Would you use a hammer to change a lightbulb?
One of the biggest risks of following an investment newsletter is expecting it to do something it isn't intended to do. Like any tool, if it's applied improperly it may not get the job done; or worse, it may even do damage (more on that below).
When it comes to investment newsletters, there are actually many different types and many good reasons to subscribe. Setting aside for the moment what type of security they follow (e.g., stocks, mutual funds, options, etc.), there are huge differences across strategy and format.
In general, most newsletters typically fall into five different categories:
General Market Discussion: These newsletters discuss the market generally, covering trends, forecasts, analysis, and the editor’s expert opinion. They don’t usually recommend specific stocks to invest in. Instead, they are most similar to a regular stock market column in a traditional magazine or newspaper.
Learn New Skills: These newsletters teach you a new set of investing skills, walking you through concepts (e.g., trading stock options) and helping you apply them in real-world trading. These newsletter are most similar to a traditional course or training.
Investment Grades: These newsletters provide grades, scores, or ranks for a long list of investments. These are sometimes found with mutual fund newsletters (e.g., grading Vanguard’s mutual funds), but can also be applied to stocks.
List of Ideas: These newsletters regularly publish attractive stocks for further research by subscribers. Often they present a few new stocks each month, or a short list of general recommendations. Sometimes they provide ratings, “fair value” prices, or “buy below” prices. However, these newsletters typically don’t discuss when to buy and sell or how much to allocate to each position. They are basically presenting a focused list of ideas for subscribers to research further on their own.
Model Portfolio: These newsletters publish model portfolios that subscribers may choose to mirror in their own accounts. These simulated (or sometimes real) money portfolios are based around investing an initial amount of capital over time. They allocate funds towards a specific number of stocks and notify subscribers every time they place a trade.
So which type of newsletter is best? It depends greatly on what your financial goals are and what you’re hoping to get out of a newsletter. Any one of the above can provide significant value to an investor.
However, when it comes to making money, we believe there is a clear winner:
Our personal favorite is the “Model Portfolio” newsletter.
“Model Portfolio” newsletters generally have the highest performance accountability and are easiest to reproduce. In other words, because they are publishing a set portfolio with clear trades, prices, and allocation amounts, their performance claims are most likely to be accurate and easy for you as the subscriber to reproduce.
For example, a “List of Ideas” type of newsletter might claim 15% annual returns over the last 10 years. But if they publish a list of five stock ideas on the first day of each month, that’s 60 new stocks each year!
Unless you buy all 5 stocks every month (and every year), you won’t achieve the same returns they did. You might do better, or you might do worse. But if you’re looking for a newsletter to guide you to market-beating returns, you’re likely to be disappointed. With the "List of Ideas," there is low performance accountability and it’s difficult to reproduce.
On the other hand, imagine a newsletter that instead provides a “Model Portfolio” approach and also claims 15% annual returns over the last 10 years. This newsletter holds a model portfolio of 15 stocks and typically places two trades every month. Not only is that newsletter publishing specific trades on specific dates with clear prices and allocation amounts, but with only 24 trades each year it’s a lot easier to follow.
So if you were to follow the model portfolio in your own account, you’re much more likely to achieve the same returns as the newsletter. With the "Model Portfolio," there is high performance accountability and it’s easy to reproduce.
For 36 years, famed investor and analyst Mark Hulbert ran the respected Hulbert Financial Digest (HFD) which analyzed and reviewed hundreds of investing newsletters. For every newsletter he reviewed, he assigned a Clarity Grade, which he described like this:
“The letter in the ‘Clarity’ column rates the newsletters and portfolios according to the clarity and completeness of the advice that is offered.
‘A’ is for letters that offer complete model portfolios;
‘B’ is for services that offer lists of recommended investments and some allocation advice—but no model portfolios;
‘C’ is for newsletters that offer nothing but lists of recommended investments.”
Similar to our example above, Mark graded the “Model Portfolio” approach an “A” and the “List of Ideas” approach a “C”.
In his final issue of HFD (February, 2016), Mark provided even more detail on his thinking around newsletter clarity:
“Does the adviser maintain a specific model portfolio - with numbers of shares or portfolio percentages assigned to each holding? Other things being equal, you should give more weight to the performance numbers claimed by such an adviser, since advice this precise makes it more difficult for an unscrupulous advertiser to fudge the numbers.
I say this because I have found that outright lying about performance is relatively rare. Far more common is spinning the numbers in a way that implies something that is false but doesn’t actually outright lie.
A related rule of thumb is to be skeptical of performance claims that are based simply on the average return of a list of recommended positions. That’s because it makes a big difference the order in which those recommendations were made. It’s theoretically possible that you could lose everything by following stocks whose average return is quite impressive.”
Mark Hulbert offers a new version of his Hulbert Financial Digest at HulbertRatings.com.
Mark's last paragraph has a sting of truth to it. If you search for customer reviews for popular and seemingly successful "List of Ideas" newsletters, a common theme arises.
Some customers leave reviews like: "This newsletter is amazing! I bought their ABC stock recommendation and it went UP 40% in six months!"
While other customers leave reviews like: "This newsletter is terrible! I bought their XYZ stock recommendation and it went DOWN 40% in six months!"
These types of reviews underscore the risks of a "List of Ideas" newsletter. Like any investing strategy, some holdings will do well while others will do poorly. That's investing 101. When holdings are presented as a "Model Portfolio," some of that individual security risk is diversified away because it's part of a larger portfolio.
But when subscribers to "List of Ideas" newsletters buy just one or two of the recommended holdings, it becomes a much riskier investment. The success of the newsletter now rests with just those few positions. And as we all know, betting on just one or two stocks is never a wise venture.
Now, a "List of Ideas" newsletter can be great if you already have a strong portfolio and you're just looking for some fresh ideas for further research. The challenge is when subscribers expect success from cherry picking just a few holdings from the "List of Ideas."
So how do you tell if a newsletter is using a “Model Portfolio” approach? They should make it pretty obvious.
First, look for a table with a reasonable number of holdings (typically somewhere between 5-40 stocks), specific dates or times they were bought or how long they’ve been held, clear allocation amounts (either in model portfolio dollars, shares, or percent), and specific details about trades.
In addition, ”Model Portfolio” newsletters will often name their portfolio and provide an inception date and starting capital amount. For example, look for something like, “The Dividend Collector portfolio was started on January 7th, 2015 with initial starting capital of $100,000.”
To provide you with a visual example, here was our own Active Stock Investor model portfolio as of July 30, 2018:
Note that each position has a specific Purchase Price, Days Held, Shares Owned, Current Value, and percent of portfolio allocation. These are the classic signs of a “Model Portfolio” approach.
Finally, if you’re unsure if it’s a “Model Portfolio” newsletter, just ask. Any good newsletter publisher will respond promptly with a candid explanation and a free sample issue.
UPDATE: When we built our new Profitable Stocks & Strategies investment newsletter, we included THREE complete model portfolios:
You can learn about Profitable Stocks & Strategies its three model portfolios HERE.
When it comes to transparency, accountability, and real-world profit performance, we think nothing beats the “Model Portfolio” newsletter. But we want to emphasize again that every investor has different goals and you should choose the type that’s right for you.
NOTE: Above is a sample excerpt. For the full article and more, download the free 25-page report, "How to Pick the Best Stock Newsletter: 7 Must-Read Secrets Before You Invest a Penny"
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