Mixed Results for Investment Newsletters : Personal finance: Study finds less than 25% chance that advice would help you ‘beat’ the market.
Many investment newsletters about the stock market appear to be worth less than the paper they are printed on, according to two university professors.
John Graham of the University of Utah’s Eccles School of Business and Campbell Harvey of Duke University’s Fuqua School of Business analyzed 237 newsletter strategies covering periods between 1980 and 1992.
About 100 newsletters were analyzed, with some offering more than one investment strategy.
The results: There is less than a 25% chance that if you act on the advice, you will “beat” the market. You may even lose your shirt. Instead, investors often would do better to hold a mixture of stocks and cash, and just stay put.
“If it’s a choice between a buy-and-hold strategy and a newsletter strategy, take a buy-and-hold strategy,” Harvey said in an interview.
“I would advise people not to try and time the market,” Graham said. “It’s better to take a long-run horizon and not try to switch in and out of the market.”
The professors analyzed how the publications advised readers to allocate or “weight” their money between stocks and cash--the latter invested in short-term Treasury bills. Here are the findings, published by the National Bureau of Economic Research:
* Less than a quarter of the strategies advocated by the newsletters, which cost about $200 a year, scored a better return than would that of an investor who merely bought and held a “passive” portfolio. The investment mix in such a portfolio was based on the riskiness of the mix advocated by each newsletter over time.
* “Very few” beat the Standard & Poor’s index of 500 stocks.
* Newsletters rarely advise readers to boost their stock holdings before the market rises or cut the stock portion of their portfolios before the market heads south.
* Wide disagreements among newsletters about the proper investment strategy usually offer advanced warning that the market is headed for volatile times.
* A newsletter’s poor past performance is a good indicator that future performance will also be poor. Good past performance typically is a sign of good future performance.
Mark Hulbert, who publishes a newsletter that tracks the performance of investment newsletters, said the link between past and future performance could be valuable.
“We say that you should look at past performance, preferably a minimum of five years or longer,” he said. Hulbert tries to steer his clients toward those newsletters “which have had good past performance.”
Newsletters typically cost $100 to $200 a year, he said.
The study said well-known newsletters had bumpy records.
It said a client either could have lost 5.4% a year or earned 12.5% a year from mid-1980 to well into 1992 based on the advice of Joseph Granville’s newsletter--depending on how a reader interpreted Granville’s “sell signals.”
A reader could have lost 14.8% a year from December, 1985, to November, 1992, based on advice from Robert Prechter. The Prechter newsletter--depending on how the sell signals from his timing system were interpreted--also yielded yearly gains of 10.8% from July, 1980, to October, 1992.
The returns take into account the trading fees associated with the strategies advocated by Granville and Prechter.
Granville contended his recent advice has been on the money, saying that among other things he picked the strong move in gold and silver stocks in the summer of 1994, and that he kept readers out of mutual funds stung by losses from derivatives. “I’m so proud of what we’re doing. History will record it all,” said Granville, adding that the Dow Jones industrial average is on the verge of a 1,000-point sell-off.
“There’s some truth to it and there’s error by omission. It doesn’t present the full picture,” Dave Allman of Prechter’s Elliott Wave International said of the study. He added that other, more recent measures show the firm’s advice has generated leading returns among newsletters in various categories.
