Aliso Viejo-based “The Prudent Speculator” is “The Little Newsletter That Crushed the Market,” according to a February headline in Barron’s.
“The Prudent Speculator has more than tripled the broad stock market since 1980,” continued the headline of an article by Mark Hulbert, founder of Hulbert Financial Digest, that tracked the investment performance of newsletters.
The newsletter has picked stocks that returned an annualized average of 15.1% compared with 11.3% average for the Wilshire 5000, according to Hulbert.
The article from a famous newsletter guru in an iconic Wall Street publication was high praise indeed.
But on a recent fog-covered morning, the newsletter’s chief investment officer, John Buckingham, was more worried about his performance this year. His value-oriented fund and the portfolios advocated in his newsletter were all lagging far behind benchmarks like the Russell 3000 and the S&P 500 as of May 31.
“You need to have the courage of your convictions to weather the storm,” Buckingham said during an interview at his Aliso Viejo office. “Value and growth take turns outperforming.”
“The Prudent Speculator,” begun by Al Frank, is celebrating its 40th anniversary this year. In 1977, Frank hammered out his first four-page issue, then called the Pinchpenny Speculator, on a manual typewriter in his one-bedroom apartment in Los Angeles.
Frank had spent time as a Linotype operator, print-shop owner and literary-magazine publisher, and as “a professional shill at the Flamingo Hotel in Las Vegas and a down-and-out would-be writer living the vagabond life in a hut on an island in Spain,” according to a Worth magazine article confirmed by Buckingham.
Frank eventually built an $8,000 stake into the millions, James K. Glassman, author of the book “Dow 36,000,” wrote in an article in the New York Times when Frank died in 2002.
Buckingham joined the firm in 1987 while he was still a senior studying computer science at the University of Southern California. In 1990, he became director of research and chief portfolio manager. He moved to Laguna Beach in 1996 when he found housing to be a “value investment” at half the price of West L.A. Buckingham took over as editor when Frank died at age 72.
“I was Al’s protégé,” Buckingham said. “As Al had a keen interest in computers and I was his computer guy, initially being hired to help automate the office and take things from the pencil and paper world to the MS-DOS world, it was a very good match.”
TV Star
Buckingham, who has written columns for Forbes magazine, also often appears on CNBC, Fox Business and Bloomberg TV. His office is equipped with a studio camera and a backdrop photo of Laguna Beach plastered with the name of his firm.
The newsletter is owned by AFAM Capital Inc., a registered investment adviser headquartered in Austin, Texas; it’s an acronym for Al Frank Asset Management, where Buckingham is a portfolio manager. In 2009, it acquired Innealta Capital, which targets institutions and features strategies for fixed income and international investments.
Altogether, AFAM has about $1.5 billion assets under management or advisement, which include licensing its models to other portfolio managers. It employs about 20 split between its two offices.
Buckingham owns 20% of AFAM Capital. An outside investor group bought out much of Al Frank’s ownership in 1998.
Buckingham is a director along with Chairman Joe Lahti, a former chief executive at Shuffle Master Inc., and Kevin Noble, who’s the owner of Noble Financial and chairman of Kensington Bank.
Toughest Year
Buckingham began the Al Frank Fund (VALUX) in 1998, which turned out to be his toughest year as his fund declined when the S&P 500 was up 20%. That year was even worse than 2008, when his fund fell 44%.
“People forgave us for 2008 because everybody lost money,” he said. “But in 1998, a lot of people didn’t forgive us. 1998 was the hardest year.”
That changed when his fund beat the S&P 500 Index by 39 percentage points in 1999, 16 points in 2000 and 42 points in 2001, Glassman said in his 2002 article.
The fund has returned 10.2% since its inception, net of its 1.5% in fees, compared to 6.9% over the same period for the Russell 3000 Index.
The fund, which has $86 million in assets under management, has outperformed the Russell 3000 benchmark in the past year while underperforming it on a three-year, five-year and 10-year basis.
“Value investing is an acquired taste,” Buckingham said. “If we can convince people that long-term performance is the key to success, we’d have a much bigger business, but investors are going to gravitate towards what is hot.”
Buckingham is known as a “solid” stock picker with a good long-term record, Hulbert said in an interview.
“When the market goes with them, they look really good; when the market goes against them, they suffer,” Hulbert said. “What he brings is the willingness to stick to it through thick and thin.”
Early to Apple
Perhaps nowhere was that more evident than when the newsletter in 2000 urged readers to buy Apple Inc., which at the time was trading at a split-adjusted $1.60.
The newsletter used a “cash is king” strategy to pick Apple, which had $1.10 in cash per share. After recommending it, Buckingham saw the shares fall 34%, which he said many investors cannot stomach.
“Volatility is normal, and you need to take a long-term view. You need to diversify and be patient.”
Then this century’s most famous run began—Apple is now trading at $145 a share.
Buckingham estimated the Apple shares have returned 8,000% since his newsletter recommended it. When people ask why he’s not a billionaire and living on a beach in paradise, Buckingham said it’s because Apple was just one holding of many and not every other stock did as well.
“Have we made 8,000% off Apple? No because we sold some along the way,” said Buckingham, who like many writers is amused by puns. “We quartered our Apple and had slices.”
AUM Roller Coaster
The firm benefitted as assets under management shot up from $150 million in 2001 to as much as $842 million by the end of 2006.
Then the 2008 financial crash sliced assets in half to $347 million. Buckingham said he now manages about $650 million.
Buckingham and his team nowadays screen about 3,000 U.S. stocks and 200 foreign companies trading in the U.S.
Cash is no longer as important as other metrics, such as dividend yield and price to earnings, sales and book value.
Apple even today remains its biggest holding; in fact, four of the top 10 holdings in his fund are technology companies, such as Microsoft Corp. and Intel Corp. About 20% are in technology, which is unusual for a value-oriented manager, Buckingham said.
Besides the fund, he also manages individual accounts, according to portfolio strategies described in the newsletter as Buckingham and TPS, which stands for “The Prudent Speculator.”
17.19% Annualized
The newsletter once reached as many as 6,000 subscribers and now has about 3,500. Subscribers pay $295 annually and receive a monthly copy of the newsletter, weekly market updates, and the ability to question the investment committee.
The newsletter proclaims that since its launch in 1977, its 1,867 stock recommendations have returned an annualized 17.19%, compared to a 10.96% annualized return for the S&P 500.
“It’s unlike many of our peers, who may not tell you what they are doing,” Buckingham said.
The newsletter “is a diary of our investment experience. We put our money where our mouths are.”
