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Something smells in the TMF land...(Uncovering the hidden truth)...



January 20, 2014 – Comments (16) | RELATED TICKERS: IT , ST , INKS

I’m sure you’ve all heard about the Hidden Gems – one of the TMF’s paid-subscription stock picking services focusing on small, not widely followed companies.

One thing I always thought about this service when I would see its returns against the S&P500’s returns on the TMF’s front page is “Hidden Gems are sure well hidden from the TMF’s analysts”. The reason, as far as I can remember, the Hidden Gems has always leg the performance of the S&P500 by quite a bit (I think that was due to their heavy bet on small Chinese companies, which btw., turned out to be hiding something pretty big – that they are fraud.

This is exactly why I was very surprised to see today, in the same front-page table with the returns of all TMF’s per-pay services, that the Hidden Gems is supposedly significantly outperforming the S&P500 (61.56% for HG vs. 37.46% for S&P500).

How’s that possible???

I checked my old records, and have a proof that in July of 2012 Hidden Gem’s return was only 14.4% (since inception of the service) while during the same period S&P500’s return was 79.90% (to see the proof of it, click on my July 2012 post “The Motley Fool Pro – what am I missing here?”)?  

I don't doubt that it's possible the Hidden Gem's performance has improved as of late, but how is it possible that the S&P500’s return went from 79.90% in 2012 down to 37.46% in 2014 (market was up last two years, as far as I remember)???

At first I thought they possibly made an honest mistake and reversed the returns for the two (new people or people on the 3rd shift tend to make mistakes like that), but that can’t be the case as that would still mean that the market's performance went down from 2012 (79.90%) to 2014 (61.56%).

So what happened?

I can only think of two possible scenarios (excluding the possibility of TMF hidding the real returns by making up numbers that make them look good): 

1. Someone made an honest mistake and somehow messed up the numbers (my bet is on the 3rd shifters), or

2. At some point TMF decided to forget the past (bad) performance and start all over from scratch.

Either way, this is not right.

Especially if they decided to "erase" the performance for the period when they severely underperformed against the market, which is what I’m thinking happened here.

I don’t think it’s right to advertise the "good-looking" numbers for this service without being transparent about the past performance.

Basically, I think the public deserves an explanation.



If you don't hear from me for a few days, please go to the police - you know who is responsible for my disappearance.

16 Comments – Post Your Own

#1) On January 20, 2014 at 1:44 PM, constructive (99.97) wrote:

I think they completely changed the method they use to calculate returns. It was a couple of months ago, all the lagging services were suddenly beating their benchmarks by large amounts. I don't really think they do an adequate job of disclosing their methods.

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#2) On January 20, 2014 at 9:15 PM, dragonLZ (75.42) wrote:

Mega, something's definitely not right.

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#3) On January 21, 2014 at 1:51 AM, ikkyu2 (97.98) wrote:

They cherry-pick whatever time periods they choose to make these performance 'comparisons'.  It's somewhat misleading.

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#4) On January 21, 2014 at 2:03 AM, Sam101101 (< 20) wrote:

I would like to see performance for the separate years instead of seeing performance since recomendation. This is not possible in the scorcard

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#5) On January 21, 2014 at 10:40 AM, Mary953 (84.55) wrote:

As I recall, didn't they have either really big winners or really big losers?  I did well with their pick of Buffalo Wild Wings, but did not lose much money on less than stellar picks because I switched to Stock Advisor.  I do recall, though, that there were not many recommendations that just sat there.  They also seemed to have more picks that subscribers were cautioned to sell immediately.  Perhaps they consider some of the picks to have been active only between the time of recommendation and the time of the "Sell Now" caution in a later newsletter.  As BWLD was my first 6 bagger, started in 2008, I really cannot complain.  (Especially since I would have to do a lot of math if I wanted to complain...and you know I don't want to do that)

And Dragon, please do not do anything that might lead to a disappearance...I would really miss your posts!   

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#6) On January 22, 2014 at 12:13 PM, dragonLZ (75.42) wrote:

Mary, no worries, I'm still around.

I'm very happy you are still an active blogger too.

Thanks and have a great day. 

