Have you ever subscribed to a stock newsletter only to feel disappointed because your results don’t come close to what was advertised?
In this article, you’ll discover 9 tricks and traps that marketers use to get you to subscribe to underperforming investment newsletters. Like a magician using sleight of hand, they divert your attention away from what really matters in analyzing investment newsletters (performance, risk, investing style) to the promise of easy riches with little work. They provide the illusion of an investing nirvana where riches are just a payment or two away. They are very, very good at what they do.
When reading any ad or offer to subscribe to an investment service take the following 9 factors into consideration before spending your hard-earned money. Then look at some of the well-respected newsletters put out including those by Motley Fool, Value Arch Stock Report, Stock Superstars Report, Action Alerts Plus, Pendultus and others. The important thing is to evaluate which newsletter is right for you based on overall performance, risk and strategy.
Here are the 9 diversions to look for.
Multiple diversions are often used to paint the best picture possible.
1. The advertisement will focus solely on individual stock recommendations without mentioning their overall performance. This is done by boldly showing the gains for stock “x” or stock “y” which gained 500% or more after it was recommended by the editor of the newsletter. Yet they fail to mention that the overall results of all their stock recommendations failed to beat a comparable stock market bench index. They do this to divert your attention away from their overall performance so they look better.
2. In addition they might use the tactic of including long-term results for stocks they recommended after their sell call in an effort to inflate their results. For example; they recommend stock “x” as a buy in 2004 and advise subscribers to sell the stock in 2006 for a nice return of 57%. Yet in their ad they’ll brag that they advised subscribers to buy stock “x” which went on to a 1,200% gain even though they recommended it to be sold after a much smaller gain.
This is a tricky one to catch but if you read the disclaimers and footnotes where there results are reported you will be able to catch it.
3. Base advertised returns on hypothetical or back-fitted results. In order to make returns look as good as possible, some vendors will use back-fitted or hypothetical results. Back-fitting is the process of using past data to develop a set of rules that would have achieved optimal or near optimal results during that specific time period. That’s pretty easy to do. But rarely do those results carry forward, it’s more the exception than the rule. Investing using back-fitted systems without proper statistical methodology is very dangerous.
I could write a lot about this subject but the most important thing to remember is this: how has the newsletter editors’ recommendations performed in real-time? Real-time is measured from the time they recommend a stock without knowing future results to the time they suggest selling it. If the ad is using back-fitted or hypothetical results it will be noted in the disclaimer or in small print somewhere on the advertisement.
4. There is always fear and greed in the markets and predators take advantage of it. Bear market newsletters use fear-based marketing to get you to sign up for their service. They are constantly attacking the market warning about the next great stock market crash by leveraging various news stories.
At some point in time, the market does go through a mild or severe correction as it always does and they promote how their prediction came true. They could be wrong 50 times before they’re right but that’s not what they will tell you. They’ll promote the one great prediction that came true and ignore the rest. They understand that investors have short-term memories and that hardly anyone will take the time to evaluate and measure all their past results.
5. Changing strategy midstream or changing the stock newsletter name to hide bad results. I’ve seen this happen to a few newsletters as they jumped on the Emerging Markets or Gold Bandwagon. If and when those stock markets crash they will erase those results and start over. You must compare like to like and long term results.
6. Stock market newsletters will sometimes compare their results to the wrong stock market index benchmark to make their results look better. For example an emerging market newsletter used to compare itself to S&P 500 as opposed to the emerging market index because the S&P 500 performed more poorly. The real question should have been; how were they doing relative to a comparable emerging market index? Why would they mislead investors like this? Simply to make their results look better than they actually are.
7. Pay particular attention to those investing services that use disclaimers stating they are paid to advertise the stocks that they are promoting! Tell me that isn’t a conflict of interest? They only do this for one reason, to drive up the price of the stock so that someone will profit from it. Hint; it’s usually not the person reading the ad. It happens a lot more than you think and is particularly prevalent in the penny stock market newsletters.
You will often hear the term pump and dump and this is one way it can be done. Thinly traded and penny stocks are easier to manipulate than stocks with large followings and large trading volume. The promoter will buy a position in a stock and then send out thousands of pieces of mail and bombard message boards promoting the stock to build up its price. As the stock rises in price they will be selling the stock on the way up for a nice profit. They’ll brag about their great stock picks and their tremendous track record while the majority of their followers become bag holders losing money.
This also happens inadvertently in reputable newsletters that promote thinly traded small-cap stocks. They have so many subscribers that the stock will jump in price based on their mere recommendation. Some subscribers will get in before the big price jump and realize nice gains but most will miss the price increase by the time they have a chance to buy. “But I quickly became disenchanted when I realized that their picks would jump in price by 15 or 20 percent as soon as they were announced, making it next to impossible to replicate their results. “You are correct that they have a following such that they can move the market on thinly traded stocks at announcement time.”
8. Fail to take into account capital gains taxes and trading fees into account. The portfolio may have beaten the market by an average of 20% but failed to beat the averages when taking taxes and fees into account. This happens most often when there is a lot of turnover in the stock portfolio.
9. I laughed out loud when I saw this tactic used. The well-known newsletter used the following in their ad; “This stock was recently rated a strong buy by Goldman” and “Goldman recently upgraded the target price to $4 which is more than double the current value”. What this suspect investment newsletter wanted you to believe is that they were referring to Goldman Sachs when in reality Goldman Sachs didn’t even follow the stock.
Here’s why it worked and lent instant credibility to the statement when it had none on its own. When you read Goldman your brain automatically associates it with Goldman Sachs based on past experience. you associate and unknown with a known without even realizing it. If you see this tactic being used, beware. It’s a big red flag that you need to look for other potentially misleading sentences. And if they’re willing to do that in their ads, what else are they willing to do?
Deciding which Stock Market Investment Newsletter to subscribe to is not as easy as picking the one with the highest published returns. Stick to what’s important when reviewing a stock market newsletter to subscribe to and beware of misleading advertising.