How Do You Grade More Than 30 Investment Advisories?

“The last thing you want is convoluted math.”

So writes a loyal subscriber. More details and more from that same subscriber are below.

This week we continue our build-up to the inaugural Legacy Research Annual Report Card.

We’ll continue to share some of the insights, thoughts… and even some of the “second thoughts” as we try to figure it all out. (Feedback from you, our subscribers, has been a helpful part of this.)

But whatever it looks like, the number one goal is to make sure the finished product is useful…

Useful to you as a subscriber of our various services, and useful to us as a way to gauge the success (or otherwise) of those services.

Last week we took you through some of the rationale for the time frame we’ll use for judging performance. In today’s edition of the Daily Cut, we’ll look at ideas around benchmarking the performance.

So that we can compare one service against another, and against market performance. More below. First…

Market Data

The S&P 500 closed up 0.1% to end the day at 4,783.83… the NASDAQ gained less than three points, to close at 14,972.76.

In commodities, West Texas Intermediate crude oil trades at $72.77 up 35 cents…

Gold is $2,051 per troy ounce, up $18.80…

And bitcoin is $43,851 down $2,362 from yesterday.

Now, back to our story…

Performance At a Glance

Before we go on, we share another thoughtful email from one of your fellow subscribers, M.J. (not that M.J.). He writes:

I like the idea of the report card, but I think you guys are complicating it too much by picking time frames. I think the right way to do it is to compare what was the opening price vs. the closing price.

You can then annualize the return if you so wish, although for me this is not necessarily that interesting, and in principle I would ignore the time frame altogether. My rationale is that our experts are giving us their best guess of what are the right entry and exit points, so that is what I would assess them on. If a recommendation has not closed yet, you can take the price as of year-end 2023, or keep it off.

The annualization of returns is not that interesting because you could have a small gain in a very short timeframe, which annualized looks better than a larger gain over a couple of months.

The larger gain will give me more money in my bank account, which is what I really care about. The small gain has a larger annualized return, but the reality is that we are not holding for the whole year, so the number is close to meaningless.

Ultimately, the simpler you make the report card, the better. For the sake of transparency, the last thing you want is convoluted math.

On the last point, we agree. For two reasons.

First, we want to show you the results so you can see the performance at a glance. We don’t want you to have to figure things out… do calculations… or question your own sanity because it’s all so complicated.

Second, the more complicated it is, the more likely you are to think that we’re hiding something or fudging the numbers.

That’s the last thing we want.

So, the benchmarking and grading will be as simple as we can make it. That said, it’s not necessarily the case that we should benchmark everything against the S&P 500.

For a start, different services have different strategies. Their strategy may not be to beat the S&P 500. Furthermore, it’s not everyone’s goal to beat the main index.

After all, to beat the S&P 500, you’re effectively taking the position that you’re willing to accept all the risks of owning stocks.

That means you’re happy if stocks go up 24% last year (as they did), but you’re equally willing to accept stocks falling 19% as they did in 2022.

A certain type of investor may not be happy with that at all. A certain type of investor may want a strategy that aims for a steady 6–8% return each year… a return that would underperform the S&P 500 over the long term but satisfies the needs of some investors.

Other investors may be at the other end of the scale. They want more risk and bigger returns. Again, is it necessarily fair to benchmark a more speculative service against the S&P 500?

Probably not. If a service promises greater returns, we’ll likely need to benchmark it against an index that reflects higher risk. A simple example would be to use the Nasdaq as the benchmark. Or maybe a hedge fund index.

But whatever we choose, as M.J. notes, it can’t be convoluted. And there’s another reason for keeping it simple.

Judging the Future Against the Past

Remember, this is the first year we’re publishing the Report Card. Next year and for all future years, we’ll want to judge the future performance against the performance of previous years.

So, the more complicated the system, the harder it will be to do that. It would be great if next year we could tell you about a performance “turnaround” story… or five years from now, we could show to you and prove to you that one of the services has received an A+ for five straight years.

This is why our colleagues are just as excited about publishing the Report Card as (based on the feedback) you are to receive it.

The other point M.J. mentioned was the idea of annualizing returns. That too has created some internal discussion. Should we annualize all returns, some returns, no returns?

There are pros and cons. We agree that taking a 15% gain in two days and annualizing that to a return of 2,737% doesn’t make a lot of sense… unless you can make that return every day. Most can’t.

