Timing Advisers Give Buy-and-Hold a Run for Money
“Tell me when to get out.”
If the typical stock market investor has one prayer today, that’s probably it. With stock prices overall floating near all-time highs, this is a market that people fear more than love, even though they stay put because of a lack of better alternatives.
For Doug Fabian and his sister Mary Jayne Fabian Barnett, that fear is a potential gold mine. Their Huntington Beach-based investment advisory service--one of the nation’s best-known stock-market timers for small investors--is in the midst of a new ad campaign that warns bluntly of the historic ravages of bear markets.
Though they don’t like to admit it, the Fabians are partly in the scare business. They have consistently aggravated Wall Street by attacking one of its most cherished themes: buy-and-hold investing. The Fabians argue that buy-and-hold doesn’t work in the long run because people inevitably panic and sell in market slumps.
Instead of riding nonstop through bull and bear markets alike, the Fabians tout a market-timing system developed by their father, Dick Fabian, 18 years ago. Adherents to the Fabian system are either fully invested in stock mutual funds or fully invested in money market funds, depending on a weekly reading of a relatively simple gauge of market direction.
In practice since 1977, the Fabian system has usually required subscribers to make just one round trip into and out of the market yearly.
The system has worked well enough to earn the Fabians’ Telephone Switch Newsletter the No. 1 ranking of timing newsletters measured between 1980 and 1992 by independent tracker Hulbert Financial Digest of Alexandria, Va. An estimated $1 billion in small investors’ money now follows the Fabian system.
The Fabians also have earned something else: the wrath of mutual fund titans like Fidelity Investments, which regards market timers as blood-sucking parasites.
The funds, of course, stress buy-and-hold like a religion. And in their battle with timers, the buy-and-holders have clearly had the upper hand in recent years.
In the five years ended last Dec. 31, Hulbert found that only four timing newsletters nationwide beat the market’s 109% buy-and-hold return, as measured by the Wilshire 5,000-stock index. The Fabians’ letter was not among the four.
When Doug and Mary Jayne bought the newsletter from their father in August, 1990, they had 44,000 subscribers. Today, they have 34,000, about one-quarter in California. At $137 for a one-year subscription, that 10,000-investor loss has cost the Fabians almost $1.4 million in annual revenue.
Doug Fabian candidly admits that buy-and-hold has worked very well since the 1987 market crash, muting the need for timing services. But as the company’s new ad campaign on financial TV network CNBC trumpets, “There will be bear markets” ahead, Fabian says. And very likely, he says, they will be the traditional kind--painful, protracted market declines that will severely test buy-and-holders’ willingness to sit tight.
The Fabian system is supposed to get investors out of stock funds near the start of bear markets and put them back in when a new bull market is born. The central idea is that you ride only the market uptrends--like a bird sailing air thermals ever higher.
“The biggest mistake that mutual fund investors make is giving back their gains in bear markets,” Doug Fabian argues. “We have an image of being a market-timing newsletter, but we are really bear-market avoiders.”
In fact, the Fabians successfully exited the market on Oct. 16, 1987--three days before the Dow Jones industrials plummeted 23% on Oct. 19. They also got out on Aug. 7, 1990, near the beginning of the bear market sparked by the Kuwait crisis.
The Fabian timing system is based on a single market indicator, an index of five popular stock mutual funds. The Fabians chart the movement of that fund index each week and compare its current level with its “moving average” over the preceding 39 weeks.
A moving average merely provides a way of smoothing out daily market fluctuations, revealing the longer-term trend in an investament’s price, up or down. Dick Fabian, who had set up shop as an investment adviser in the early 1970s, was intrigued with the market’s cyclical patterns and began researching the use of moving averages as market barometers.
Testing various formulas back to the mid-1960s, he settled on the 39-week period as a reliable predictor of long-term market trends.
If the Fabians’ fund index falls below its 39-week average price--and the 65-stock Dow Jones composite index of blue chip stocks also is below its 39-week average--their system flashes a “sell” signal, and subscribers are told to shift out of stock funds and into money market funds. No emotion or subjectivity is involved.
