Tuesday, December 3, 1996
Garzarelli's Edge, The Sequel
by MF Cubster
David Gardner (aka MotleyFool) wrote a wonderful Fribble in April 1996 on Elaine Garzarelli's newsletter, called The Garzarelli Edge. At that time, Elaine Garzarelli, WORLD FAMOUS market-timing guru was hawking, for her subscription newsletter, a market-timing BUY signal. The market shortly thereafter "corrected" with a downward move in June and July. Oops! Then she changed her tune in August to a SELL signal right after (not before!) the Summer "correction." Since her latest call, the market once again has had a strong move up. Oops again! I wanted to bring us up to speed on the consequences of all these market-timing prognostications.
David highlighted the way Garzarelli's ad hyped the "great danger" in the market right then as well as the argument that you should be completely invested: "Given the juxtaposition of the first statement ("extreme danger") with the second ("HUGE profits ahead ... you should be invested 100% right now!"), we see that Ms. Garzarelli and her copywriters have reached true virtuoso status in the high circles of Market-Timin' Gooroodom. Have to have both sides of the hedge well trimmed, of course, and they do ... this is outstanding timing work."
and now ... THE SEQUEL:
Dang. My "always accurate" watch just broke again. It seems to break whenever I get one of those **THE STOCK MARKET'S GONNA CRASH ... THIS TIME FOR SURE** guru newsletter advertisements. They've got to be right eventually, if they keep repeating that same message. Unfortunately, they don't care about accountability when self-promotional activities are involved. Remember, my broken watch will be right twice today.
I just received Elaine Garzarelli's UPDATED promotional flyer for her STRICTLY LIMITED MEMBERSHIP PROGRAM. On the envelope it says:
SELL NOW!
The Next Bear Market Is At Hand.
Get OUT of all U.S. stocks and mutual funds now.
Details Inside.
Inside, it looks like all the other flyers. There are the usual claims of WHOPPING GAINS for subscribers, SHOCKING HEADLINES of accurate predictions and of course the claim of TOTAL ACCOUNTABILITY.
Lets look at her accountability:
"Elaine G. has called every bear market of the last 20 years -- Zero false alarms. (Newsweek)"
... and here is her claim to fame:
"She dramatically predicted the Crash of 1987 on CNN -- one week before it struck!"
I predict (this one's a gimme): In the year 2007, she will still be getting a lot of mileage out of her 1987 call.
Ms. Garzarelli lists six reasons why she is so Bearish:
1. Critical Early Warning Sign: bonds are much more attractive than
stocks.
2. Historically low dividend yield
3. A weak recovery is giving way to a slowdown, perhaps even a recession
4. Disappointing corporate earnings
5. Interest rates will likely rise
6. Too many bulls
This author doesn't spend a lot of time worrying about how accurate reasons 1 - 5 might be. As for "too many Bulls," I thought that this is what the rest of the NBA says when they see Michael Jordan and Chicago warming up. When the Dow Jones goes from 5200 to 6500 (a 25% gain), there is a reason for some optimism. Of course Ms. G's sell signal came about 25% ago, right after the July "correction." So when the next 25% correction occurs, can you say she'll be "break even," I knew you could.
Nonetheless, she will have made the correct current market-timing call again in the next advertisement to potential subscribers, because:
"She's called every major market top and bottom within 4% - 11% since 1982"
That leaves a lot of room to rework the exact timing of this latest call ... and nobody is really going to hold her accountable anyway. I predict that the next edition of her advertisement will say:
**She's called every major market top and bottom within 4 - 25% since 1982**
Accountability, Guru Style.
Next, the advertisement states: "Her stock system has produced compounded yearly gains of 20.2% since 1982 -- while keeping investors out of Bear Markets."
The Dow Dividend Strategy (aka Beating the Dow, Dogs of the Dow) has done better than this over the same time frame. Michael O'Higgins paperback book called "Beating The Dow" (author of this classic investing strategy) can be purchased at all good bookstores or in FoolMart. It costs about 5% of the price of Ms. Garzarelli's newsletter publications, and you only need to buy his book once! If she truly had her followers out of those bear markets and only had an annualized gain of 20.2%, she must be under-performing in the bull markets, no? In fact, BTD significantly out-performed Ms. G's results during the bear markets of the early 80s, while not worrying about timing the market.
Let's compare Ms. G vs The Dow Dividend Strategy (using the Fool's variant Beating the Dow-4):
Year G BTD4 Difference ~~~~~~~~~~~~~~~~~~~~~~~~~~ 1982 29.7% 47.88% -18.18 1983 23.0% 35.20% -12.20 1984 -4.6% 7.40% -12.00 1985 27.4% 38.2% -10.80 1986 25.5% 28.43% -2.93 1987 45.4% 2.28% +43.12 1988 10.1% 3.43% +6.67 1989 28.3% 9.04% +19.26 1990 17.5% -15.06% +32.56 1991 21.4% 89.34% -67.94 1992 16.9% 28.77% -11.87 1993 8.1% 37.80% -29.70 1994 2.6% -6.70% +9.30 1995 41.4% 37.19% +4.21
Summary: Garzarelli vs. Dow Dividend Strategy: 1982 - 1995 BTD out-performed Garzarelli by average of 2.8% annually Last 5 yrs BTD out-performed her by average of 19.2% annually
I love backing up conclusions with numerical analysis. David Gardner concluded his original Fribble: "Somebody somewhere needs to let the advertising copywriters know. Maybe then they won't keep writing stuff so easy to ridicule, and touting GARZARELLI EDGE-type products that are so clearly inferior to:
* Thinking for yourself
* Ignoring the gooroos
* The Dow Dividend approach
* The amazing financial info now online"
Market Timing for the individual investor? Very "foolish" but not very "Foolish". Some conclusions are just so good that you don't have to "time" them. Thank you Michael O'Higgins and The Motley Fool!
Transmitted: 12/3/96