The Track Record

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I have a become a member of your site because of all the "analysts/chartists" out there I find that good or bad at least you tell it like it is. Although I have not acted on any of your recommendations to date I have watched closely and like what I see in terms of your accuracy. Hopefully with your help I can grow my portfolio. Keep up the great analysis!

Joseph DiPietro, President and General Manager, AML Group Inc.
Sudbury, Ontario, Canada

The Wiktionary defines the ‘track record’ as past performances viewed as a whole. We might add the ‘verifiable’ and ‘comparable’ to this definition to make it complete.

Most likely, you are reading this text because you want to check our performance, see if it meets your expectations, and perhaps compare us to other similar websites which provide you with their track record. Before we proceed with giving you the details of our track record, we would like to emphasize why this is usually a DISinformation, and therefore why you should not rely on it. We believe you will find the text below really worth the time taken to read it.

There are many factors that are almost always omitted in the ‘track records’ and sometimes the most crucial facts get ‘blurred’ only to get your attention. Below is the list of most commonly overlooked details of the ‘track records’. Click on each name to expand or shrink the particular block.

You don’t know how much leverage and risk was involved

You don’t know how much leverage and risk was involved – if someone brags that they increased their capital 10 times in five years, this means that they would need to gain about 59% per year and reinvest all of their capital each time. They will give you a comparison to an index which on average was up, let’s say, 30% per year. Most people would now say ‘wow, this company is great, they outperform the market almost 2 times!’ That is true, but at the same time this company can be destroying the capital! It did not have to be the wise decisions that made this money - this could be the leverage itself that caused the capital to grow by that much, despite often wrong decisions.

Let’s say that the leverage here was 3 to 1. So if the market was up 30%, then the leveraged investments should be up 90% per year, not 59%. This would imply that decisions of the person in charge have really caused losses. If it was not for the leverage, this portfolio would be up less than 20% per year. Not really amazing performance, if the market was up 30%, right?

How many different portfolios there were originally?

Another thing is that the ‘track record’ doesn’t tell you how many different portfolios a particular analyst had. Let’s say that an investment advisor runs 100 investment funds and 99 of his funds go bankrupt and the remaining one gains 300% in a year. This is virtually a drop in the ocean that doesn’t change anything, but guess what information will you find in the advertisement of the next investment fund? That’s right – ‘Staggering performance! 300% in a year! This investment advisor outperformed market 10-fold!’ and so on... This ad is not lying, but knowing all the facts, would you be willing to put your life savings into this new fund? Neither would we.

At this moment we cannot resist to quote one of our favorite author’s, Nassim Nicholas Taleb’s, book ‘Fooled by Randomness: The Hidden Role of Chance in Life and in the Markets’.

If one puts an infinite number of monkeys in front of (strongly built) typewriters, and let them clap away (without destroying the machinery), there is a certainty that one of them would come out with an exact version of the Iliad. Upon examination, this may be less interesting a concept than it appears at first: such probability is very low. But let us carry the reasoning one step beyond: Now that we find that hero among monkeys, would any reader invest his life’s savings on a bet that the monkey would write the Odyssey next?

Now, a single person can do the same, what the investment advisor just did with his funds. Just open accounts at 100 online brokerages, each with $100 or so. Buy some random, but different super-risky penny stocks on each account. After a few years you will most likely lose most of your money, but some companies will actually go to the moon (rather not compensating for the losses), but that is not the point. You can now go to the broker which holds your best ‘pick’ and demand a certificate of your performance. You will get all the signatures you need and there you have it – the ultimate proof of your ‘competence’ and ‘outperformance’. Now, you have probably seen such ‘proofs’ before. Have you ever seen it along with some sort of a different ‘proof’ that this is account owner does not have an account at a different brokerage and did not have one during the previous several years? Neither have we.

What is it exactly that is being compared to indices / metals / etc.?

What is it exactly that is being compared to indices / metals / etc.? Is it the whole portfolio (as it should be) or its selected part? If selected, then how is it selected? If that is the average of the best 5 stocks or so, then you should get more curious. This may mean the best at the moment of creating a particular comparison or chart, not at the moment of selecting these stocks. So – an analyst decides that they need a chart that ‘proves’ their competence, takes five best performing stocks in a given period and then shows them as their ‘best model portfolio’.

If there were 50 stocks in the real portfolio, it is natural that there will be winners and losers among them. The fact that five of them are very strong is just a normal, random effect – not a proof of the analyst’s competence. What should be included are all the stocks that were featured at the beginning of the analyzed period. If any ranking is to be used, stocks would need to be described as ‘the best’ at the beginning of that period (along with providing information on what they were compared to), not at the end of it.

Do you know how exactly is a given rate of return calculated?

Do you know how exactly is a given rate of return calculated? Is it geometric average, arithmetic average, or perhaps something different? If you used arithmetic average for a fund that doubles (+100%) for four years and then goes bankrupt in the fifth year (-100%), you could still get average yearly gain of 60%. Would you want to invest in that particular fund? Neither would we.

How was the risk measured?

Do you know what risk was involved? How it is measured: Standard Deviation, Value-at-Risk, portfolio’s Sharpe Ratio, etc.?*

How likely a particular strategy is to repeat its featured performance? Remember the monkeys and the typewriters? The less likely the outcome was originally, the less likely it is that it will be repeated in the future.

