4 How the newsletters ‘improve’ the performance.
There are two major ways:
1. Cheating
the results.
2. Only
show you the portfolio among several that performs.
Cheating the results
They
do not cheat if they use real money for the portfolio. Here are some ways they
can cheat:
Do not trust the performances of the newsletter providers.
There are many ways to manipulate their performances:
·
They buy at the lowest prices of the day and
sell at the highest prices of the day. To illustrate, a stock shot up by 25% in
the afternoon, and the newsletter could use the open price of the day to buy. A
stock can rise by more than 10% on encouraging earning report, an upgrade by a
famous analyst, or being acquired.
·
I just discover another way to cheat by changing
the sell date 2 days (3 due to holiday on Friday) earlier than today Monday.
The gain and the sell price do not change, but the annualized return change
favorably for gains and unfavorably for losses.
Trading with the closing prices has less chance to cheat. However, some stocks can be traded off hours and morning futures can indicate the direction of the market for the day.
Trading with the closing prices has less chance to cheat. However, some stocks can be traded off hours and morning futures can indicate the direction of the market for the day.
·
Survival bias.
In simple term,
the stocks will not be included if they lose all the value like the many penny
stocks. For example, Lehman Brothers is not included in most data bases after
2008, so it makes your searches look better than they really are. Penny stocks
have higher chances of being out-of-business. The spin-offs and mergers could
do opposite to survival bias, but there are more bankrupt stocks than the
spin-offs and mergers combined.
To illustrate,
you have two stocks 10 cents each. One stock gains 100% and the other one loses
all the value. Your portfolio should have zero gain. However, if you use a
historical database that does not take care of survival bias, the bankrupt
stock is not in your database and your search shows you have 100% gain instead
of 0% gain.
·
Most compare their performances with S&P
500. It is legal for investment newsletters to inflate their performance with
dividends while comparing to an index without dividends. To illustrate, for the
last 10 years, S&P 500 has an average annual return of 1% on appreciation
and 1.5% on dividends. Your same return of 2.5% (1% appreciation and 1.5%
dividend) beats the index return of 1% even they perform the same.
·
The performance of last 10 years is more
important than that of 25 years. Their method of stock evaluation / ranking
hopefully has been improved.
·
Ensure they change their strategies according to
the current market conditions. For example, for some years ADRs (U.S. listed
stocks of foreign countries) perform better than some years.
·
Few if any use real money for their portfolios,
as they cannot cheat with real money. That’s why you never achieve the
compatible performance by following what the portfolio trades. Do not trust any
performance claims even from reputable monitor services unless the portfolios
are in real money and can be verified.
Many sample portfolios trade excessively and they many
not fit your investment strategy not to mentioning the broker commissions. See
next chapter.
Only advertise whose
strategies or funds that perform well
When a subscription service has
several funds or strategies (say 10), it will advertise the best return of its
top fund or strategy for a specific time period. They have too many obvious
examples.
My e-book Debunk the Myths of Investing could save you a lot of money in investing. The above is one chapter out of 105 and some important chapters will not be included in the blog.
http://ebtonypow.blogspot.com/2012/12/special-debunk-myths-of-buffett.html
Sample portfolio for the book.
http://stockportfolios.blogspot.com/2013/03/welcome.html
(c) 2013 Tony Pow
Disclaimer. I'm not responsible for your actions in your investment. Treat this as educational information and past performance does not guarantee future performance.
-------
My e-book Debunk the Myths of Investing could save you a lot of money in investing. The above is one chapter out of 105 and some important chapters will not be included in the blog.
http://ebtonypow.blogspot.com/2012/12/special-debunk-myths-of-buffett.html
Sample portfolio for the book.
http://stockportfolios.blogspot.com/2013/03/welcome.html
(c) 2013 Tony Pow
Disclaimer. I'm not responsible for your actions in your investment. Treat this as educational information and past performance does not guarantee future performance.
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