Straining a sea of ink for advice on investing

Every month they make grand promises, often in bold type: "Earn 30 to 50 percent on your investments." "Know when to buy that downtrodden company." "Profit from tech stocks."

Alas, when it comes to the scores of investment newsletters published in the US, lawyer language is best: "Caveat emptor." In other words, "let the buyer beware."

Few newsletter recommendations beat the stock market. And except for newsletters published by registered investment advisers, and thus watched over by the Securities and Exchange Commission, many such publications are largely unregulated.

To begin with, no one is quite sure how many investment newsletters there are. Part of the problem "involves semantics," says Mark Hulbert, who tracks the financial newsletter industry through his Hulbert Financial Digest, published monthly in Annandale, Va.

Mr. Hulbert wonders what exactly constitutes a financial newsletter. "Do you count investment-house newsletters?" he asks. Or do you restrict the industry to observers outside brokerage houses?

Since most financial newsletters don't carry advertising, no outside agency tracks ownership or circulation. As a result, distribution or ownership figures given out by a newsletter may be off. (Such data for newspapers are tracked by the Audit Bureau of Circulation.)

Moreover, attrition rates are high; many newsletters go out of business after a short while. Others reinvent themselves by changing names. Only about half of the the 30 or so newsletters Hulbert began tracking about 20 years ago are still around, though the overall number of newsletters has exploded. Today, Hulbert tracks 160 or more. (He subscribes to newsletters under fictitious names to see how well publications do compared to market averages.)

Scrutinize performance

"The newsletter business is a business, just like other businesses in the personal-finance area, including brokerage houses and mutual-fund companies," says Hans Stoll, director of the Financial Markets Research Center, at Vanderbilt University in Nashville, Tenn. "A financial newsletter should be judged on the same grounds that you would judge returns from a brokerage house."

Mr. Stoll recommends people find the returns garnered by a newsletter, learn how the numbers were determined, compare them to market averages, and determine who publishes the newsletter, and thus, how objective it is.

"Be skeptical," he says.

Brokerage-house newsletters, for example, are frequently suspected of touting stocks in which the firms have a stake, even though they usually carry a disclaimer against that policy.

It is no secret, for example, that "buy" recommendations well outweigh "sell" recommendations in brokerage sheets.

Whatever the case, newsletters have become big business in the past several decades. Many, such as the Prudent Speculator (see story, opposite page), Value Line Investment Survey, Dow Theory Forecasts, and No-Load Fund Investor, are highly regarded and frequently quoted in the mainstream business press.

"Some publications, such as reports from Standard & Poor's and Value Line" are especially useful because they apply statistical analysis to stocks and mutual funds, Stoll says.

Such newsletters have sometimes become "authority reports." It's often forgotten that The Value Line Investment Survey started out as a newsletter more than two decades ago. Today, Value Line is widely looked upon as an independent analytical service in its own right.

Hulbert, who has craftily created the lodestar of all newsletters with his "Hulbert Financial Digest" tracks the performance records of most well-known newsletters. In one recent review, Hulbert found that only five of 27 newsletters outperformed the Wilshire 5000 Index, the main index for the entire US stock market, for the 10-year period ending Jan 31. Over a five-year period, some five of 44 publications beat the market.

An in-and-out approach

Yet Hulbert is not down on newsletters. Far from it. Anyone who wants to learn more about the stock market and the investing process could benefit from studying a good newsletter, he says.

The challenge, he adds, is finding a good one.

One problem newsletters have, he says: Most adopt market timing as an essential strategy, based on their particular proprietary way of analyzing stocks.

Yet, studies by academic groups, as well as market-research organizations such as Ibbottson Associates, have repeatedly shown that to stay even with market averages - let alone exceed the averages - you have to stay invested almost every day of the year.

Unfortunately, many people either choose not to, or cannot afford to do that, as they watch their investments - such as those in retirement plans - spiral downward during periods of market turbulence.

Also, newsletters occasionally change their investing strategy, particularly if their existing strategy isn't panning out. Sometimes newsletters direct investors away from the market at a time when they should remain invested.

As Forbes magazine notes in its annual honor-roll rankings of newsletters (based in part on special research work by Mark Hulbert), many of its highest scoring publications - such as the No-load Fund Analyst (edited by Steven Savage) and the No-Load Fund Investor (edited by Sheldon Jacobs) - tend to avoid short- term market-timing strategies. (See box, left.)

How the advisors stack up: two views

Investment newsletters can be compared in terms of the relative performance of their model portfolios. The Hulbert Financial Digest tracks the leading publications on that basis. The following were the best-performing newsletters over the past 20 years, by return, according to Hulbert. Relative risk was not taken into account.

Newsletter Percent gain

1. The Prudent Speculator 16.3%

2. The Chartist 15.9

3. The Value Line Investment Survey 15.4

4. No-Load Fund-X 15.0

5. Dow Theory Forecasts 11.2

Source: The Hulbert Financial Digest, through 4/30/01

Using a different proprietary formula, Forbes ranks the best-performing newsletters - with their model portfolios' potential performance in both bull and bear stock markets taken into account - as follows:

1. Bob Brinker's Market Timer/ Robert Brinker

2. Dow Theory Forecasts/ Richard J. Moroney

3. No-Load Fund Analyst/Steven Savage

4. No-Load Fund Investor/Sheldon Jacobs

5. Value Line Investment Survey/ Harvey Katz

Source: Forbes Global "Newsletter Honor Roll." Returns from 1990 through 11/30/00.

(c) Copyright 2001. The Christian Science Monitor