Lessons From a Stock Newsletter Scandal

I ran across another cautionary tale highlighting the world of paid stock newsletters, where people pay hundreds of dollars for “exclusive” stock picks.

In this one, former professional baseball player Lenny Dykstra somehow become a highly-touted investment columnist in 2005 for TheStreet.com. Here’s a video of Jim Cramer heaping praise upon Dykstra, calling him “one of the great ones” and one of the 5 people in the world he’d take stock advice from.

Dykstra specialized in deep-in-the-money calls, and promised a 95% success rate. He sold over a million dollars in newsletter subscription fees at TheStreet.com. Then things started falling apart.

Sharp bloggers exposed this scam: he counted his winners, but endlessly rolled over his losers, so that he could keep claiming no losses. He didn’t even make the picks himself; they were supplied by another stock analyst. His actual return on money was probably negative. Dykstra was fired in April 2009 and is now in bankruptcy.

The most recent allegation is that Dykstra secretly took $250,000 in exchange for recommending a little-known stock to his newsletter subscribers and “access” to Jim Cramer, according to sources within the company.

As you can see, stock newsletters can be very murky. How can you verify their advertised performance is true? Are they being paid to tout the stocks you’re reading about? Mutual funds are highly regulated. Stock newsletters are not.

Most stock newsletters are more about marketing than actual results. For example, did Cramer really think Dykstra was a genius? Or did he simply see the opportunity to leverage an athlete’s well-known name to create a lot of easy buzz and thus money?

Comments

  1. Forget Dykstra. What about Cramer? Why is this guy not in jail let alone still on TV? I know, this is just the free market at work, and everyone is free to swindle everyone else.

  2. I actually started subscribing to Motley Fools’ Stock Advisor. Thoughts on that one?

  3. NYC GUY says:

    I remember seeing the real sports documentary on Dykstra when it first aired. I was impressed and sort of had a WOW feeling thinking that I always thought he was dumd, but if he could pull of investing the way Crammer claimed than certainly I could with enough research and desire.

    I should’ve known if was some type of fraud.

    Great blog post, I enjoyed it as I knew he went bankrupt but didn’t know the details and the scam involved.

  4. I never really understood newletters – if they had a formula, why sell it?!

    The qual guys don’t just give away their codes

  5. @David – If you’re looking for an opinion, I think that Fool.com used to be a nice site for beginning investors, but figured out that recommending index funds wasn’t profitable. So now they primarily push sub-par stock newsletters.

  6. I have no idea why anyone would look at Cramer as anything more than a highly paid clown. The man has been busted more times than I can remember (I don’t mean legally busted, I mean intellectually busted).

    @Jonathon, I used to really like Fool.com, and, years ago, used to spend a lot of time on that site. I don’t know about the quality of their newsletters, but if they really are sub-par, that is sad. That was a cool site, with a lot of very nice and helpful people.

    You have to take all newsletters with a grain of salt. Mark Hulbert’s digest can give you some insight into financial newsletters, but most of them don’t have a very good track record, all considered. None of them consistently beat the market. Very few people do.

    And, yes, newsletters are more about marketing than actual results, but so are mutual funds. Mutual funds don’t exist to make us money, they exist to make themselves money. If you knew all the shenanigans they pull, you’d think long and hard about putting your money in them.

    Marc

  7. MakingItWorkNJ says:

    I just subscribed to etf.morningstar.com (not hawking it, or anything, just stating fact). I am investing in the “hands-free” portfolio, and I seem to be doing ok. Market hasn’t been doing great, but I don’t need the money until a couple-few years anyway. Just going long for now on the positions I’m buying, plus Citi (C). C is the only stock I own (the rest are etfs) and I consider that my speculative play. It was between that and Sirius, and I felt that Citi would triple in stock price by the time all is said and done. And at $10 a month at sharebuilder, I’m not exactly caring if I’m wrong. I’m hoping it will go up by 2012.

    But getting back to morningstar, it seems all right to me. Would welcome anyone else’s opinion. The positions I bought pre-newsletter I will try and sell when sharebuilder has another promo deal where I get free credits. :)

  8. @David. I agree with Jonathan. The old Motley Fool books warn you away from sites like the new Motley Fool…

  9. David – I can’t speak to all the Motley Fool newsletters, or even to Stock Advisor in general, but I can tell you about my experience.

    I have been a subscriber to SA for 4 years now. I have occasionally tried my hand at picking stocks, but never was any good at it. So when I subscribed, I had a simple plan – there are 2 recommendations each month, and I would buy approximately the same amount of each pick each month, and sell when they said to sell. And I would track how well they did compared to what I could do myself – which was put the same amount in an index fund each month.