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#7) On January 22, 2014 at 12:30 PM, TMFBlacknGold (89.66) wrote:

I'm pretty sure the returns of the services are calculated on a weighted average of each company's performance compared to the benchmark when the company was purchased, not simply by the value of the S&P 500 at inception of the service itself. So selling winners or losers and buying more shares of a company already in a portfolio will affect both numbers reported on the front page.

I have no say any of TMFs portfolios or services, but that's how I think it works. Fool on!


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#8) On January 22, 2014 at 10:03 PM, dragonLZ (75.42) wrote:

TMFBlacknGold, How do you explain that, per TMF's returns-comparison table on the front page, the S&P500's return went down from 2012 to 2014 (from 79.90% to 37.46%)?

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#9) On January 23, 2014 at 2:23 PM, TMFBlacknGold (89.66) wrote:

Right, but it's time-weighted based on each recommendation, not just the return of S&P 500 from 2012 to 2014. As TMF explains:

"Real-Money Portfolios

The Motley Fool's real money portfolios that are included in this table are Million Dollar Portfolio's Charter Portfolio and Motley Fool Pro. The total return is calculated using a time-weighted rate-of-return formula. The returns of the individual stocks are calculated using a simple average, excluding dividends. Dividends are included for both the total portfolio return and the benchmark, the S&P 500 Total Return Index.


Recommendation Services

Total average returns are the average of all individual stock recommendations (active and sold) and the average of the S&P 500 Total Return Index, starting from the end of the day we make each recommendation. Both the stock and benchmark returns include reinvested dividends."



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#10) On January 24, 2014 at 11:25 AM, dragonLZ (75.42) wrote:

"Recommendation Services

Total average returns are the average of all individual stock recommendations (active and sold) and the average of the S&P 500 Total Return Index, starting from the end of the day we make each recommendation. Both the stock and benchmark returns include reinvested dividends."

Maxxwell, The way this works (and I know it as I've been a "subscriber" to one of their services - I won a 1-year subscription once through CAPS) is this:

TMF recommended XXX on 1/1/11, Current return 50%, S&P's return during the same time 40%

TMF recommended YYY on 2/2/12, Current return 100%, S&P's return during the same time 20%

Then take the average of all of their returns (including both closed and open trades) and the average of S&P500 against all of these trades.

In my example, that would be: TMF's return 75% (average of 100% and 50%) and S&P500's return 30%.

These numbers then make it into the table on the TMF front page.

At least, this is how it used to work. But I guess not any more (as all S&P500 returns in the current table are very low).

I think TMF has definitely changed something to make them look "better-than-they-are" stock pickers (especially, when it comes to their Hidden Gems service).    

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#11) On January 24, 2014 at 12:49 PM, Mary953 (84.55) wrote:

Maxxwell, thank you for trying to add an explanation.  It is nice to see a TMFer (large caps) adding his .02 here.  I hope you post on CAPS regularly - or will start if you don't already.

Dragon, you know that once you start talking in numbers and equations, you lose me.  Believe it or not, I actually understood your example though!  Given that my mind usually freezes at  the very sight of any sort of equation, I am well past surprised.  (Would you believe that I used to get my highest scores on the math portions of standardized tests like SAT's or GRE's?  It makes my husband crazy.)


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#12) On January 26, 2014 at 6:13 PM, Stockllama10 (90.60) wrote:

Yeah, I'm also confused on it. I posted a four-part series (TMF Special Report...revealed!) in which I noticed that they put misleading graphs in their ads to mislead people who wanted to sleuth for the stock instead of paying. I wasn't worried about disappearing, but suppression was in the back of my mind. Good thing we're both alive.

TMF is a great business, but the HG and ads are a bit shady...


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#13) On January 30, 2014 at 8:41 PM, dragonLZ (75.42) wrote:

Mary, I'm glad you think I explained it well.

I just didn't mention the S&P's return of 30% in my example was the average of 40% and 20%, but I thought that was kind of obvious.

Thanks for commenting and sorry I'm so late with the reply.  

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#14) On January 30, 2014 at 8:45 PM, dragonLZ (75.42) wrote:

Stockllama, I agree TMF is a great business, but I also think it's OK to bring up a thing or two about TMF that are somewhat not-so-great or at least confusing.


Thanks for commenting. 


And see, no one from TMF who knows exactly why HG returns are now so handily beating the S&P500 has commented here... 

