Watcher of the watchmen - Mark Hulbert, publisher of Hulbert's Financial Digest

Nation's Business, Feb, 1988 by William Hoffer

Watcher Of The Watchmen

Every month 104 privately published newsletters arrive at Mark Hulbert's Washington, D.C., townhouse, advising him on how to invest his money in the stock market. Although he follows their instructions to the letter, Hulbert, 32, never invests a penny in stocks. Instead, he punches the investment advice into his four personal computers, which he has programed to invest make-believe money in fictitious portfolios made up of real stocks traded in real markets.

Since Hulbert started doing that, he has permanently changed the world of the stock-market investment letter.

It all began almost eight years ago when Hulbert, working as an economic analyst for the National Taxpayers Union, was exposed to the confusing world of these advisory letters. Each newsletter's editor has a system for determining buy and sell recommendations, and many letters, as if to justify their hefty subscription prices, boast of their superior records in anticipating the gyrations of the stock market.

"How does anyone really know who is giving the right advice?" Hulbert asks. His question is rhetorical, since the answer is in the Hulbert Financial Digest, his market letter that tracks the performance of the market letters.

In Hulbert's system, each market letter starts the year with a hypothetical $10,000 bankroll. When an issue of a market letter arrives in the mail (a disguised name and address ensure that Hulbert receives the same advice at the same time as any other subscriber), he enters its recommendations in his computers, which also keep track of price movements in the stock markets.

Every month the Digest rates the market letters on how well--or poorly --their recommendations have translated into increases in the imaginary bankroll. The text of each issue is transmitted by telephone to Northern Virginia Printers, whence it is released to an investment world that has come to regard the Digest as the standard by which the gurus are graded.

"Whether or not a newsletter appears in the Digest can make the difference in whether it stays in business," Hulbert says. "This is what editors have told me. So I'm getting two or three letters a week saying, 'Please follow my newsletter'" in the Digest.

The Digest first appeared in the summer of 1980. It struggled for a time, until word of its existence appeared in the financial press. The subscription list expanded to 3,000 almost immediately, held steady for a while and then, benefiting from the extended bull market, rocketed to its current level of about 16,000. The base subscription rate is $135 a year, although Hulbert offers inexpensive introductory rates. Last year the Digest's gross income was more than $1 million.

Hulbert has two silent partners: James Davidson, a former classmate of Hulbert's at Oxford University in England (Hulbert, a native of Kansas, holds a master's degree from Oxford), and William Bonner of Agora Associates, a Baltimore public-relations firm. Davidson now publishes his own market letter, Strategic Investment, and Bonner's firm also publishes investment letters. When Davidson and Bonner started their own newsletters, their stakes in the Digest were converted to nonvoting shares.

Hulbert describes himself as a pacifist, vegetarian Quaker. He says personal gain is not his major objective. He plows the bulk of the Digest's earnings into advertising and promotion.

The Digest currently tracks more than 200 stock portfolios recommended by the 104 different market letters. Every serious investor wants to know which letters were winners and losers on Hulbert's list, and the results can make a major difference to a market-letter publisher. For example, after Martin Zweig's Zweig Forecast led Hulbert's rankings for two years in a row, circulation jumped from 4,000 to 20,000.

The big winner for the tumultuous year of 1987 appears to be what Hulbert calls "an obscure newsletter that no one ever heard of before," Putz Investment Report, published in Fowler, Ind. All year long the pessimistic Putz advised the purchase of "put" options (the right to sell short as a later date--a decided gamble that the market will fall), and by the end of September Hulbert's Putz portfolio had lost 86 percent of its value. But after stock prices plummeted on October 19, the "put" options gave Putz a whopping 500 percent gain for the year.

Other notably successful bears were the aforementioned Zweig, who, although his portfolio was heavily invested, had hedged with enough "put" options to cancel his losses, and Richard Russell's Dow Theory Letter, which issued a felicitously timed sell signal on October 16.

Although Hulbert himself lost nothing on "Black Monday," since he never buys stocks, he is concerned about the possible effects of an extended bear market (if that is the outcome of the October plunge) on his Digest. The subscription lists of investment letters usually shrink during a bear market, he says, even though "this is probably when people most need advice."