How do you know if you’re getting ripped off?
Based on our experience with investment newsletters, we want to call out some specific practices and behaviors that we consider red flags (a bad sign) and green flags (a good sign).
We don’t claim to be experts. And this certainly isn’t a comprehensive list.
But it should help give you a sense of what to look for when deciding whether a newsletter publisher is honest or dishonest.
17 Red Flags: Have You Spotted These?
If you spot any of these red flags, you should be concerned:
Guaranteed results: When it comes to stock market returns, there are no guarantees. There’s a reason you always hear the phrase, “Past performance is not indicative of future results.” Anyone promising future profits is not credible.
Lack of clarity: As discussed in our “3 Powerful Questions to Find a Stock Newsletter That Beats the Market” post, any newsletter that’s vague about how they track and report their performance assumptions (investment timing, trade prices, trading fees, allocation amounts, etc.) should be scrutinized more closely.
Penny stock newsletters: While very small companies can offer outsized profit potential, they also carry outsized risk. In general, penny stock newsletters are highly speculative and should be approached with caution.
Backtested returns: A backtest is the application of an investing strategy to historical data in order to see how it would have performed in the past. It’s a highly valuable tool for testing and improving investing strategies.
Many good investors and newsletters do, and should, employ backtesting. However, some newsletters promote their backtested results as if they were actual results. It’s relatively easy to optimize a strategy to perform well in a backtest, but that doesn’t always mean it will be a good strategy going forward.
Any newsletter blurring the lines between backtested theoretical results and actual real-world results should raise red flags.
Personalized advice: As discussed in our post, “The Surprising History of Investment Newsletters“, investing newsletters are prohibited from providing any personal investment advice. Instead, “The publication must offer only impersonal advice, i.e., advice not tailored to the individual needs of a specific client, group of clients, or portfolio.” If the newsletter or publisher is offering you personalized advice, that’s cause for concern.
Cherry-picked winners: Newsletters will commonly promote their best investment recommendations as evidence of their abilities. Typically it looks something like, “AMZN stock is up 845% since we recommended it!” That’s fine, assuming the return they’re advertising is accurate.
However, keep in mind they’re likely cherry-picking their very best winners while not discussing their worst losers or their typical performers. A more transparent approach would be to share their top ten best and worst recommendations in order to provide a more complete picture of their past results.
Repeated recommendations: We’ve seen some “List of Ideas” newsletters repeat the same recommendations over several different issues. They might say something like, “This month we are again recommending AAPL, since we think it’s such a great company.” There’s nothing inherently wrong with this. But if you’re paying for a monthly newsletter that generates 12 stock ideas per year, are you really getting your money’s worth if some issues are simply repeat recommendations?
Cherry-picked prices: As discussed above, newsletters should be clear about the price at which they recommend or trade a stock. While there are many reasonable approaches, there are some that raise red flags. For example, it would be dishonest to buy a stock in a model portfolio and report the purchase price as the lowest trading price from the prior week. Whatever method they choose, it should be clear, reasonable, and consistent.
In addition to the above, the SEC outlined in a June, 2014 Investor Alert titled, “Investment Newsletters Used as Tools for Fraud,” several newsletter schemes they consider to be outright fraud. We have reprinted them here verbatim to preserve accuracy:
Touting: Promoting a stock without properly disclosing compensation received for promoting the stock.
“Pump and dump” schemes: Pumping up a company’s stock price by making false and misleading statements to create a buying frenzy, and then selling shares at the pumped up price.
Scalping: Recommending a stock to drive up the stock price and then selling shares of the stock at inflated prices to generate profits.
Undisclosed conflicts of interest: Falsely claiming to provide independent analysis or failing to explain conflicts of interest (or biases), including financial incentives, that may influence the investment recommendations.
False performance claims: Misrepresenting the track record of the newsletter’s investment recommendations.
No disclosures: Be suspicious if the newsletter does not disclose having received any compensation.
Vague disclosures: Be skeptical of newsletters that do not specifically disclose who paid them, the amount, and the type of payment. The following examples raise red flags because they do not contain specific information:
- “From time to time, the Newsletter may receive compensation from companies we write about.”
- “From time to time, the Newsletter or its officers, directors, or staff may hold stock in some of the companies we write about.”
- “The Newsletter receives fees from the companies we write about.”
Buried disclosures: Be wary if the newsletter’s disclosures are difficult to find or appear in tiny, hard-to-read print.
Questions about your stock purchases: Be careful if a newsletter representative asks you detailed questions about your stock purchases like how many shares you bought, when you purchased the shares, or which broker you used to buy the shares. The newsletter publisher may make money based on the amount of shares its subscribers buy.
Look for These 5 Green Flags
In contrast to the above, below are some green flags (good signs) to keep an eye out for:
Sample newsletters: Every publisher should offer you a free recent sample of their newsletter so you can get a feel for it before you subscribe. It should appear professional, clear, understandable, and free from any of the bad practices discussed above.
Responsive to questions: Newsletter publishers should be responsive to any questions you ask about how their newsletter and subscription works. However, keep in mind they legally cannot provide advice or answer any investing questions.
Trial period: It’s a good practice for a newsletter to offer you either a free trial or a money-back trial period. Typically somewhere between 7 and 60 days, this gives you a chance to review all their materials, follow the newsletter, and decide if it’s a good fit before committing to a subscription.
Past newsletter issues: A good publisher will provide subscribers with access to clear, organized, and easily accessible records of their past newsletter issues. This is typically done through their website, where you can see all past trade details. It’s a good idea to download some and review them during your free trial.
Easy cancellation: If you decide to cancel your subscription for any reason, a good newsletter should make the process easy. They should be responsive to your request and if you’re still within the trial period, they should offer a prompt refund of your subscription fee.
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“