But if you look at the annualized returns across a whole portfolio of recommendations… well, it’s easier to justify that. Those positions with longer holding periods, plus losses, will smooth out the overall number.

That said, just as we’ll use different benchmarks for different services, there may be instances where we don’t feel it provides a fair reflection on a service by annualizing the returns.

Whatever we decide, we’ll explain it all to you. To make sure everything is completely clear… no “smoke and mirrors.”

Anyway, we hope that’s given you a little more insight into what’s going on behind the scenes. As always, please feel free to email me directly at [email protected].

Remember, that email address goes directly to my inbox. It doesn’t go to a customer service team. Also remember that unfortunately, I can’t reply to you personally, but I do receive and read each email.

The feedback we’ve received to that email has already been highly valuable in helping us understand your thoughts and what you want to see from Legacy Research.

So please, if you have anything to say, just drop me a line.

The Winners Circle

The Winners Circle trades is an occasional feature in The Daily Cut, where we showcase closed winning trades from our stable of experts.

We’ll typically publish these one or two days after they’re published in the individual publications. That gives paying subscribers enough time to exit their positions.

You won’t see this feature every day in The Daily Cut, as it’s not necessarily every day that our publications close out gains.

But when they do, we’ll highlight them here.

Just note, from time to time, we’ll withhold the name of a sell recommendation if it was only a part-sell. That may be an occasion where the expert has recommended subscribers to sell enough to cover their initial stake.

This is what we call a “free ride.” That’s where after an investment doubles, you sell half, effectively meaning you’re playing with “house money” on the remainder of the investment (of course, that doesn’t factor in any tax liability you may have from selling).

Anyway, we hope this gives you a little more insight into what’s happening around Legacy Research.

Unconnected Dots

Our main task at the Daily Cut is to try to “connect the dots.” That is, we help you figure out what events are about, what makes them important, what their consequences are, and what it all means for you.

But sometimes, we see the individual “dots,” but can’t yet figure out how they connect to anything. Maybe they never will connect to anything.

Regardless, if those unconnected dots feel as though they could be important, we’ll mention them here. And we’ll let you draw your own conclusions.

Today’s unconnected dots…

• A story from the Financial Times last week. We know we’re slow on the uptake, so forgive us:

  That’s London consultancy Drewry’s index tracking the cost of container shipping worldwide. It’s up more than 60% this week, as readers can see, thanks to continued Houthi attacks in the Red Sea and ongoing diversions of container ships.

  Meanwhile, the Baltic Dry Index, after spiking higher in December, is now back to where it was in early September:

  

  Why the difference? We don’t know. We know the Baltic Dry Index includes Capesize vessels, which are too big to transit the Suez and Panama canals.

  So terrorism issues in the Red Sea and drought issues in Panama don’t impact those ships.

  Regardless, it seems to be mostly good news for shipping stocks. The SonicShares Global Shipping ETF (BOAT) is up 14% since early December. Eagle Bulk Shipping Inc. (EGLE) is up 31% since November.

  And AP Moller-Maersk A/S (MAERSKB DC) is up 32% over the same time frame.

  We thought it would interest you to know. We’ll also continue to watch this with interest.

More Markets

Today’s top gaining ETFs…

• U.S. Global GO GOLD and Precious Metal Miners ETF (GOAU) +3.6%

• VanEck Gold Miners ETF (GDX) +2.8%

• WisdomTree India Earnings Fund (EPI) +1.8%

• Franklin FTSE India ETF (FLIN) +1.7%

• Invesco Energy Exploration & Production ETF (PXE) +1.4%

Today’s biggest losing ETFs…

• Siren Nasdaq NexGen Economy ETF (BLCN) -4.2%

• Amplify Transformational Data Sharing ETF (BLOK) -3%

• Global X Lithium & Battery Tech ETF (LIT) -1.6%

• Invesco S&P SmallCap Consumer Discretionary ETF (PSCD) -1.5%

• iShares U.S. Healthcare Providers ETF (IHF) -1.5%

Mailbag

If you have any questions or comments for our experts here at Legacy Research, we’d love to hear from you.

Write to us at [email protected] and just type “Daily Cut mailbag” in the subject line.

Cheers,

Kris Sayce
Editor, The Daily Cut