Newsletter Writers--What Do They Know?

A new study confirms what many investment newsletter readers probably already know: Most such letters have had a tough time beating just buying and holding a broad index of stocks in the 1990s.

The business schools of Duke University and the University of Utah reviewed the advice given by 326 newsletters between December 1990 and December 1995 and found that following the average newsletter’s advice would have yielded average annual returns of 12.6% over that five-year period.

In contrast, the study’s authors said, their own “passive” buy-and-hold investment model produced an average annual gain of 16% in the period.

By one measure, “only 16.5% of the newsletters provided valuable investment advice,” said Campbell Harvey, a professor of finance at Duke University’s Fuqua School of Business. Harvey conducted the study with John Graham, professor of finance at University of Utah’s Eccles School of Business.

“We found that most of these newsletters were beaten by our passive investment strategy that maintained a steady mix of 70% stocks and 30% Treasury bills for the whole year, and we did not fluctuate like the newsletters,” Harvey said.

The key to the success of the study’s model is that “we stayed put and we did not listen to anybody else’s advice” in terms of market timing, Harvey said.

He said the best newsletter among those surveyed produced an average annual return 3.5 percentage points above the study’s model portfolio.

The worst newsletter’s average annual return was a whopping 20.7 percentage points below the model’s returns.

Harvey said newsletter writers’ most common mistake was in their reactions to information affecting the market.

“A little piece of information comes up and they immediately adjust their portfolios when they shouldn’t have,” he said.

“The majority of the newsletters are perfect examples of the worst sins of the way to invest,” said James P. O’Shaughnessy, president of O’Shaughnessy Capital Management and author of “What Works on Wall Street.”

The newsletter industry, he said, is “populated by people who think way too much of their own opinions, and some are storytellers and are from the ‘got a hunch, bet a bunch’ crowd,” he said.

O’Shaughnessy said the most valuable newsletters are those that offer investment strategies that have been tested over long periods of time and that have the discipline to stick with their strategies, without allowing emotion to get in the way.

“You have the Four Horsemen of the Investment Apocalypse--Fear, Greed and Ignorance and Hope,” he said. “All but one is emotion, and ignorance can be corrected, but the other ones are very hard to tame.”