Don't invest in newsletter model portfolio
Special to Coloradoan
Fort Collins Coloradoan
October 23, 2005
I first learned of mutual funds in 1956, as a beginning accountant working for a CPA firm in Hammond, Ind.
One of the firm's clients was Dow Theory Forecasts, founded by LeRoy Evans and publisher of Dow Theory Forecasts investment advisory newsletter. Evans wanted to start a mutual fund using his stock-picking skills. He did - the Dow Theory Mutual Fund. Trouble was, in its short life the fund posted a dismal record. Evans retained financial doctorate degrees from Northwestern University to fix the problem. They couldn't and the fund was eventually sold and merged out of business.
Many readers will recognize the name Mark Hulbert, founder of the Hulbert Financial Digest. The digest begin tracking advisory newsletter performance in 1981 and has 25 years of newsletter history.
Hulbert recently conducted an experiment to determine if some newsletter writers really have special stock-picking skills.
He chose newsletter model portfolios at Jan. 1 of each year based solely on their performance in the previous year.
The experiment revealed that if an investor had followed this strategy beginning in 1992, as of the end of August 2005 (14 years and eight months), the investor would have lost an astonishingly 24 percent annualized.
The total nonannualized loss exceeded 98 percent.
What if the investor chose the best performing newsletter model portfolio over five years?
Hulbert says the investor's portfolio would have gained 5.5 percent annualized compared with the 3.9 percent annualized return the investor would have earned by investing in 90-day treasury bills.
Maybe 10-year model portfolios would show better results. They do, returning 9.4 percent annualized, according to Hulbert. "Not bad," you may think. But the Wilshire 5000 index gained 11.9 percent annualized over the same 10-year period.
Hulbert continued his experiment to see how the best performing newsletter model portfolio in 2004 has performed.
That newsletter is published by Hager Technology Research and Hulbert calculates its model portfolio is down 80.3 percent from Jan. 1 through Aug. 31.
I logged onto the newsletter's Web site. The 20-point type headline reads: "It's official. According to the independent audit of the Hulbert Financial Digest, Fredhager.com has the No. 1 performing investment newsletter of 2004, up 154.8 percent."
Now that is impressive. If my math is correct, a $10,000 investment in the fund at the beginning of 2004 was worth $25,480 at year-end 2004. As of Aug. 31, the value had declined 80.3 percent or $20,460 and the $10,000 investment reduced to $5,020. That is some model.
If instead of picking the one-year best performing newsletter model portfolio you chose the best five-year performing model portfolio, Corcoran's Chronicle, you would have been down 10.7 percent at Aug. 31. The Wilshire 5000 index was up 3.1 percent.
The best 10-year model portfolio with an annualized gain of 11.5 percent was recorded by The Prudent Speculator. Its model portfolio, in my opinion, is only for those who would get into a craps game with strangers. Its volatility is unchallenged.
Come to think of it, many investors might do better in a craps game than investing in a newsletter model portfolio.
Personal financial specialist James L. Watt, CPA/PFS, is a fee-only, NAPFA-registered financial adviser. Reach him at jimwatt100@msn.com or 225-1440.
* * *
[8/7/05] Even though newsletters traditionally underperform the market, I was suprise to learn that individual investors subscribing to newsletters outperform those that don't subscribe. Well, I guess the Motley Fool folks would be happy to hear that.
Shortly after the dawn of the stock market, the investment
newsletter industry was born. Today industry sources believe
there are over 2000 investment newsletters (including online
versions) with total annual revenues in the billions. Below we
will discuss the benefits of investment newsletters and how to
find one that best meets your needs.
Benefits of Investment Newsletters
At the end of the day, the reason to subscribe to investment
newsletters comes down to performance. Studies show that
investors who subscribe to newsletters outperform the average
investor. Unfortunately most investors left to their own
devices follow a scattered approach that leads to sub-par
returns. Whereas investors that subscribe to newsletters are
in affect subscribing to a time-tested investment philosophy.
The philosophy is usually based upon sound investing principles
and gives clear buy and sell signals. Most important are the
sell signals since most investors have difficulty selling
stocks at the right time. If their stock picks are down, then
investors will hold on until the price returns to breakeven
(which almost never happens). Or investors try to ride winners
too long and do not lock in profits. Investment newsletters
provide the holistic approach needed to help investors succeed.
Another benefit of newsletters is value. Consider that
investors keep vast amounts of their wealth in mutual funds.
Unfortunately, as most of you already know, 85% of the funds
underperform the market. And for this sub-par performance,
investors pay mutual funds 1.5% of assets. Even a modest sized
portfolio of $50,000 pays $750 in mutual fund management fees
to underperform the market. Note the average newsletter costs
only $250 per year and provides superior results.
-- Zacks, Profit from the Pros, 1/19/05
I'm not sold on that last paragraph. Though newsletters outperform the average investor and mutual funds generally underperform the market, it does not logically follow that newsletters outperform mutual funds.
[6/1/14 reply to roy] Most newsletters (and mutual funds and individual investors) don't outperform the market.
Question: Recently I've been reviewing a few financial newsletters that provide market advice. I don't trust most of them but have been intrigued by some. Would I just be wasting my money ($200 or $300 a piece) or could I actually see some better than average returns? How does the current downturn in the economy affect the advice offered by these newsletters?
The Mole's Answer: This is an easy one. You'd be much better off just throwing the money in the nearest dumpster than buying these newsletters and risking a big chunk of your nest egg in following the newsletters' advice.
[6/1/14 update] Consider the 51 advisers out of more than 200 on the Hulbert Financial Digest's list who beat the market in the decade-long period that ended April 30, 2012, as measured by the Wilshire 5000 Total Market index, including reinvested dividends.
Of that group, just 11—or 22%—have outperformed the overall market since then.
***
The Reserve Bank of New York also did a broad-ranging study in 1998 which looked at investment newsletters. This paper analyzes the recommendations of common stocks made in the HFD database from 1980 to 1996. They found that newsletters typically recommend 10-16 stocks. They tend to recommend growth rather than value stocks, smaller than the value-weighted average of market capitalizations. They generally encourage much higher turnover of holdings than found among mutual funds.
In terms of performance, they concluded that:
1) Newsletter recommendations do not on average outperform benchmarks based on market capitalization, book-to-market and stock price. Including trading costs (and newsletter costs), newsletters likely underperform.
***
The Hulbert Financial Digest is a monthly newsletter that serves as an impartial, independent reviewer of all the leading stock and mutual fund newsletter services (publications that recommend and advise on what to invest in). Run by editor Mark Hulbert for more than 20 years, over 180 stock recommendation letters are tracked each month, with data going back as far as 1980 for services that have been around that long. Hulbert's tracking and research shows that 80% of these professional stock pickers can't beat the market indices -- which might make you think twice before paying their subscription fees and following their investment advise.
***
Where's my book on newsletters? Here it is. The Wall Street Gurus by Peter Brimelow (1986). Chapter four is on Hulbert.
"At the end of June 1985, after five years of rating the letters, Hulbert's results looked like this (see pages 68 through 75). It would be easy to say that these results were devastating.
No comments:
Post a Comment