Reasons To Watch Out For Stock Newsletters

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Now and then, I get asked if I recommend any specific stock newsletters. I usually assume these people haven’t read much of my blog 😉 I’m often given specific examples, like one that touts a 145% supposed return last year, or another one run by a group of Harvard MBA graduates. My reply is always the same: I don’t recommend any stock newsletters. There are a couple of reasons why:

First of all, the ones that you can go back and check on reliably haven’t done so hot. The Hulbert Financial Digest has been tracking the recommendations of investment newsletters for over 25 years. It’s research shows that 80% of these professional stock pickers can’t beat the market indexes.

According to this FundAdvice article, chasing last year’s hot newsletter is a very bad idea. From 1981-2002, if every year an investor put his or her money into the prior year?s top performing newsletter, the result would have been an annualized loss of 31.4 percent a year. That?s the same as starting with $10,000 and ending up 21 years later with $2.32. Ironically, most people that subscribe to Hulbert’s are looking to buy a stock newsletter!

Don’t forget the Motley Fool’s 100% failure rate for their 2006 predictions. Better luck this year, Fools!

As for the rest, how do you know if they are lying? Recently, FundAlarm caught one of these newsletters in the act of changing their historical trade data after a dismal year:

Using the market-timing system from Intelli-Timer, my return for the year came in at less than 2%, and I wondered how Intelli-Timer was going to update its Web site, and continue selling its system, after such a dismal performance. Now we have the answer: My year never happened. With no explanation, the Intelli-Timer Web site has completely revised its historical performance information… Faced with a system that was failing, it looks like Intelli-Timer has simply backtested a new system that produces dramatically better — and totally fictitious — results.

Nothing like making up crap when all else fails. Since there is essentially nobody policing these newsletters and websites, why not? Link via Diehards Forum.

I’ll say it again – commentary from stock analysts always sounds great and logical. They can throw out nice figures like rising margins, economic statistics, or fancy PQI ratios. If they are right, the can toot their own horn. If they aren’t, they can either ignore it or even lie! I really think most of you don’t need to hear all this, but it’s always good to have some links to help convince others.

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Comments

  1. If I read this right, I think the FundAdvice article is saying you can sell short the prior year’s top performing newsletter and make out pretty well. Turn that $2.32 into $10,000! Or is this just another trap? 😉

  2. Michael M. says

    As for the rest, how do you know if they are lying?

    Their lips are moving?

    (Old joke)

  3. Even fool.com? 😉

  4. This reminds me of the ol’ story on how to be a market guru.

    1, Send out 500 emails that stock XYZ will go up and 500 emails that XYZ will go down.
    2. To those who you were right, send 250 emails that XYZ will go up and 250 emails it will go down.
    3. To those who you were right, send 125 emails that XYZ will go up and 125 emails it will go down.
    4. . To those who you were right, send 60 emails that XYZ will go up and 60 emails it will go down.
    5. To those who you were right, send 30 emails that XYZ will go up and 30 emails it will go down.
    6. To those who you were right, send 15 emails that XYZ will go up and 15 emails it will go down.
    7. To those who you were right, send 7 emails that XYZ will go up and 7 emails it will go down.
    8. Congradulations, you are now a market guru to 7 people.
    9. Start a newsletter.

  5. My 2 cents…I’ve had good and bad experience with stock newsletters. I’ve been trading for 12+ years, and I have my own investments ideas, but I like to receive info from different newsletters to see what other people thinks.

    Overall, from my experience, I can say that the most expensive newsletters are the worst. I had good experience with cheap advisories ($20/$30). These are guys that make a living from the trades they make, and they just charge a nominal fee to maintain a web site/email/chat rooms/etc, but they don’t make a living from the subscription fees (also, they don’t tout 100%+ performance…they usually show their real trades, and maybe 20% annual).

    Any time I see newsletters selling for $1000+/year promising 100%+ results, I ran for the exits!!!

  6. They guy who screams a lot seems like he must be right all the time. But probably not, right?

  7. There is a simple reason why all the stock market tricks and strategies dont work ( at least in short term )

    If a strategy consistently produces above average return, then most people will follow it.

    But by definition most people can not make above average return thus proving that there is no strategy to produce consistent above average returns.

    Or think of it this way if fool.com every year gave solid market beating stock recommendations, then everyone will buy those stocks thus making the fool.com recommendations expensive and useless.

  8. What about shorting the top picks from last years hottest news letters. Sounds like free lunch to me.

  9. My first rule of stock investing:

    Do (not would) you buy the products the company makes/offers? If the answer is no, seriously consider not owning the stock. If it’s not good enough for you/familiy, what makes it good enough for other people?

  10. “If I read this right, I think the FundAdvice article is saying you can sell short the prior year?s top performing newsletter and make out pretty well. Turn that $2.32 into $10,000! Or is this just another trap? ;-)”

    “What about shorting the top picks from last years hottest news letters. Sounds like free lunch to me.”

    You’ll be essentially taking advantage of the tendency of return to revert back to the mean. You’ll have a lot more volatility and you’ll need to be able to cover your shorts, but in theory you would get pretty good returns 🙂

  11. I subscribe to International Speculator and Martin Weiss’s Safe Money Report. I had subscribed to Steven Leeb’s The Complete Investor but ended it since I could not afford many of his recommendations even though I enjoyed the newsletter and did explore a couple of mutual funds for investment.

    Not every pick is a screaming winner. You still have to use your own brains and read up on what you are purchasing like anything else. The newsletters I mentioned also own up to their mistakes but also tell you to diversify and not mortgage the family home based on their analysis.

    I like the newsletters since they provide some other investment ideas that I am not going to get anywhere else. The one’s I mentioned are not read by everybody like Kramer’s or the Motley Fool. The pick’s suggested are something I could not have done by myself given my time constraints.

    I make it a point to listen Jim Puplava at Financialsense.com every weekend that provides some interesting insights into the markets and the economy. I do bother to read Forbes and Kiplingers for some other opinions.

    One can easily follow up on past recommendations since any good newsletter will post its old newsletters and with the internet it easy to check how the recommendation worked out. A good newsletter will offer to refund the unused portion of your subscription if you are not satisfied.

    As for expensive, that is a subjective term. A 2 year subscription that works out to $12/month is not all that bad since one can easily spend that on a good Friday lunch these days. As they say, if think that is expensive, try ignorance.

  12. Richard Young has a good newsletter that sells for about $240 per year. He only recommends stocks that are in his own portfolio.

    The guy is very conservative and focuses mostly on people who are near or at retirement. My father has done very well by following his picks.

  13. I’ve use Bob Brinker’s MarketTimer and No-Load fundX and both have given me very good results when it comes to mutual funds.

    The Turnaround stock letter I’m going to give a try so I’m asking anyone if they have used this and what there HONEST opinion is.

    Has anyone tried the Prudent Speculator? I’m really interested if anyone has any success or has found it helpful.

    Have a great week and stay cool during this hot weather.

    Paul

  14. I would only recommend newsletters that post their trades in real time.

  15. Aandelen Kopman says

    I have done much better since I stopped listening to “talking heads” including newsletter writers. I read where 80% of them could not outperform the indexes.

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