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Mark Hulbert

Are we in a Kids' Market?

8/1/12 12:05 AM ET (MarketWatch)Print

CHAPEL HILL, N.C. (MarketWatch) -- Is it a "Kids' Market"?

That's an important question to ask any time, since the answer has profound implications for whether you should seek out an older or younger investment adviser.

But right now there is an additional reason to ask the question: The granddaddy of the investment-newsletter industry, Richard Russell, last week celebrated his 88th birthday. And, perhaps not surprisingly, he does not believe we're are in a "Kids' Market."

By "Kids' Market," of course, I have in mind the famous phrase introduced by Adam Smith, the pseudonymous author, in his classic book from the late 1960s entitled "The Money Game."

He used that phrase to refer to an investment environment in which the advisers and traders making the most money are those too young to remember the last bear market.

"Memory can get in the way of such a jolly market," Smith wrote about "Kids' Markets." He referred to this memory as "that malaise that comes with the instantly gone, flickering feeling of déjà vu: We have all been here before."

Russell, of course, has "been here before" not just once but many times. He began publishing his Dow Theory Letters advisory service in 1958, 54 years ago. He's witnessed innumerable bull and bear markets, along with the fizzling of countless fads.

To further describe what he had mind in introducing a "Kids' Market," Smith created a fictional character called The Great Winfield, who in some ways reminds me of Russell. The major difference is that The Great Winfield was far more cynical.

Unlike Russell, who tirelessly warns us in his nightly website postings about the dangers that lie ahead, The Great Winfield cynically exploited Kids' Markets by only hiring investment managers who were not yet 30 years of age.

"The strength of my kids is that they are too young to remember anything bad, and they are making so much money that they feel invincible," Winfield is quoted as saying. "Now you know and I know that one day the orchestra will stop playing and the wind will rattle through the broken window panes, and the anticipation of this freezes us."

Russell, needless to say, has suffered through so many occasions in which the "orchestra" stopped playing that, using Smith's terminology, that the memories have scarred him. And, as Smith put it: "The scarred sit, frozen by memories, through the ebullient markets, and the unscarred are sliced apart" when the music stops playing.

Not a very pretty picture, is it -- regardless of the market environment we happen to be in.

Are we in a "Kids' Market?"

To come up with some clues, I turned to the investment advisory services tracked by the Hulbert Financial Digest. I considered first those services that have been continuously edited by the same adviser at least since the early 1970s. A disproportionate number of them are, like Russell, out of the stock market.

In contrast, the advisers on the Hulbert Financial Digest's monitored list who have been publishing their services for less than 10 years are, on average, 74% invested in U.S. equities.

So, true to form, the "kids" are more bullish than the battle-scarred veterans of many bear markets. And, so long as the three-plus-year-old bull market remains alive, these kids will continue to dominate the short-term performance rankings.

Russell is certain, however, that those kids will eventually become just like the veterans. And his hunch is that this eventuality will come sooner rather than later.

In the meantime, we can all -- kids or veterans -- wish him a happy 88th birthday.