On Newsletters

Why Do We Read Investment Newsletters?
by Marco den Ouden

The following three short articles look at investment newsletters and the Hulbert Financial Digest which reviews and rates newsletters. The first article appeared on my Investing: Canada website at About.com in November 1999. The following two appeared in The Break Out Report for Nov. 20, 2005 and December 18, 2005.

Investors use newsletters because, frankly, who's got the time to research all the zillions of stocks out there? I certainly don't. But newsletters should not be a panacea. One should still use one's noggin in assessing the advice from the pundits.

Mark Hulbert, publisher of the Hulbert Financial Digest, points out that long term sustainable gains attain an upper limit in the 20% to 25% per year range. He came to that conclusion after examining the published recommendations of over 150 newsletters over fifteen year periods.

His newsletter is unique among investment newsletters because it does not analyze stocks, mutual funds or other investments. It looks only at investment newsletters and rates them.

Even though some newsletters may exceed that 20% to 25% return by a large amount in any particular year, over the long term, says Hulbert, there seems to be a "practical maximum long-term return".

A striking example is the much touted Granville Market Letter. Joe Granville achieved much fame and glory when his newsletter's picks returned 89.4% in 1997, the best performance by any newsletter Hulbert tracked. Granville did even better in 1989 when his stock picks returned 367.9% But here's the kicker. For the fifteen years to the end of 1997, in spite of those two fantastic years, Granville's return was a 24.6% annualized loss! (Didn't hear Joe mention that number, did we?)

Hulbert bluntly states that if you see a newsletter pundit advertising returns in excess of 25% annualized, "either the performance being advertised was produced over a very short period of time and is unsustainable, or the advertisement is lying".

The best newsletter to the end of 1997 according to Hulbert was The Prudent Speculator with an annualized return of 18.6% over fifteen years.

Although they may be hard to find, a good newsletter can help us in our research of stocks and in managing our portfolios. Hopefully these pages will help investors sort the wheat from the chaff, newsletter-wise.

An Old Friend (from Nov. 20, 2005)

Hulbert Financial Digest

In the late 90s I subscribed for a while to the Hulbert Financial Digest, one of the more intriguing investment newsletters available. Intriguing because it does not analyze investments. Rather it compares investment newsletters. Currently there are 180 newsletters it monitors and compares.

I decided to subscribe again recently, five years after my previous subscription lapsed, for several reasons. One, of course, was to see how the Break Out Report stacks up against the competition. I’m pleased to say that we stack up pretty darn good. The year-to-date return on my Model Portfolio to June 30^th (14.41%) surpassed all but two of the portfolios monitored by Hulbert. 

Here are some of the other returns – Aden Forecast: 5.6%, Bernie Schaffer’s Option Advisor: -7.9%, Cabot Market Letter: -7.0%, Change Wave Investing: -8.9%, Dines Letter:   -4.8% average and +10.8% for his Good Grade Portfolio, Forbes Growth Investor: -8.3%, Fred Hager.com: -60.9% (ouch!), Linde Equity Report: 3.7% (Linde advertises heavily in the Vancouver market), Louis Navallier’s Emerging Growth: 7.7%, Mark Skousen’s Forecasts & Strategies: -0.5%, OTC Insight: 11.5%, Oxford Club: 3.1%, Successful Investor: 7.8%.

The two beating my Model Portfolio were the Turnaround Letter Small Cap with 20.7% and Outstanding Investments with 15.8%.

More on Hulbert (from Dec. 18, 2005)

Eliminating Ambiguities

If you’re interested in stocks and investing, you’ve no doubt got yourself on a number of mailing lists and probably get lots of mail and/or email touting this or that newsletter. They all seem to scream big headlines claiming huge profits in the hundreds of percents. But what can you really believe?

In many cases, the results shown are cherry picked. We recommended stock XYZ and it soared 587%. Or in 2003 our picks gained 115%.  You know that if these results were true and if these analysts could repeat them over and over again consistently, they would be as rich as Warren Buffett or Bill Gates in short order. But aside from Buffett and his pal Charlie Munger, there are few if any billionaires on the Forbes list that got there by investing.

