Eastern Time. You can learn more about this webinar and register to attend at the following Potomac Webinar Link. In this webinar, you'll hear directly from a member of Potomac's Investment Committee and be able to ask any questions you may have about Potomac's proprietary investment strategy.

We've had an incredible attendance rate at our first two online webinars. Maybe you should register and see why.

Wishing you profits in a difficult market,

Gary D. Halbert

IMPORTANT NOTES: Halbert Wealth Management, Inc. (HWM) and Potomac Fund Management (PFM) are Investment Advisors registered with the SEC and/or their respective states. Some Advisors are not available in all states, and this report does not constitute a solicitation to residents of such states. Information in this report is taken from sources believed reliable but its accuracy cannot be guaranteed. Any opinions stated are intended as general observations, not specific or personal investment advice. HWM receives compensation from PFM in exchange for introducing client accounts. For more information on HWM or PFM, please consult the appropriate Form ADV Part II, or the PFM Annual GIPS Disclosure Presentation 2007, available at no charge upon request. Any offer or solicitation can only be made by way of the Form ADV Part II. Officers, employees, and affiliates of HWM may have investments managed by the Advisors discussed herein or others.

As a benchmark for comparison, the Standard & Poor's 500 Stock Index (which includes dividends) represents an unmanaged, passive buy-and-hold approach. The volatility and investment characteristics of the S&P 500 may differ materially (more or less) from that of the Advisor, and this Index cannot be invested in directly. The performance of the S&P 500 Stock Index is not meant to imply that investors should consider an investment in the Potomac Guardian trading program as comparable to an investment in the "blue chip" stocks that comprise the S&P 500 Stock Index. Potomac's performance results are based on the Model Portfolio. The Model Portfolio is an actual account that is considered representative of the majority of client accounts with similar investment objectives. Returns for the Model Portfolio are time-weighted, total returns that reflect the reinvestment of dividends and capital gain distributions. The Guardian strategy is actively allocated across many sectors and/or asset classes, overweighting those exhibiting the best risk-to-reward ratio. PAST RESULTS ARE NOT NECESSARILY INDICATIVE OF FUTURE RESULTS. Any investment in a mutual fund carries the risk of loss. Mutual funds carry their own expenses which are outlined in the fund's prospectus. An account with any Advisor is not a bank account and is not guaranteed by FDIC or any other governmental agency.

When reviewing past performance records, it is important to note that different accounts, even though they are traded pursuant to the same strategy, can have varying results. The reasons for this include: i) the period of time in which the accounts are active; ii) the timing of contributions and withdrawals; iii) the account size; iv) the minimum investment requirements and/or withdrawal restrictions; and v) the rate of brokerage commissions and transaction fees charged to an account. There can be no assurance that an account opened by any person will achieve performance returns similar to those provided herein for accounts traded pursuant to the Potomac Guardian's trading program.

In addition, you should be aware that (i) the Potomac Guardian's trading program is speculative and involves a moderate degree of risk; (ii) the Potomac Guardian's trading program's performance may be volatile; (iii) an investor could lose all or a substantial amount of his or her investment in the program; (iv) PFM will have trading authority over an investor's account and the use of a single advisor could mean lack of diversification and consequently higher risk; and (v) the Potomac Guardian's trading program's fees and expenses (if any) will reduce an investor's trading profits, or increase any trading losses.

Returns illustrated are net of the maximum management fees, custodial fees, underlying mutual fund management fees, and other fund expenses such as 12b-1 fees. They do not include the effect of annual IRA fees or mutual fund sales charges, if applicable. No adjustment has been made for income tax liability. The results shown are for limited time periods and may not be representative of the results that would be achieved over a full market cycle or in different economic and market environments.

Copyright © 2009 Halbert Wealth Management, Inc. All Rights Reserved.


"Gary D. Halbert, ProFutures, Inc. and Halbert Wealth Management, Inc. are not affiliated with nor do they endorse, sponsor or recommend any product or service advertised herein, unless otherwise specifically noted."

Forecasts & Trends is published by ProFutures, Inc., and Gary D. Halbert is the editor of this publication. Information contained herein is taken from sources believed to be reliable, but cannot be guaranteed as to its accuracy. Opinions and recommendations herein generally reflect the judgment of Gary D. Halbert and may change at any time without written notice, and ProFutures assumes no duty to update you regarding any changes. Market opinions contained herein are intended as general observations and are not intended as specific investment advice. Any references to products offered by Halbert Wealth Management are not a solicitation for any investment. Such offer or solicitation can only be made by way of Halbert Wealth Management’s Form ADV Part II, complete disclosures regarding the product and otherwise in accordance with applicable securities laws. Readers are urged to check with their investment counselors and review all disclosures before making a decision to invest. This electronic newsletter does not constitute an offer of sales of any securities. Gary D. Halbert, ProFutures, Inc. and all affiliated companies, InvestorsInsight, their officers, directors and/or employees may or may not have investments in markets or programs mentioned herein. Securities trading is speculative and involves the potential loss of investment. Past results are not necessarily indicative of future results.

Posted 07-28-2009 5:05 PM by Gary D. Halbert
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