Gaining Control Over Your Investments – Part 4 of 6

The tale of the “Tortoise and the Hare” is taught to us at a very early age for a very good reason. Slow and steady wins the race. Yet, the majority of investors forget the lessons from childhood, often opting for flashier paths that might bring them enormous fortune. Sadly, the quest for a magical formula or a “stock market guru” typically ends in disappointment, if not disaster.

Magical formulas in the stock market do not exist. Stock market gurus do not exist either. Nevertheless, we are constantly bombarded with “get rich” publications, TV shows about making “mad” amounts of money, as well as industry profiles that crown individuals with mystic investment skills.

The purpose of this article is not to tar and feather several of those “hot-to-not” individuals; rather, it is meant to make investors aware of their natural—and quite hazardous—urge to chase performance, hop on band wagons, and place blind faith in a stock market guru.

Bill Miller:
Bill Miller co-managed the Legg Mason Capital Management Value Trust Fund (LMVTX) from its inception in 1982. Over the years, Mr. Miller and his team received numerous accolades for their performance record and distinct investment style, which focused on a detailed understanding of businesses and their intrinsic value.

Mr. Miller was ranked among the top 30 most influential people in investing when he was named a member of the “Power 30″ by SmartMoney. He was also named by Money Magazine as “The Greatest Money Manager of the 1990’s” and named Morningstar’s 1998 “Domestic Equity Manager of the Year.” In 1999, he was selected as the “Fund Manager of the Decade” by Morningstar.com. In 1999, Barron’s named him to its All-Century Investment Team, while BusinessWeek called him one of the “Heroes of Value Investing.”

In 2007, LMVTX became the largest stock mutual fund in the world. With 15 consecutive years of beating the S&P 500, it seemed that Mr. Miller could do no wrong. In June of 2007, LMVTX was hitting fresh all-time highs, just as scores of hopefuls piled in. After all, why wouldn’t you want a stock market guru with awards galore at the helm of your portfolio? No brainer, right?

With a recession beginning to take shape in the 2nd half of 2007, not everyone believed that it would lead to an epic meltdown in the financial system. In fact, Bill Miller decided to invest even more heavily in banks and other financial services firms. The “stock market guru” was not able to predict the financial collapse nor the depth of declines in the shares of major financial institutions.


From June of 2007 to March of 2009, Bill Miller’s fund plummeted 73%. In less than two years, LMVTX wiped out more than a decade’s worth of returns. Not only did LMVTX fail to “beat the market” in 2008, it underperformed the Lipper Average for Large-Cap Value funds over 1, 3, 5, 10 and 15 years. Worse yet, bear market math shows that while S&P 500 index funds fell roughly 55% in the time period, requiring 122% to get back to even, the 73% decimation would require 270% to recover. Here in late 2013, it still has quite a ways to go.

John Paulson:
Mr. Paulson made a fortune from the collapse of the mortgage-backed securities market at the heart of the 2008-2009 credit crisis. His bet on short-selling subprime mortgages in 2007 has been called one of the greatest trades ever. At the time, there wasn’t a single financial news publication that wasn’t touting his seemingly clairvoyant portfolio management capabilities. The world of finance had a guru on the other side of Bill Miller, and his name was John Paulson.

The popularity associated with having made the “greatest trade ever” allowed Mr. Paulson to grow a miniscule, one-employee, $2 million hedge fund, Paulson & Co. Inc., to the fourth-largest hedge fund in the world; $2 million swelled to an astonishing $36 billion in investor assets under management.

Undoubtedly, Mr. Paulson’s 2007 bet against subprime was a home run. Since then, however, Paulson’s performance is less like Hank Aaron and more like the infamy of the biggest strike-out artists. In 2011, John Paulson earned the dubious title of owning the worst performing fund. Large company stock market funds may only have been flat to up a percentage point or two, yet Paulson’s Advantage Plus Fund lost a ridiculous 52.5%.

Surely the guru with the greatest trade ever could do better in 2012, right? Despite S&P 500 index funds earning more than 15% in 2012, Mr. Paulson’s flagship Advantage Plus was near the bottom in performance yet again, logging a pitiful -19%. The droves of investors that hopped on the John Paulson bandwagon suddenly found themselves down 62% from the top… in just two years. Buy-n-hold believers in Paulson began 2013 needing 163%… just to get back their initial investment!

Americans need their heroes. And some portfolio managers seem to have it all – media recognition, awards, past performance. But when a “guru” does not have a plan to minimize losses, it’s the buy-n-hold believers who lose.

Smart Investing:
The world is filled with very intelligent men like Bill Miller and John Paulson. Yet the smartest investors understand that they themselves, as well as their heroes, will be wrong. It takes humbleness and a keen understanding of human nature to develop a plan to protect yourself from being wrong. In other words, you need a plan to protect yourself from yourself. Otherwise, things can get real ugly, real quick.

Disclosure: Gary Gordon, MS, CFP is the president of Pacific Park Financial, Inc., a Registered Investment Adviser with the SEC. Gary Gordon, Pacific Park Financial, Inc, and/or its clients may hold positions in the ETFs, mutual funds, and/or any investment asset mentioned above. The commentary does not constitute individualized investment advice. The opinions offered herein are not personalized recommendations to buy, sell or hold securities. At times, issuers of exchange-traded products compensate Pacific Park Financial, Inc. or its subsidiaries for advertising at the ETF Expert web site. ETF Expert content is created independently of any advertising relationships.