I’ve been in the investment advisory business for more than 30 years.

During that time, I have fallen in love with all of the most voluptuous investment systems — fundamental investing, contrarian investing, technical investing, etc.

Without exception, those relationships began euphorically. I was happy to have discovered some new way to wealth, confident in its logic and eager to accumulate the profits they would bring.

Eventually, of course, they all jilted me. And when they did, I blamed it on myself.

I wasn’t smart enough for technical analysis, not brave enough for geopolitical analysis, not disciplined enough for contrarian investing, and not patient enough to succeed as a fundamentalist.

But while all this was going on, I was making loads of dough as a businessman. Through boom cycles and busts, I was raking in the green stuff as regularly as I would launder my shirts.

When I agreed to be a consultant for Investor’s Daily Edge (IDE), ETR’s sister publication, I thought, “Surely there must be something in my business experience that I can apply to making money in the markets.”

And that’s what I’m going to talk about today: why all of the best-known investment systems don’t work over the long haul, and how I found one strategy that I like.

The Long-Term Track Record Tells All

I mentioned that I’ve been involved in the investment advisory business for about 30 years. So has Mark Hulbert, the editor of the Hulbert Financial Digest. A one-time employee of Agora, he’s been independently tracking the investment records of financial gurus.

What Hulbert has discovered is that most financial gurus — regardless of the investment method they use — cannot outperform the market over an extended period of time. Of the 19 newsletters Hulbert has been tracking since 1985, only four have had portfolios that outperformed the Standard & Poor’s 500 Index. None had the kind of returns I was looking for: 15 percent to 20 percent.

Peter Brimelow, who tracks the performance of investment newsletters for MarketWatch, has discovered another disappointing fact.

The investment performance of a guru or newsletter one year has little bearing on their performance the next year. Three of the top 10 performers of 2008, he noted, were among the worst 10 of 2009.

So whether you are talking about short-term or long-term performance, the best-known systems are both unreliable and unlikely to meet your expectations.

I think there is a reason why this is true. These systems are like religions. They are based on a dash of history and a ton of faith. The high priests who represent them are loath to make changes when they don’t work. After all, they have committed their reputations and their livelihood to proving that they do work.

As I said, these strategies are compelling when you hear them explained by their high priests. Each one has an internal logic that makes it seem eminently sensible. Their proponents also have stories about how they have worked in the past that are persuasive. So it’s not surprising that thousands of new investors fall in love with them every year and throw millions of dollars behind them, hoping for a wonderful outcome.

But if you take the time to examine them in depth,  you discover that their track records aren’t as good as they “should be.” And then if you go back and examine the underlying logic of these systems you may find, as I have, that each one has a fatal flaw.

The Fatal Flaws

Fundamental investing doesn’t work because it is based on the assumption that, eventually, the market for share prices will reflect the true business values of particular companies.

That is a lovely thought, but it is simply not true. The stock market is not a machine that tracks and reflects the fundamental values of individual companies. Rather, it is a vast gambling system in which institutions, insiders, and individual investors compete to see who can most accurately predict price valuations of very complicated businesses. The outcome of this competition is rarely “fair” prices. Just the opposite happens. Prices tilt toward their “unfair” extremes, either way overpriced or undervalued.

Contrarian investing doesn’t work because it operates on the assumption that most investors are wrong most of the time. So when they buy, you should be selling. And when they sell, you should be buying.

Again, this is an attractive idea, but it is fundamentally wrong. If you study the market, you will see that most of the time investors are right about price trends.

Another problem with this system is that contrarians tend to be happy to leave their money in investments for years or even decades with no ROI, simply because they are so convinced that one day their position will be proven true. And when they finally do enjoy a run up, they find it hard to get out. Often they will stick with a losing investment all the way to the bottom again.

Technical investing doesn’t work because it is based on the assumption that there are mathematical forces operating in the universe that can actually affect the buying and selling decisions of the stock market.