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#15) On January 31, 2014 at 8:29 AM, TMFOpie (92.05) wrote:

Hi DragonLZ,

Let me see if I can help explain the changes and the difference for Hidden Gems. Mega has it mostly right that starting last year we made a change to our HG service back to a two-pick-per-month model rather than investing TMF's capital into real-money positions on a variable schedule. And because of this change in process we needed to change our reporting methodology back to the way we report our other monthly scheduled recommendation services like Stock Advisor, Rule Breakers, Income Investor and Inside Value. And importantly we needed to have a system that shows our stock-picking abilities since inception to give anyone a look at how good or not we are at picking stocks.

When HG introduced its real-money component we would selectively, unscheduled, put out recommendations to our members and score the overall performance of both the invested capital and the total capital. And that is the returns we used to report on the front page: the performance of that $250k, even though much of it went uninvested.

Starting last year we switched back to a scheduled two-pick-per-month system and returned our capital back to our CFO. But, we had to modify our reporting to best reflect the individual performance of our recommendations, regardless if they were made on a schedule (like 2003-2009) or as part of our real-time, real-money service (2009-2013) and then going forward (like now…back to a monthly schedule). So we decided the best, most transparent way to do this is to report the performance line-by-line of every recommendation we ever made (and the performance against the S&P 500). And then for the summary we report the average performance of each of these recommendations. So it is not time-weighted but a simple average across every recommendation (including sold positions).

So if someone asks me…say, how are you guys at picking stocks? I say, well, on average across al our recommendations, our average pick performance in service XYZ (SA, RB, HG, II or IV) is XX% and YY% against the S&P 500.

So that is what is reflected now in HG. The big difference is that it is the performance only of the stocks and doesn’t include any invested cash like the old system did. It’s a simple line-by-line performance of each recommendation put out to our members and the average performance.

And on our membership companion site we archived the final portfolio report so anyone can see how well or not it did, on both an overall performance and a invested capital performance (the former trailed the market and the latter beat it). We’re not hiding from that performance.

As CIO I have weekly if not daily conversations about reporting returns and the methodology, purpose, transparency, etc. for our newsletter services. It’s actually fairly complicated. So for these basic stock-picking monthly services we try to keep it simple and report the individual rec performance + an average of all those recs.

And because HG is back to its roots as a scheduled, monthly stock picking service, we now represent our performance that way. The difference with other two-stocks-per month like SA and RB is that our scorecard shows more unscheduled, variable recommendations between 2009 and 2013 when we were pumping out recommendations whenever we wanted and not on a schedule. But the methodology to the returns is exactly the same as those other services. So there is consistency across all of our original 5 services (SA, RB, IV, II and HG).

I hope this helps. I do want to have a better system for showing the returns of all our services and the methodolgy to make sure it's as clear as a summer sky (even though there is always nuaces). And this just shows/reminds me that we can do better.


Fool on,


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#16) On February 03, 2014 at 10:05 AM, dragonLZ (75.42) wrote:

Andy, Thank you very much for clarifying this "mistery" for us.

I have to admit, you did lose me a couple of times with your explanations, but I did get that TMF did basically decide to start all over (kind of) with the HG performance, and only report the new performance in the table on the front page.

I kind of have a problem with that, but that is probably just me.

I do understand that TMF did not completely "forget" about the old (poor) performance of the HG service (it's available to subscribers if they want to see it - that's how I undertood it), but to me, that's a little misleading.

Imagine, for example, the Vanguard showing a very good performance for one of its mutual funds on their website, but then, once you "subscribe" to it / start investing in it, you find out that particular fund actually was losing money until recently. Wouldn't you at least get concerned, if not upset or disappointed with their "after the fact" reporting of performance? I know I would.

The fact that HG's way of picking stocks has changed, I don't think justifies the "old performance is gone, and here is a new performance" approach to performance reporting TMF decided on. (Imagine Vanguard advertising the new / good performance of our example fund, and not mentioning their old performance because they used to invest in 40 stocks and now they invest in only 20 stocks).

As for the way TMF reports its performance (the average total picks score vs. the average S&P500 score), I don't see anything wrong there. The way they do it, I actually think is the best way of doing it.

Thanks again for commenting. I really appreciate it.  



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