I want to talk about my BIGGEST professional pet peeve: the importance of demanding financial professionals’ audited performance.
By “financial professionals” I mean market timers (like me), financial advisors, or anyone else who puts themselves out there as superior investment decision-makers. By “audited performance” I mean a track record that has been verified by an independent third-party.
This post is a bit long, but the general flow will go something like this:
- Audited professionals are usually better than unaudited ones.
- Audited professionals are usually pretty bad.
- Audited professionals are oftentimes deceptive (this is a must read).
- Imagine how bad unaudited professionals must be.
AUDITED PROFESSIONALS ARE USUALLY BETTER THAN UNAUDITED ONES
A logic question. Which financial professionals would be more likely to be audited: bad ones or good ones? Logically, I would say good ones – if you’re bad, you want to hide it – if you’re good, you want to prove it. Now I’m not saying all audited professionals are good, or all unaudited professionals are bad, but on par I think it’s fair to say that audited professionals are better.
AUDITED PROFESSIONALS ARE USUALLY PRETTY BAD
Some numbers I pulled from Theta Research (a respected independent verification firm). There are 313 professionals in Theta’s database with at least a 2-year track record. Of those 313, only 177 (57%) beat the return of an S&P 500 index fund over those two years net of fees. But no one wants to go through all that trouble just to eke out a gain over the market so let’s say we require the fund to beat the S&P 500 by at least 10%/year. The number now drops to an abysmal 39 (12%). Suffice is to say, even audited professionals are usually pretty bad.
AUDITED PROFESSIONALS ARE OFTENTIMES DECEPTIVE
Here’s the fun part.
Everyone (and that includes me and you) is guilty of positive spin, but there’s a very big difference between looking on the bright side of results and being outright deceptive. The sad truth is even audited professionals are oftentimes guilty of not just bending, but breaking the truth.
Here are three examples of deception using info taken from actual websites. I’ll use initials in place of names because I’m an incredibly nice guy (see, positive spin).
Example #1 (TC) – Switching the Track Record
TC boasts a 44% annualized return since 2001 with the reassurance that (I quote) “at TC, everything we do is based on absolute integrity. For complete accountability, our trades and returns are independently verified and tracked by TimerTrac.com”.
This is the only audited track record provided on their website:
Looks pretty good, but note that the track record only extends back to mid-2007. What happened to the 2001+ track record? Here’s the track record they use to carry on the website (kudos to me for snooping this out):
No mention of this old program. No (obvious) mention that the 44% they advertise is not for an actual real-time program. No mention that they’re knee deep in a -30%+ drawdown. That’s just outright deceptive.
Example #2 (IT) – Hiding the Track Record
IT boasts a 59% annualized return since 1990 and says they’ve been tracked by Timer Trac (another respected independent verification firm) since 2004. After scouring their website (and refusing to pay for a subscription to Timer Trac) I can’t find this purported track record.
So I’ll have to let this independent review from a trusted source speak on IT’s behalf (read second paragraph). If that’s not deceptive, I don’t know what is.
Example #3 (PM) – Acting like We’re Idiots
PM boasts between a 26% and 45% annualized return depending on their program. When you click PM’s audited graph, the graph has been manually set to end on September, 2006, and I have to admit, up to that point, they were pretty impressive. But here’s the entire track record:
Is PM guilty of deception? Perhaps not. They do state (in a paragraph full of the boring stuff) that the numbers on their websites are only current up to September, 2006. Are they guilty of thinking we’re all complete idiots who wouldn’t notice a -60%+ drawdown? Most definitely.
IMAGINE HOW BAD UNAUDITED PROFESSIONALS MUST BE
So we’ve postulated that audited professionals are better than unaudited professionals. We’ve demonstrated that audited professionals are usually pretty bad. And we’ve demonstrated that even audited professionals are guilty of deception. Put 1+1+1 together folks and imagine how bad most unaudited professionals are.
What’s the point? We as investors have to demand from our financial professionals bulletproof independently-audited results. We have to make clear to the financial community that if their results have not been audited, we don’t even want to see them, because they don’t count…PERIOD.
Shameless plug: EVERY MarketSci and YK strategy you’ll see discussed on this site is audited by at least one (and sometimes two) independent third parties. Visit MarketSci.com for more details.
Happy (audited) Trading,
ms
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