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Lies, Damned Lies, and Statistics

"Lies, damned lies, and statistics" is a phrase describing the persuasive power of numbers, particularly the use of statistics to bolster weak arguments. The term was popularized in the United States by (among others) Mark Twain in the 19th Century.

The Financial Services Industry and the Political Industry probably use Lies, Damned Lies, and Statistics more than any other industry to further their own agendas. Two egregious examples used by the Financial Services Industry are shown on this page.

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Example #1

As a former American Association of Individual Investors (AAII) member, I was regularly subjected to AAII's promotions. During February 2010 I received the following promotion from AAII inviting me to subscribe to the AAII Stock Superstars Report:

James B. Cloonan, PhD, Founder and Chairman of AAII wrote: "I want you to know that the Stock Superstars Report Maintains the Absolute Integrity you expect from AAII."

The Stock Superstars Report Performance Update was enclosed. It claimed that the "Stock Superstars 12-month performance as of 12/31/09 is 30% greater than that of the market. Further, the portfolio has performed 10X better than the market since its inception in early 2002."

For the 12 months of 2002, the AAII's Stock Superstar's website reports a Superstar's gain of 0.5% vs. a loss of 21.0% for the Wilshire 5000 - the Total US Stock Market. This is outstanding performance, but the problem is that the AAII Stock Superstars Report was NOT available to subscribers until January 2003. That means it would not have been possible for subscribers to realize the AAII Stock Superstar's outstanding returns during 2002.

Note that this is a well known strategy used by some mutual fund families, and it's perfectly legal. Here's how it works:

1. Register a new mutual fund with the SEC, but keep it secret from the public.
2. If the fund performs well, then open it to the public.
3. If the fund performs poorly, then terminate it.

A terminated fund and its underperformance disappear from the public record forever. However, if a fund performs well, then its outperformance becomes part of the public record. That's how some mutual fund families can claim their funds are above average. Don't you wish that you could make your underperforming investments disappear forever?

The Hulbert Financial Digest began tracking the AAII Stock Superstars portfolio on January 1, 2003, exactly when it became available to subscribers.

The Hulbert Financial Digest is a digest that has been monitoring financial newsletters since early 1980. During 2010, Mark Hulbert and his squad of analysts monitored almost 200 newsletters in which more than 500 portfolios are included. Mark Hulbert writes regular columns on MarketWatch, a bi-weekly column for the Sunday New York Times and a quarterly column for the Journal of the American Association of Individual Investors.

How well did the AAII Stock Superstars perform during the period after which The Hulbert Financial Digest began monitoring the portfolio i.e., the 10 Years ending 12/31/2012?

The Superstars gained 6.6% per year during the 10 Years ending 12/31/2012
The Wilshire 5000 - the Total US Stock Market - gained 7.9% per year during this period.
The Vanguard 500 Index Fund gained 7.0% per year during this period.
The Vanguard Mid Cap Index Fund gained 9.9% per year during this period
The Vanguard Small Cap Index Fund gained 10.8% per year during this period.

The Hulbert Financial Digest reported that the AAII Stock Superstars Report is primarily a small cap portfolio, but AAII claimed the Stock Superstars Report is a blend of Large, Mid and Small Cap Stocks, more or less equally weighted. If that's true, then the most appropriate benchmark for the Superstars Report is probably an average of the Large, Mid and Small Vanguard Index Funds shown in the last column on the right in the Table below.

A gain of 6.6% per year during the Ten Years ending 12/31/2012 ranked the AAII Stock Superstars # 61 out of 109 newsletters monitored by The Hulbert Financial Digest for Ten Years or more. Also, owing to the fact that the Superstar's returns have been more volatile than the overall stock market, this portfolio lags by even more on a risk adjusted basis.

During 2012, the AAII Stock Superstars Report had a relatively good year, but it still failed to outperform its most appropriate benchmark, and it failed to outperform ALL of the Vanguard Index Funds over the entire period during which it was available to subscribers.

During January 2013 AAII heavily promoted the AAII Stock Superstars Report. Its January promotion consisted of a full page inside cover advertisement in their monthly AAII Journal that claimed the Superstars Report returned more than twice the return of the market since inception. In addition to several ads in the AAII Journal every year, AAII also bombards its members with email promotions.

The table below shows data for the ten year period ending December 31, 2013

The table above shows that the AAII Stock Superstars Report was a winner during 2013, but it still failed to outperform an appropriate benchmark over the ten year period ending with 2013. A gain of 7.0% per year during the Ten Years ending 12/31/2013 ranks the AAII Stock Superstars # 47 out of 115 newsletters monitored by The Hulbert Financial Digest for Ten Years or more. Also, owing to the fact that the Superstar's returns have been more volatile than the overall stock market, this portfolio lags by even more on a risk adjusted basis.

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Example #2

William J. O'Neil is the legendary founder and publisher of Investor's Business Daily, and originator of the CANSLIM system. This famed investment system is laid out in his book, How to Make Money in Stocks.

His seven CANSLIM principles of investing are current earnings, annual earnings gains, new products, supply and demand, leaders or laggard performance, institutional ownership and market direction.

He was apparently rich enough to pour tens of millions of dollars of his own money into chasing The Wall Street Journal with his Investor's Business Daily, but because O'Neil's finances are private, no one had ever been able to track his results.

His New USA Growth Fund offered the best proxy to date -- and the results have been decidedly mixed. Certainly no one would accuse his New USA Growth Fund of being a growth business. He started the fund in 1992 and had attracted an impressive $170 million after just a month on the basis of his near-cult following. Five years later he had just under $200 million in assets when he folded up the fund in March 1997. He has never again attempted to publicly manage money.

Over the life of the fund, New USA Growth gained 90.0% versus 98.4% for all growth funds, ranking it 162 out of 276 similar funds tracked by Lipper Analytical Services. Over 1996 it was up 15.4% versus 18.3% for all growth funds, putting it at 498 of 705 growth funds.

This isn't the first time that O'Neil has tried and failed in the mutual fund business. His O'Neil Fund ran up big gains in the bull market of 1966-67 but crashed along with the market in 1968-69. When the market came back his fund didn't, and he sold it in 1975 with just $6 million in assets, down from a peak of $49 million.