Evaluating Paid Investing Newsletters

Investment newsletters have been around for decades, but questions have always lingered about their usefulness. We will examine the different types of investment newsletters, pricing structures and availability in an effort to help individuals determine whether or not newsletters can enhance their investment returns.

Any analysis of investment newsletters must begin with an identification of what type of investing is being considered.

Broadly speaking, investment newsletters might be broken up into the following categories: individual stock recommendations, market trading strategies, overall market/economic commentary and specialty newsletters (i.e. natural resources focus or real estate focus.)

Stock Recommendations

Many newsletters offer individual stock recommendations based upon some valuation methodology. These newsletters often examine small-cap stocks or even penny stocks, on the theory that these are the securities most likely ignored by Wall Street analysts. Although many of these newsletters tout the incredible gains the writer experienced on some recommendations, it is important to examine an overall track record, taking into account performance over a long period of time as well as trading costs and tax consequences.

Trading Strategies

As with active fund managers, it is unlikely that the majority of newsletters are able to outperform the broader market over the long-term; furthermore, it is exceptionally difficult to forecast which newsletters will be the best performers. Investors might also wonder why an analyst with an exceptional ability to select undervalued stocks would choose to share that information with the general public.

Investors considering newsletters that tout trading strategies should also ask themselves why the analyst is sharing this valuable information, especially when there are easier ways for an exceptional market timer to make a lot of money. Trading newsletters may also suffer from a timeliness issue as recommendations may be out of date by the time they are published.

Specialty Newsletters

Specialty newsletters may have more value for investors. However, investors should beware that they are not simply buying into whatever sector is currently popular (e.g. technology stocks). Some sectors may not be as heavily followed by large company analysts or may require a high degree of specialization. In these instances, a newsletter writer may be able to add value through their analysis.

Overall Market/Economic Commentary

The final broad category of newsletter is those focused upon overall economic and market trends. The quality of these newsletters is dependent on the analyst's ability, but some newsletter publishers have earned excellent reputations for contrarian thinking over long periods of time.

If investors decide that newsletters are not for them, or if they are interested in free alternatives, where should they look? The key for an investor is to select the source that makes the most sense for them and then focus on that source. Unfortunately, the average individual investor may not have access to a full range of Wall Street research. However, most investors can access at least some reports through their brokerage firm, and the internet has provided access to a great deal of additional material, much of it free.

In particular, newsletters commenting on general market and economic trends can be complemented by or replaced by a wide range of periodicals such as websites, newspapers, magazines, social media and analyst research reports. Fewer alternatives exist for market timing and stock selection newsletters. If an investor finds that they are unable to replace the fundamental or technical research contained in a newsletter, they may want to consider a subscription.

Once an investor has decided what type of newsletters they are interested in, they must next turn to the question of pricing and availability. Any money spent on a newsletter is money not invested into the portfolio. Therefore, newsletter expenses should be carefully managed just like other investment costs. Information does have value though, so if an individual finds that a particular newsletter is helping them manage their investments, the cost may be justified.

In general, it is probably best not to subscribe to a newsletter with a long-term contract period until you have determined whether or not the newsletter has value to you. That way, if you decide the newsletter isn't helping, you can cancel your subscription without additional expenses.

Availability is another important consideration that will largely depend on the type of newsletter and its use. For example, a market timing newsletter will need to be published very frequently in order to be of any value in contributing towards a trading strategy. On the other hand, a newsletter examining broad currents in the overall economy or international financial markets may not need to be published as frequently, particularly if it is being used to contribute to an overall sense of the market that will be incorporated into a long-term investment portfolio.

Investors should never rely on a single source of information, whether that source of information is a newsletter, an expert opinion, a financial news article, social media or a brokerage recommendation. Instead, investors should attempt to collect as much information as possible before forming their own independent judgment which they can then incorporate into their overall investment strategy.

Investors that research available newsletters with good long-term reputations, and then incorporate them into their investment program may find value. However, investors who subscribe to stock selection or market timing services and then attempt to specifically replicate the newsletter's suggested portfolio are unlikely to be successful.

There are many different kinds of newsletters available and investors must decide which is most appropriate to their investment style. Furthermore, investors must determine whether the cost of the newsletter equals the value it provides. Importantly, investors should never utilize a newsletter (or any other source of information) as their only input into the investment process. Multiple, independent, and often conflicting sources of information are important if an investor is to reach the best conclusion as to the future course of the market and their investment portfolio.