* - We believe that none of them should be fully relied on, as they are all based on the assumption that the rate of return is characterized by the Gaussian distribution

How was the data obtained? Are the sources reliable?

How was the data obtained? Are the sources reliable? Who verifies the information provided? Does the analyzed period make you suspicious? For example ‘Our annualized rate of return between January 2nd and April 23rd is 5000%!’ could mean that this was the only time when this company did anything profitable throughout the whole year. It says nothing about the rest of the year, which could mean just as enormous losses.

Do you see an impressive track record? How about a real-time test?

Do you see an impressive track record? How about a real-time test - is it offered? Is that indeed a test of this company’s service, like what we offer free of charge after registration, or is that just a bunch of ads mixed with obvious statements?

Besides, does a particular analyst / company brag about their 'best picks' from the beginning of this bull market, not more recent ones? This should make you alert. At the beginning of the bull market all precious metals stocks were valued ridiculously low, and it didn't take a rocket scientist to pick just any stock from the sector and see it fly to the moon in the following years. Back then it was difficult to find stocks that did not perform well, so bragging about 'having picked high-flyers' in 2000-2002 is no proof of one's competence. Naturally, this does not mean that everyone who claims to have chosen PM stocks back then is incompetent.

However, at the moment of writing these words we have 2009, and creating value in this sector is more difficult. If that analyst/company doesn't tell you about their performance in recent months/years, it may mean that they were able to make good calls only under the most favorable conditions. The problem here is that under those conditions, almost everyone could make big money in the sector, whithout any third-party help. Therefore, in the case described above, you would get help when you don't need it, and you wouldn't get valuable help, when you do need it.

This brings us to the conclusion – the ‘track record’ is very rarely free of the abovementioned flaws. There is no reliable and at the same time fast way to measure performance of anyone in the investment business. Ideally you would want to be able to check how that particular analyst makes their decisions, how they react to the losses, which are bound to occur every now and then – acting very emotional is not a good sign.

Do they manage their own capital in the way they suggest you to manage your own – tell you to sell, but keep their holdings, thus violating the rules that they created? You would additionally want to see what they created / invented themselves, not just copied someone else - in that case, subscribe to that someone else’s service. Last, but definitely not the least, you would want to be able to test this analyst’s performance in the real time, for instance in a limited, free service. We realize that and we strive to fulfill these needs – if you feel that we can somehow do it better, than we currently do – please contact us and we will work hard to follow your suggestions.

Keeping all of the above in mind and knowing that it is incomparable – do you still want to see our ‘track record’? If so, please note that the facts below are verifiable by thousands of registered Users of this website.

We are publishing our essays since the end of March 2008 and since that time we send out Market Updates and Speculative Alerts. During that time we emphasized adding to the long-term holdings as the prices declined. During particularly favorable moments we indicated that opening speculative positions, using the options market might prove profitable. You can find all of the e-mail that we sent in the "Free commentary" section. We used call options, so we were positioning ourselves according to the long term trend. As this is a free service that we are talking about, alerts did not contain our preferred position sizes, so it is impossible to determine the rate of return on these transactions. Because of the volatility and the declining trend, these were risky transactions and most of them did not play out as expected, however those that did, were more than enough to compensate the losses, making our overall rate of return impressive. Details of the best transaction: Sep 30 calls on GDX went from about 60 cents to $6 during just six trading days and the Market Update in which we mentioned these options was sent on 11/9/2008. Even though the size of this position was (or at least should have been) small, the profits are substantial.

In 2009 our performance has been even better. We wrote about position sizes so it is possible to estimate the value that we created for those who followed us on our trades.

The first transaction: GDX puts: 25% profit with 3% of our speculative capital. This means that the speculative part of one's portfolio increased by 0.75%
The second transaction: GDX calls: 160% profit 5% of ones speculative capital and 106.7% with 9% of one's speculative capital. This means that the speculative part of one's portfolio increased by 17.6%
The third and final transaction at the moment of writing these words: RTP calls: 331% with 4% of one's speculative capital, 184% with 3% of one's speculative capital. FCX calls: 300% with 3% of one's speculative capital and 284% with 3% of one's speculative capital. This means that the speculative part of one's portfolio increased by 36.28%

Therefore, as of March 16th (the day of writing these words), our speculative part of portfolio has gained about 61.5% in 2009 alone. To put things into perspective, during the same timeframe HUI Index declined about 5%. You can verify these trades in the "Free commentary" section. You can find more details regarding prices of options on www.marketwatch.com. Does this mean that we will always be correct? Of course not - we don't aim to be always correct, as it is impossible. We aim to help you increase your holdings over time, and we believe that you will find our service worth of your attention.

Summing up, long-term holdings were down in 2008, but we still managed to profit on speculative transactions, despite the massive decline in the underlying equities. As far as our ability to choose outperforming stocks is concerned, please take a look at the table in this essay on silver stocks. There were two companies that we described as weak: SIL and CDE. A year after we published it, it turns out that SIL filed for bankruptcy, and Coeur's performance is much below the sector average. This means that just by staying away from these two companies you would outperform the market. That essay has been online for about a year - anyone who visited the Research section from that time can verify that.

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