Subscription services

4         Newsletters and subscriptions

I've been using investment newsletters / subscriptions for years. Many are priced reasonably and some are even free. While a lot of them are garbage, some are very good.

When you have a lot of money to invest and you're not using a financial adviser and/or not subscribing any investment service, it could be a big financial mistake. You do not want to be penny smart but pound foolish.

You may need a computer, access to Internet and a spreadsheet in order to use most subscription services effectively.

I'm not going to compare specific systems / newsletters, but will include general pointers on how to select them. Yesterday’s garbage could be a gold mine today if the subscription improves and/or the market conditions fit what they recommend.

First, you need to find what you need and how much time you can afford to use them. If you have $20,000 or less to invest, most likely you just buy an ETF like SPY as your investment both in money and time will not pay off.

Here are some pointers.

·         Newsletters giving you specific stocks to buy do not require much of your time. However, if they're successful, there will be too many followers buying the same stocks to drive up the prices of the recommended stocks at least temporarily. The owners and his insiders will buy the recommended stocks before you. I have several of this kind of newsletter, and so far I have not renewed any one of them.

·         If I found the Holy Grail of investing, do you believe I’ll share it with you for $100 or so? I only will after I invest my findings first. My subscribers would push up the prices for me and then I unload them before the herd.

·         If the volumes of the recommended stocks are small, they can be manipulated easily either by the newsletter owners and/or by your peer subscribers. The first ones to buy the recommended stocks win and the last ones to sell lose.

·         I prefer systems that can find a lot of stocks by providing many searches (same as screens). However, it will take a lot of time to learn and test their performances that would require a historical database. Most likely, you need to further research on each stock screened. The service would select a limited number of stocks for further analysis, so it will save time.

From my experience, the best performance comes from the stocks that have been screened by more than one search especially in shorter term (less than 6 months). My theory is that they've been identified by more folks and the buyers jack up the prices. You need to buy them and sell them before the herd.

·         We all get promotional mails that they can triple the return of your investment. Just ignore them. If it is that good, most likely they will keep them for themselves. Same for seminars to boost some penny stocks. Sometimes the recommended stocks will rise initially to lure you for more money as more suckers move it. Watch out!

·         A ‘guru’ told me that he made a big fortune in silver a month ago. Guess what? He also recommended selling it two months ago and lost a lot of money in doing so. He is always right but he will not advertise the times he was wrong. We call it a double talk technique.

·         When you have subscribed an investment newsletter or take advantage of the trial subscription, keep track of the performance yourself. It is better to do paper trading before using it with real money.

·         Subscribe the newsletter to fit your style of investing. If you're a day trader, newsletters on long-term investment are not good for you. Some subscriptions handle all kinds of investing styles and you need to find the strategies and recommendations to fit your style.

·         Newsletters on penny stocks are most likely too risky for most of us. I define penny stocks as less than $2. However, I do buy stocks around $2. Actually I bought ALU at $1 but ALU’s market cap is about 2 B. The stocks with prices between $1 and $10 represent the most volatile and some are real ignored gems as most analysts do not do research on them.

·         There are many sectors like drugs, mines and banks that we cannot evaluate effectively ourselves. It is better to seek expert advices.

·         Remember there is no free lunch in life. The higher potential return of a stock is, the riskier the stock is.

·         Some newsletters / subscriptions save us time by summarizing the financial data like a value rank and a growth rank. When the market favors growth, you use the growth rank (vs. a value rank).

·         Be careful on the commercials particularly from Radio in selling to peoples' fears and their greed by overstating without necessarily telling the whole story. There is no free lunch. It is not possible to make 25% in covered calls consistently or making another gold rush from $400 to $1,800.

·         As a retail investor, most of us cannot afford to do any extensive research. Many researches and market opinions are available in the internet free.

·         Do not trust the performances of the newsletter providers. There are many ways to manipulate their performances. See next chapter.

·         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.

·         When a subscription service has several strategies (say 10 for illustration), it will advertise the best returns of its top strategies (say 2) for a specific time period. See next chapter.

As contrary to not recommending investment services, here are very low priced or even free. By opening a small account with a broker, you can access their research. Check your current broker’s website on evaluating stocks. AAII is a low-priced subscription with on-line stock research. Yahoo!Finance is very popular among investors. Seeking Alpha is a good web site.

For the most updated financial statement of a company, try to log on the company’s web site.    

Afterthoughts

·         My friend told me he saw an ad that would show him how to make $500 a day for working a few minutes before the market opens. He is nice enough to share his ‘discovery’ with me. If it is for real, I would be the first one to sign up. If it really works, it will not work very soon. When a strategy is over-used, it will not work. Unfortunately, a fool is born every minute as the same ad has been there for a long time.

·         Currently I spend about $1,500 for my all my subscription services. I believe $300 should cover the basic. To start, you can use your broker’s web site for tools. Some have a lot of research for evaluating stocks and some even include searches. Try the biggest broker’s research as they spend more on this topic. Even if you do not trade with them, use their research by opening an account with the minimum balance pays off.

·         If the offer is too good to be true (like making $500 every day with little effort and little investing money), it probably is not. If they give you a free 50” TV for spending $299, most likely it is a trap with bait. Remember there is no free lunch.

However, some baits are good like the free 30-day trial offer for an investment service or the free dinners I attended for seminars on estate planning. It is part of the business cost. If I do not attend more than two dinners, eventually I will pay two free dinners for someone I do not even know. This book could be the best deal for your entire investment life if you invest time to read it, digest it and use the ideas that are applicable to you and to the current market.

·         How to monitor the RECENT performance of a subscription service.

Do not trust their claims and the past performance may not have anything to do with the current or future performance unless they are from reliable sources.

Most subscription services have a free 30-day trial offer. Take advantage of it. Before you sign it up, ensure you have enough time to test it out. If you do not have time, you can sign it up again using your brother-in-law’s name.

To illustrate how to monitor their recent performance, if they give you 20 stocks every week, save the prices and check their performance in the same period you usually hold the stocks. It has busted many well-advertised and very popular subscription services. I prefer to compare the performance to S&P 500 index. It is better to compare it in an up market and a down market as some strategies amplify the common market by selecting riskier stocks.

·         On 5/2013, I received an ad boosting how great its portfolio performs from a well-known paper on investing. The cumulative return from 2001 to today is an impressive 308% beating the S&P 500’s 43% by a huge margin. However, if you read it again with an open mind (Chapter 11), most of the big gains are made before 2009.

To prove it, I used their data and input their returns from 2009 to today. Their accumulative return is 37% while the S&P 500 is 66%. The more current data has better predicative power than the older data. Why they advertise this way is beyond my belief, they try to insult my intelligence or the want to avoid future lawsuits from their potential clients. If they just listed 308% and compare it to the S&P 500’s 43%, it could have fooled me.

However, from my own testing using their composite score, it predicts pretty well for long term (12 months) and short term (6 months).

The morals of the story:

1.       Read any claim with skepticism.

2.       The recent performance has better predictive power than the older data.

3.       When a strategy is over-used, it will become less effective.

4.       The market conditions change. Some strategies work better than others in different conditions.

5.       Most likely the 308% includes dividends while the 43% does not.

6.       Test it yourself than listen from others’ claims.  

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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.