    At the end of the first year, I was, I believe, slightly behind the index benchmark (S&P 500), but things were moving up on my portfolio, so I gave them another year. Somewhere around month 15 I crossed over into positive (compared to the index) territory, and have remained so. When the market dropped, my portfolio dropped also and the gap closed a bit, but when it went back up, my SA portfolio went up even more.

    End result, I’m currently pretty well ahead. I don’t want to reveal exact amounts, but my account has 20% more value than I put in it, and the benchmark portfolio has about 8% less.

    Tim

    I should add, this doesn’t mean all their picks are winners, I’ve bought some real dogs (like 80% loss dogs). But the winners have outnumbered the losers, and a couple doubled or quadrupled winners wipe out the bad ones. Past performance is no guarantee of future results. :-)

  10. I agree with Marc. And I think Cramer is just as much a fool as the Motley fools. Newsletters and mutual funds are greedy money makers, especially those mutual fund companies charging loads or 12b-1 fees, but I do think some mutual fund companies like T Rowe Price & Vanguard are O.K.

    @MakingItWorkNJ, I think Morningstar is a great source, but we shouldn’t be too reliant on their star rating system. I think their analysis is pretty stellar at times, but they have been wrong too. I get their stuff free through the public library and I would have a hard time paying for their services.

  11. MakingItWorkNJ says:

    @Ron, thanks for your input. The reason I subscribed to Morningstar is because I like their X-Ray product, where they breakdown the fund by companies and how much I owe in that company. It’s a good way to see if I bought funds that overlap (and the ones I did, I will sell when either I’m ahead OR when I get free-commission). Then, during a busy period, I got some cute-sounding babe calling me asking if I wanted the etf part of morningstar. I was reluctant, but she was really persistant and put the sexy-voice on. LMAO. At $85 a year, I figure what the hey. I’m gonna try it for a year and see how my portfolio does. I have my funds matching their target allocations and it’s only $200 a month. Nice mixture of bonds and stock etfs, plus I added C. When Cramer is not adamant about buying that stock, I figure (for me) it’s a buy-buy-buy. I really do see Citi getting to a $12-$20 stock within the next 2 years (though I’ll give it $5). Then we will sell-sell-sell! LOL.

  12. I believe Jonathan has mentioned in the past that the Morningstar X-ray tool is free through T Rowe Price

  13. I used to subscribe to Bob Brinker’s Markettimer. For those of you not familiar with Bob, he has a nationally syndicated radio show that comes o Saturday and Sunday. I started listening to him in the mid 90s when in college.

    When he completely missed the market down turn over the last couple of years I stopped subscribing to his newsletter. He suggested some good mutual funds when the market was going up, but all those gains and then some were lost when the market tanked. So much for timing the market.

  14. If anyone is interested in a little inside dirt on what it’s like to work with Jim Cramer, I highly recommend the book “Trading with the Enemy”. It’s an easy read and some of Cramer’s supposed tirades are hilarious. If half of this book is true, Cramer is a raving lunatic.

  15. Sean Ruiz says:

    Lol. An author debunking another author? That’s hilarious but if it’s true he had it coming. So does anyone think that the stock market might go kaboom in the next couple decades? I mean its only 100 years old. It could happen. What are your thoughts?

  16. I used to subcribe to http://philstockworld.com . Phil lost 110% of a 1.3 million dollars member club stock portfolio which was suppose to follow his safe trading method. Afterward he admitted that all the trading on his site were fakes. 2 years later the site is still running and he is a star at seekingalpha. An investigation is pending

  17. I used to be a fan of fool.com, as well, but here’s my problem with much of their content: it’s all sensational now. They make outrageous “predictions,” my most favorite recently being that SIRIUS XM will be out of business within three years. What’s funny to me on this is that SIRI is a cyclical business, in that it’s directly related to new car sales…so of course the past two years have been brutally negative for their business. However, in the past 6 months, SIRI’s business has improved substantially, and its stock price has experienced a sustained and meaningful recovery. Irresponsible headlines that serve only to draw attention and polarize serve little purpose and contribute nothing meaningful to a well-rounded investing discourse (imho). Having said this, I should disclose that I still visit the site daily because I like to be open-minded in what I read and I’m never too prideful to not at least consider an alternative or outrageous viewpoint. Still, I can’t help feeling that The Motley Fool is nothing more than a short-hyping machine.

  18. I think that these newsletters prey on the get rich quick mentality that people have. There really isn’t any proven way to get rich quick.

    People are always seeking to get that huge pop, and they’ll brag about how they got a huge gain from XYZ stock when it got bought by SuperMegaConglomerate, but nobody tells you about their losses.

    Everyone wants to be the hare. Nobody seems to remember that the tortoise won the race.

  19. Great video to review yourself. A number of independent nations have adopted programs that allow citizenship to people of great value.

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