Investment Newsletters

Investment Newsletters

Investment newsletters: Tip Sheets You can Use – Top newsletters beat the market, but the worst could lose you lots

It used to be that only Wall Street gnomes looked at stock-tip sheets, and an editor’s call to sell could send a ripple through the market. Today, more than two million people read investment newsletters. Hundreds of advisory publications are published, many of which carry one or more sample stock or mutual fund portfolios for subscribers to follow.

Financial newsletters are founded on the idea that you can beat the market, if you’re just smart enough or fast enough. If you don’t believe in market timing, you’re wasting your time with a newsletter, admit even the top-ranked mutual fund newsletters editors.

Most people subscribe because they think there are geniuses out there who are going to make them rich quickly. But they really should examine the past track record of these newsletters first.

A few sites monitor and rate the performance of the investment newsletters, examining a portfolio’s total return as well as its return on a risk-adjusted basis. If a newsletter recommends more than one portfolio, its ranking is based on an average of its portfolios. Risk-adjusted ratings are based on a ratio of return to risk to measure net profit.

Newsletters with the best-performing portfolios significantly outspace the stock market averages. For example, newsletters at the top of rankings have compound annualized returns of more than 20 percent in their portfolios. That’s one to one-third times the S&P 500 return. Over the same time, index of 5,000 companies show a compound annualized return of over 9 percent.

Beating the market on a risk-adjusted basis – the comparison is performance per unit of risk – is more difficult. Only few do it and the lowest-risk market-beating strategy approach is more statistical and sophisticated than common strategies, and only few make good use of index options.

One of the highest risk-takers to beat the market was The Chartist, edited by Dan Sullivan, a rare newsletter with a real account. Sullivan who erred on the side of caution, made his mark by buying when the market was declining.

Manhattan Island. Photo - Elena.

Two other market-beating timers, Zweig Forecast and Zweig Performance Ratings Report both published by Martin Zweig, took on average risk. Zweig’s Ph.D. in finance provides a clue to his rigorous investing, but most of his overall success rate can be traced to a hedge he bought smartly.

Overall, however, most newsletters’ real or sample portfolios have only turned in so-so performances. Seventy percent of the newsletters don’t make the grade. Only thirty percent of the letter beat the market over two market cycles.

Most readers, of course, don’t slavishly follow the investment advice dished out. Yet, some investors who already know what they want may still rely on an editor’s talent for market timing to flash a red or green light when it’s time to climb in or out of the market altogether. Many newsletters used to record daily messages on telephone hotlines for their subscribers. Because newsletter don’t earn a commission on your stock transactions, they may be more objective than a traditional stockbroker. After all, it’s their insights that convince subscribers to pay, on average, $100 to $300 a year.

But in their efforts to lure subscribers, newsletters often make exaggerated advertising claims and routinely cherry-pick statistics. Sometimes investment letter advertising makes outrageous claims that strain the business’ high tolerance for hype. For example, a well-known newsletter advertised that its editor was considered by many to be America’s foremost stock market analyst. In fact, many years of performance data for his newsletter showed that it was second from the bottom in rankings…