This is patently stupid. But it’s appealing to some because it seems to work some of the time. Why? Because of the many investors who believe in it and react the same way when supposedly “critical” levels are reached or exceeded. It’s a self-fulfilling system.

Data mining doesn’t work because, although it’s good for finding correlations (when “Event A” happens, a market moves a certain way), it’s lousy for determining causality (the market moves a certain way because “Event A” happens). Data mining is just a fancy term for finding random coincidences in the market.

Alex Green, a long-time colleague and the Oxford Club’s investment director, puts it this way:

“Even if stocks have rallied every second Thursday in May for the past 50 years, it doesn’t mean they will rally this year on the second Thursday in May. Data-miners regularly turn up meaningless correlations and claim they have discovered how to divine the stock market. If history could determine what the stock market is going to do next, the world’s richest investors would be historians, data processors, and librarians. And that’s not the case.”

Sentiment-based investing is pseudo-science at its worst. It predicts the market about as well as astrology predicts who will win the Super Bowl. Judging investor sentiment by the amount of cash on the sidelines or in mutual funds, or by the dozens of bulls vs. bears ratios out there, is a crap shoot. Sentiment-based investors get creamed because (1) they jump the gun, anticipating a reversal in sentiment that never happens, or (2) when a reversal does occur, they take action on it too late.

A Businessperson’s Solution

So what is the individual investor to do? How can you beat the market when all of the conventional methods can’t?

When I look at the money I’ve made in business and real estate, there is one fact that stands out above all the rest. I never made any money betting against the market. And I never made any money trying to anticipate future trends either.

But I believe there is a way to get superior returns over the long run. In fact, my biggest returns – and most of my wealth – were the result of following a specific strategy based more on my experience as an entrepreneur than anything I’ve learned from investment experts.

It employs a combination of some of these strategies — fundamental, technical, and sentiment-based investing. But it does so by subjecting them to the real-world perspective of successful businesspeople who build super-profitable businesses.

I explain my strategy in detail in a special report, on which this essay is based, for readers of our Liberty Street League service. But you can get a free copy when you join the League for a 30-day, risk-free trial membership. Even if you don’t decide to stay in the club, you can keep the report. In the report you’ll learn:

  • The two-step process for identifying the market sectors that, combined with my strategy, will maximize your returns
  • How to make sure you don’t have to be involved in the marketing or trading on a day-to-day basis – and still profit
  • Why being one of the first investors in Microsoft would have been a bad idea
  • 6 trends picking up steam… but still under-the-radar enough that average investor can get in on the action
  • The 20/60/20 formula for investing safety and profitability

The League is made up seasoned wealth builders, entrepreneurs, investors, and other experts who see money-making opportunities instinctively in the world around them. Internet business, commodities, small cap stocks, precious metals, futures, currencies, real estate, off shoring… they cover it all. But what unites them is a love of freedom from the prying eyes of the government… and from the financial players on Wall Street who – to put it mildly – do not have the best interests of the average investor at heart.

Go here to find out more about the League and to get a copy of my special report, How to Make the Trend Your Friend: A Businessman’s Guide to Investing, with your 30-day trial membership. (You’ll also get a free copy of my Wall Street Journal and New York Times bestseller, Ready, Fire, Aim.)

[Ed. Note: Mark Morgan Ford was the creator of Early To Rise. In 2011, Mark retired from ETR and now writes the Palm Beach Letter. His advice, in our opinion, continues to get better and better with every essay, particularly in the controversial ones we have shared today. We encourage you to read everything you can that has been written by Mark.]

Mark Morgan Ford

Mark Morgan Ford was the creator of Early To Rise. In 2011, Mark retired from ETR and now writes the Wealth Builders Club. His advice, in our opinion, continues to get better and better with every essay, particularly in the controversial ones we have shared today. We encourage you to read everything you can that has been written by Mark.