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Investment Newsletters & Gurus.
Why even the best newsletters will fail.

There are quite a variety of investment newsletters, available to investors today. Unfortunately, few investment newsletters, or any hot pick type service, deal with what it really takes to become a successful investor. You can subscribe to the "best" investment newsletters on the market, but the simple fact is that, at the end of the day, most investment newsletter subscribers will fail to match the newsletter's model portfolios.

On paper, many investment newsletters tracked by the Hulbert Financial Digest have a great long-term track record. The reality, however, is that these high-ROI investment newsletters have generally not translated well for most investors subscribing to them. Often, the tendency is to blame the newsletter, but it has been my observation that the fault lies elsewhere.

Let's face it: if to become a successful investor, all it took was to subscribe to an investment newsletter, then the word would spread rapidly, and that one investment newsletter would have more customers than any other entity on Wall Street. The reality however, is that there has never been such a success. Why? Because in the final analysis, 9 out of 10 investors fail due to two simple reasons:

  1. Position Sizing
  2. Investing emotionally, instead of mechanically

The majority of investors who sign up to popular investment newsletters are extremely naive. In their minds, the process is as simple as, "Just give me your recommendations and let me become as successful as you are." Unfortunately, as any money manager knows, entry points account for very little in the overall success of a portfolio.  Following a successful investment newsletter's recommendations is pointless, when Position Sizing is not part of the equation. We all know that Warren Buffet is a value player, but so are millions of other smart value investors, so why are they not as successful?

What is Wrong with Investment Newsletters' Model Portfolios:
The most interesting aspect of any investment newsletter's model portfolio is the fact that the overall ROI is notably improved by the strong performance of a few great-performing, high-volatility stocks. Unfortunately, in a real portfolio with real money at stake, instead of diversifying amongst all the recommended stocks in the model portfolio, investment newsletter subscribers often pick and choose only those stocks that they view as safe bets, or having the greatest potential, and therefore cause their actual returns in a real portfolio to be far lower than what a model portfolio portrays. 

In addition, the majority of investment newsletters' recommendations tend to be triggered at times of extreme pessimism, as the market is selling off for one reason or another, which means stocks are falling to desired investment newsletter buy targets. It is this exact pessimism that motivates millions of investors to panic-sell their positions, and it is very common for most investors to freeze at this juncture of the market, and thus never become fully invested at the best possible time.

I cannot think of a better way to make my point than by going straight to the Hulbert Financial Digest Guide, which tracks the model portfolios of the top investment newsletters. Fred Hager has been listed in the Hulbert Financial Digest as one of the highest achieving investment newsletters, with a long-term 30-year track record of over 29%. A very respectable record indeed, but I seriously doubt that many of Fred Hager's subscribers have had similar returns. Why? I personally do not doubt Fred Hager's ability to pick high flying stocks, but I seriously doubt that subscribers would be able to stomach such drawdowns. I don't know a single person who can stand a yearly drawdown of -73% as Fred Hager suffered in 2001, remain in the game, and still come out a long-term winner.

Yes, there are many very capable investment newsletters, and there is a whole cottage industry of investment newsletter tracking services, whose sole job is accurately reporting investment newsletter performance.  However, when real money is at stake, few will be able to match the published ROI. In fact, I would even venture a bet that most investment newsletters publishers themselves, will also fail to match their own model portfolio when real money is at stake.

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