Stock Market Newsletters: Do They Work?
Are you tired of working for that boss you hate? You'll never get rich working for a big company so here's the proven way to build wealth, working only about an hour a month.
I just love pitches like this -- ever so appealing to our emotions and our human ability to believe anything we want to believe. In this example, it's stock market newsletters that are being pitched. Let's take a closer look, starting with a typical advertisement.
From here the ad pans to one of its subscribers sitting on a beautiful yacht in the Bahamas, and spinning the tale of his days as a factory worker in debt. Then the subscriber "brings it home" by assuring us that spending fifteen minutes a week following the simple advice from this newsletter has built him wealth beyond belief. That's the one thing I'll buy -- this story is not to be believed.
Since my column is called The Irrational Investor, let's examine the rationality of market newsletters. We can do this from two perspectives - logic and data.
The Logic of Newsletters
Though the advertisement on this page is fictitious and borrowed from my book How a Second Grader Beats Wall Street, most of these advertisements show verifiable data. Who wouldn't want to earn ten times the market return, especially given our recent losses?
Thinking logically, however, we must remember that there are hundreds or even thousands of newsletters in existence. Of course, some are going to do quite well, since all of them being wrong is a mathematical impossibility.
To illustrate, let's say I wrote two newsletters last year with one saying put everything in India and China, and the other saying to short India and China. The first one didn't do so well, so I won't put much marketing into that one. But my newsletter saying to short India and China maybe had a 1,000 percent gain in 2008, a year most investors suffered miserably. So I send out flyers and get a booth at The Money Show and talk about how I reached my brilliant conclusion and why I know what will happen over the next year. And all this wisdom can be yours... if you pay me $299 for a one year subscription. If you're not satisfied, I'll send your money back within the first 14 days, which of course is not enough time to have a clue if it works.
If you don't completely buy the logic above, think a bit more about it. If I really knew how to earn even two percent more than the stock market, would I be peddling $299 subscriptions around the country? I think not. Instead, I'd make a beeline to institutions, where I could parlay my statistically significant track record into mega-millions. Maybe then I really could have that yacht in the Bahamas.
The Data from Newsletters
Mark Hulbert writes a newsletter of newsletters for Dow Jones MarketWatch, and has been tracking newsletters since 1980. According to Hulbert, if you had invested $10,000 in 1980 and followed the advice of the top-performing newsletter of the previous year, you would have turned your investment into mere pennies. In fact, following the advice of the best newsletters with long-term track records still would have underperformed the appropriate indexes.
My Advice
It's only natural to want financial freedom with the least amount of effort. Unfortunately, it's completely irrational to think there exists out there some financial visionary who would rather channel those psychic abilities to the greater good rather than for their own good. It would be nice, but the financial services sector doesn't draw too many altruists. So no matter how much you want to believe in the veracity of these newsletters, just say no-no-no!
The wealth-building appeal of writing newsletters has gotten me to thinking of writing my own newsletter. What do you think of the first two issues?
Issue One: Own a low cost, diversified portfolio and rebalance.
Issue Two: See issue one.
Any guesses as to what issue three will say?