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Oct 27 2010

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Financial newsletters and empty promises


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The best advice I could give someone getting into stock picking is to think for themselves, and avoid advertisements of financial ‘gurus’ who want to share the light—for a fee.

When professors John Graham (University of Utah) and Campbell Harvey (Duke University) tracked more than 15,000 stock market newsletters from June 1980 to December 1992, they found that 94% of them went out of business during these dozen years of a bull market.

Why follow the stock picks of newsletters when their comparative mortality rate is higher than a minnow’s in a piranha tank?

You might wonder about the newsletters with staying power. Perhaps they’ve gone on to beat the market, as many purport.

In the January 2001 edition of The Hulbert Financial Digest, Mark Hurlbert revealed the results of 160 stock market newsletters that they deemed respectable. But of the 160, only 10 of them had recommendations that beat the market over the previous 10 years. That’s fewer than 7%.

But what I love most is the selective advertising. Let’s take George Gilder’s newsletter as an example we can roast over an open fire. He’s the one currently advertising this on his homepage:

“The technology portfolio that gained 155.8% in the last 3 years”

Rookies to stocks might find this enticing. But the wise would dig deeper. Gilder has had a stock touting technology report since 1999. And let me put his 155.8% total 3 year gain in perspective.

My investment club had a membership to Gilder’s ground-breaking brilliance eleven years ago. If you followed Gilder’s advice from his earliest report, throwing your faith and money behind his recommendations, your portfolio would probably envy a five year old’s piggy bank. You don’t advertise that, do you George? Perhaps he should show us his eleven year track record.

What would we see?

George dumped people into the Grand Canyon, and now he’s celebrating that his followers have scraped their way upwards–155.8 feet in the past three years—with thousands and thousands of feet to still climb before getting back to the surface.

Here are some of George’s 1999 darlings:

  • After some reverse splits, $1000 invested in Nortel Networks would be worth pennies today …more info
  • How about Novell? It’s down about 75% since George recommended it. Good work George! …more info
  • And he loved JDS Uniphase, down 98%  since he talked it up. …more info

I’d bring up a few more of his illustrious recommendations, (Globalstar was a good one) but the depression coming from Gilder fever can live in dormancy for a long time.

Most newsletters are created by opportunists wanting to separate you from your hard-earned money. Avoid them—and beware of selective advertising.

 

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About the author

andrew hallam

I'm a freelance finance writer, lucky enough to have been nominated as a finalist for two Canadian National Publishing Awards. I'm also the author of Millionaire Teacher: The Nine Rules of Wealth You Should Have Learned in School, a book explaining how I became a millionaire on a teacher's salary, while still in my 30s. Working to empower people financially, I'm available to motivate and inspire people on basic retirement planning and index investing. I'm happy to comment on your questions, first, please read the Terms of Use.

Permanent link to this article: http://andrewhallam.com/2010/10/financial-newsletters-and-empty-promises/

10 comments

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  1. avatar
    The Biz of Life

    Charlatans seem to thrive in the newsletter industry. Most are self-anointed experts who cherry pick their investment history for their marketing materials, but rarely reveal their long-term performance adjusted for expenses and taxes. There may be a handful of truly talent individuals publishing newsletters, but it is always hard to sort out the gifted from the random.

  2. avatar
    The Rat

    I think this post offers words of wisdom, especially to less savvy investors who are just getting ready to go it their own investing wise, or even preparing to seek professional investment advice.

    I am always exceptionally suspicious (probably too much) with advertisements in general and always go for the fine print. For example, lately Bell Aliant have been offering combo packages to pay for utilities at $99 per month in my region. On the surface, I'm thinking "geez, I can save over $10/month if i changeover from my local provder to Bell". Right? Wrong! If you're like I used to be, you wouldn't have noticed the asterix *. After reading the fine print, you realize that the $99 rate per month is only for a one-year promotional period, meaning the regular rates kick in after a year (and probably after you have signed a contract!).

    I realize that the Bell Aliant example above is not an example of investing, but money saved translates to more cash available for investment. I think Andrew's post really highlights how there are many newsletters and advertisements that are similar in nature in that the offers may not be best suited for your personal finance objectives.

    For example, some institutions claim to offer a 3% guaranteed rate for a 5-year GIC, but when you read the fine print, if you want the interest paid monthly, they will knock off 0.25%. In my view, it's really important to read the fine print with any decision that involves using your hard-earned money.

    Great thread!

  3. avatar
    Andrew Hallam

    @The Biz of Life

    Hey Biz,

    I read The Dick Davis Dividend, which was interesting. In his book, he mentions some solid newsletters, but I can't recall them at the moment. Does anyone know of any?

  4. avatar
    Andrew Hallam

    @The Rat

    Hey Rat,

    Your comment made me think of an amazing course someone could teach highschool kids. The course could be called: "Spot the marketing scam". It would be awesome. And the final exam would be based on real advertisements where students are supposed to find the misleading sections. Wouldn't that be great if every kid was put through a course or two like that? It could completely change the financial service industry, for starters. Nice work finding the fine print on that Bell Aliant deal. If you're ever keen on doing a guest post on this site, I'd love it. It could coincide with a re-opening of your excellent blog, Beatingtheratrace.

  5. avatar
    Andrew Hallam

    Can anyone tell me what $1000 in Nortel stock would really be worth today? My guess is just a handful of dollars. Ideas?

  6. avatar
    Andrew Hallam

    $1000 in the year 2000….

  7. avatar
    The Rat

    @Andrew Hallam

    I totally agree in that I think a course, or at a bare minimum at least a chapter devoted to it, would be a great exercise for students to learn from.

    Our televisions and computers are full of ads and it's not so easy to decipher things so easily. You almost have to get burned a few times before you become apprehensive to it all.

    I'd love to do a post for your site sometime and I genuinely appreciate the offer; I'll hit you up with an e-mail as soon as I'm back officially back on the scene (and that shouldn't be long).

    Cheers

  8. avatar
    Invest It Wisely

    Sometimes I think experience is the best teacher, but a spot the scam class would be a pretty neat exercise, too. Maybe you can even have the students roleplay and alternate between would-be scammer and scammee :O

  9. avatar
    Dividend Monk

    I know a guy who invested quite a bit in Nortel years ago. He eventually cashed out and used the money for a meal at Burger King.

  10. avatar
    The Rat

    @Dividend Monk

    I know a guy who invested a lot in Nortel when I had just entered the workforce and he lost out big time. Nortel has a tragic history.

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