A look at two `model' investors who outdo averages
James McKeever is a man for all markets: stocks, gold, options, mutual funds, futures, currencies. And he knows his way around. The McKeever Strategy Letter based in Medford, Ore., has topped the Hulbert Financial Digest's annual ranking of investment newsletters for the second consecutive year now. Mr. McKeever posted gains of 99 percent in 1985 and upward of 55 percent in 1986.Skip to next paragraph
Subscribe Today to the Monitor
``Quite impressive,'' remarks Mark Hulbert, editor of the Washington, D.C., rating service. Quite. Fewer than 20 percent of the 100 newsletters Mr. Hulbert tracks outperformed the Dow Jones industrial average's 22.6 percent rise last year.
McKeever's multimarket tack has risen out of a strong sense that today's stock market has gone beyond ``the simple buy-and-hold approach. Therefore,'' he says, ``what one has to do is to be able to intelligently move from one market to another.''
After retiring from the economic consulting business in 1973, McKeever coudn't find a newsletter that pulled the disparate markets into one coherent strategy. So he started one. In 1984 he set up a model portfolio for the first time and promptly lost 13 percent. Since then, he hasn't looked back.
How's McKeever's performance in 1987? He admits missing the monumental January rally. At the close on Friday, the Dow industrials stood at 2,101.80, up 25.17 points for the week in wild and heavy trading. The Dow zoomed almost 52 points Thursday, then went through a series of amazing swings on Friday, rising 64 points, falling 110, and finally ending up with a 43.87-point loss on record volume of 302 million shares.
Even though he longs to be long on Standard & Poor's 500 stock index futures, McKeever says he will not chase the market. He's waiting for a 200-point correction. And he can afford to be patient; his portfolio is already up 22 percent this year without a play on the S&P 500 index.
How does he do it?
``It's 50 percent fundamental, which gives you the long-term direction of a market, and 50 percent technical,'' he says. Later, he adds, ``Timing is the No. 1 consideration.'' His timing tools range from garden-variety moving averages and cycles to the more esoteric ``parabolics'' and ``stochastic'' charts.
McKeever projects that the US dollar will continue to tumble. ``Our major economic problem, that must be solved, is the balance of trade.'' This points, fundamentally, to a weaker dollar, and he says the technical signals confirm the trend.
So McKeever remains an ardent bull on currency plays, international companies, and international mutual funds. Indeed, these same areas were crucial to his 1986 strategy. A fair chunk of his model portfolio was riding on last year's hot mutual funds: Fidelity Overseas, Scudder International, T.Rowe Price International.
This year McKeever likes gold. But bonds, he says, may be running out of oomph after two strong years. ``We may get one more discount cut, but it looks as though interest rates have bottomed.''
As if to show that Wall Street doesn't have a corner on investment talent, the only other newsletter to make a repeat appearance on Hulbert's annual top-10 last year was another West Coast-based money manager. Louis Navellier's OTC Insight came in second to McKeever, with a 53 percent gain.
That was an exceptional showing - but even more so when one considers that Mr. Navellier invests only in over-the-counter stocks. Last year the NASDAQ composite average gained a mere 7.4 percent.
Navellier's El Cerrito, Calif., newsletter shatters the efficient-market theory by discovering secondary stocks ahead of most investors. ``We place big bets on low-risk stocks until they wake up,'' Navellier explains.
He minds a 1,100-stock universe with a battery of personal computer programs that screen such things as company fundamentals, earnings growth, and institutional participation. The list narrows to about 100 ``low risk'' stocks rated according to beta (how responsive a stock is to overall market trends) and alpha (a relative strength indicator of a stock's potential return).
From the 100, he selects 18 to 20 stocks - ``the cream of the crop'' - for his nine model portfolios, which vary in size and aggressiveness. Navellier claims that over time the system should produce annual returns of 38 to 39 percent on average. To date, his performance has exceeded those claims.
One of the pluses of strict reliance on his quantitative computer system, says Navellier, is that his judgment isn't blurred by the emotion euphoria accompanying a bull market. ``If you think of the market as an airplane, I never look out the window. I just fly on instruments.''
But experience tells him the current boom in OTC stocks is bound to subside before too long. ``The OTC market can be very treacherous. It rallies like this once every 18 months or so. But I don't think there's anybody out there to sustain it. Individuals are all buying mutual funds. I think we'll see a 4 to 8 percent correction. My priority now is to realign my portfolios so I don't get hammered when it happens. And it will correct.''
Navellier is starting to sell the hot stocks that now carry risky beta numbers. For instance, Smithfield, a food company, has soared 30 percent since Navellier bought it. ``It's still a good, stock but the beta is up at 1.9 percent.'' (A beta of greater than 1 means a stock tends to rise or fall faster than the overall market.) ``We'll put the proceeds in new low-risk stocks and wait for the move. It's an endless cycle of playing on market inefficiencies.''
Navellier's bread-and-butter work is for some 200 pension and institutional money managers. (For about $30,000 annually, he also runs New York Stock Exchange stocks through his selection process.) And he manages private portfolios of $250,000 and up. The publicity his newsletter's performance generates has swelled the assets of individual accounts under management to $60 million. He says that's getting to be an unwieldly sum and plans to close the door on new individual accounts within the next three or four months.