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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:
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Position Sizing
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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?
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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.
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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, that is not the point. The
real point here is that without position sizing, the majority of investment newsletter
followers will end up losing money. In fact, I
would even venture a bet that most investment
newsletters publishers themselves, will fail to
match their own model portfolio when real money
is at stake. |
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