The fact of the matter is that continued sustained  returns year after year seem to have a natural limit. Mark Hulbert, who puts together the Hulbert Financial Digest, has made the study of investment newsletters his life’s work. He started his newsletter 25 years ago when he got similar promotional material in his mailbox and, being a skeptic, decided to take a closer look.

His conclusion after years of comparing newsletters are that long term sustained returns above 25% are rare. Buffett, regarded as the greatest investor that ever lived, managed 35% consistently for two decades.

In order to effectively compare newsletter performance, Hulbert needed to establish some rules so all the newsletters he covers (currently around 180 of them) are all on a level playing field. To do this, Hulbert took the position of the naive new subscriber. How, he asked, is the new subscriber likely to interpret the recommendations in a newsletter? And how would a new subscriber interpret ambiguous information?

Some newsletters are somewhat vague on how to use the newsletter so Hulbert assumed that the subscriber would invest in all stocks recommended by the newsletter equally. So if a newsletter profiles two new stocks and has 15 others in its list of followed stocks, Hulbert creates a mock portfolio for that newsletter consisting of 17 stocks equally weighted.

There are two controversial aspects to the way Hulbert treats newsletter recommendations. One is that if a newsletter editor recommends a stock as a hold rather than a buy, Hulbert considers it a sell. Why is that? Well, he says, if a new subscriber were to get his first newsletter and found 17 stocks listed, 15 rated as buys and 2 as holds, he would just buy the ones rated buy. Hulbert always takes the position of the new subscriber. Unless the editor clearly points out that a stock rated hold is rated as highly as one rated buy, Hulbert does not consider it a buy. 

Hulbert also rebalances a newsletter’s portfolio every issue unless the editor is very clear on the weighting each stock should have in the portfolio. For example, in my Model Portfolio, I specify a specific number of shares and actually put a dollar amount to the portfolio. Someone just subscribing can follow my Portfolio exactly by investing in similar proportions on her own.  My stop losses are clear and so the reader knows exactly when to exit a position as well. And re-investment of the proceeds always takes place on the Monday following my online Portfolio Update.

One of the reasons I construct my portfolios as I do is because I was a Hulbert subscriber years ago and decided to make my newsletter as clear and unambiguous as possible.

Another thing Hulbert does is charge a reasonable “brokerage” fee for each transaction (except for the rebalancing for which he does not assess a fee). The reason for this, of course, is because the subscriber has to pay broker fees so if those fees are not included in the calculation of the portfolio’s return, it is artificially inflated by that amount. That can add up to several percentage points each year. In my portfolios, I follow Hulbert and deduct a $27 brokerage fee for each transaction which is what I pay on my e*trade account. E*trade is lowering their fees to $19.95 in January as will I.

But there were and still are some ambiguities in my newsletter. One was that I have a Watched List of around 50 stocks, not all rated buy.

Another ambiguity is newly profiled stocks. How should they be treated? This was an area that was vague before because my Model Portfolio had just ten stocks and I did not shuffle two out each month to make room for the new recommendations.

The upshot is that I will be putting together a User’s Guide over the next few months to eliminate ambiguities and make clear how you, dear reader, can most effectively use this newsletter.

Postcript: Since I wrote the above article, I have completely reorganized the way I manage my Model Portfolio. Now I do not use stop losses at all. Rather, the portfolio is now composed of three parts. One is a portfolio of three mutual funds taken from my Power Performers mutual funds analysis. Another is what I call the Rich Get Richer section. This consists of the ten best performing stocks from my Watched List from the previous quarter. It is held for a full quarter and then traded. The third segment consists of cash and newly featured stocks. If the newly featured stocks make the Top Ten Performers from the Watched List at the end of a quarter, they are folded into the Rich Get Richer section, otherwise they are held until the cash is needed to buy a new stock pick. So far this method has been performing quite well and as of March 30, 2007, the portfolio is up 9.21% for the year-to-date compared to the benchmark TSX's 1.99%.

Disclaimer