Likewise, so long as one or both indexes are above their 39-week averages, Fabian subscribers are supposed to stay in stocks.
The last Fabian “buy” signal was Nov. 6, 1992, and the index trends have remained positive since. So despite worries about stocks’ heights, the Fabians believe the bull market is still on--for now.
If the system worked so flawlessly, however, the Fabians obviously would have much more than $1 billion following their lead.
While newsletter-tracker Mark Hulbert shows the Fabians as the No. 1 stock market timers in the 12 1/2-year period through 1992, he also shows them lagging buy-and-hold investing over the last 10, five and three years.
One problem with the Fabian system: re-entry. By the time their fund index climbs above its 39-week average post-bear market, much of the new bull market’s gains may have been realized.
For example, after the U.S. stock market “sell” signal of August, 1990, the next Fabian “buy” signal was on Jan. 25, 1991, during the Gulf War rally. By then, the Dow index was already at 2,659--up 12% from its bottom of 2,365 in October, 1990.
A greater problem in 1988 and again in 1990 was a sequence of money-losing whipsaws, a function of short-term market volatility. The Fabians’ indexes flashed “buy” on April 11, 1988, then “sell” on April 15. Another whipsaw occurred over March 19-22, 1990.
Doug Fabian believes the whipsaw problem has been solved by the system’s switch to the Dow composite index as a “confirming” index in late 1990, in place of the narrower Dow industrials. But that remains to be seen.
From a practical point of view, some Fabian investors’ major quarrel probably would not be with the system’s timing but with the stock funds the Fabians appear to recommend while in the market.
Long term, “their timing has added value, but their model portfolio has not,” Hulbert contends.
Since 1980, an investor rigidly following the Fabians’ market timing calls would have earned 570% if trading in a proxy for the Wilshire 5,000 (i.e., the entire market), according to Hulbert. No newsletter has a better record.
Trading in and out of the five stock funds now in the Fabians’ fund index, however, your gain would be 413%--below the 489% buy-and-hold return in the period.
The Fabians, however, tell their subscribers not to assume that the five funds in the index are recommended. “We’re not trying to select the best funds,” Doug Fabian says flatly. “We’re trying to select funds that are a good representation of the overall market.”
Individuals, Fabian says, must take responsibility for building portfolios that fit their needs.
In fact, that message has been consistent since Dick Fabian’s early days. The Fabians have always attempted to educate investors rather than simply provide a timing service. The Fabians’ basic investment kit includes primers on financial goal-setting, fund mechanics and retirement planning.
Neither Doug nor Mary Jayne claim any specialized financial background. Doug, 36, was a woodworker before joining his father’s business in the late 1970s; Mary Jayne, 37, had worked in graphic design before joining in 1980.
“We’re not investment gurus. We have an investment methodology,” Doug Fabian says.
Hulbert gives the Fabians substantial credit on that count. “The real contribution they make to the whole debate (timing versus buy-and-hold) is that their system is very simple to follow,” he says.
“It’s valid to say that they have the best (long-term) record of newsletters that someone could actually follow.”
To reach the Fabians by phone, call (800) 950-8765.
The Fabians’ Track Record
The Fabian Telephone Switch Newsletter in Huntington Beach ranks as the No. 1 stock market timing service over the 12.5 years ended last Dec. 31, according to newsletter monitor Hulbert Financial Digest. Over shorter time periods, however, the Fabians’ timing has lagged buy-and-hold investing. Here are two measures of the Fabians’ U.S. stock market performance compared to the buy-and-hold return of the Wilshire 5,000 stock index.
Period ended Fabian Fabian Market return: return: return: Dec. 31, 1992 Timing only Fund selection Buy and hold 12.5 years +569.5% +413.3% +489.0% 10 year +291.1% +164.0% +318.6% 5 years +74.9% +68.7% +109.0% 3 years +31.7% +33.6% +37.2%
Source: Hulbert Financial Digest
