What you can watch for in choosing the best financial newsletters

In a nation with 42.1 million investors (the latest New York Stock Exchange count), financial newsletters have become a mini-industry. If you have cut yourself loose from a broker and are investing on your own - or even if you use a broker and want another opinion - newsletters can be appealing sources of financial information. A discount brokerage account plus a tax-deductible subscription to a good newsletter (average yearly cost: $150) can be a terrific way of saving money if you are managing your own portfolio.

But just how good are these newsletters? What should you watch for? How should you choose one?

Some newsletters are paragons of good sense, useful information, and clear writing. Others can be vague, alarmist, esoteric, or idiosyncratic. Some are worth keeping for future reference. Others are better for a quick read-and-toss. Still others are best for wrapping small fish.

You should also be aware that investment newsletters as a whole are seen as a valuable tool by many money managers - but not for the obvious reason. Many institutional strategists monitor newsletters in order to determine exactly what advice is being dispensed, then they do just the opposite.

Investor's Intelligence newsletter was able to turn this ''reverse psychology'' to its advantage. It tracks 130 other newsletters, and its bullishness or bearishness indicators are widely followed by both individual and professional investors. The latter is important to note since institutional investment activity constitutes the bulk of shares traded on the nation's stock exchanges.

''Back in 1961, when we began, we thought if the majority of investment advisers said the market was bullish, that's what it would be,'' editor Michael Burke says. ''In fact, we found the reverse was true. Most advisers tend to be trend followers.''

Mr. Burke avoids brokerage-affiliated newsletters, because, he says, ''they tend to look on the sunny side of everything - they always have something to sell.'' The best newsletters, he says, are those that emphasize stock selection more than overall market patterns. He mentions Growth Stock Outlook, The Value Line Investment Survey, and The Chartist. Of the market-oriented letters, he cites the widely followed Zweig Forecast as being ''more scientific than most of the others.''

One of the most practical approaches to newsletter monitoring is that of Mark Hulbert, publisher of the Hulbert Financial Digest. Mr. Hulbert constructs model portfolios from stock recommendations given by some 70 other newsletters. He then rates portfolios on performance (risk-adjusted performance, actually, says Mr. Hulbert, since some portfolios might earn twice as much as others but with four times the risk).

''It's amazing the number of newsletters that don't tell you where to get the money to buy a stock, or what to do with the proceeds once you sell, or the ratio of cash to equities,'' says Mr. Hulbert, who is writing a consumer's guide to newsletters.

Mr. Hulbert has found it necessary to grade other newsletters on clarity of recommendations. An ''A'' rating is a letter that already has constructed its own model portfolio; a ''D'' vaguely alludes to stocks and market trends but does not make any real recommendations.

Hulbert's top performers from June 1980 to April '84 include Green's Commodity Market Comments, Growth Stock Outlook, Market Logic, Value Line OTC Special Situations Survey, Dines Letter, and Zweig Forecast. Leading Hulbert's list for the year ending April 30 were the Dines Letter, Holt Investment Advisory, Addison Report, Peter Dag Investment Letter, Switch Fund Advisory, Dessauer's Journal, and Kinsman's Low-Risk Advisory. Holt, Addison, and Dessauer's were rated less than an ''A'' for clarity.

(For $16 postage paid, you can obtain a list of addresses from The National Directory of Investment Newsletters, Idea Publishing Corporation, 55 East Afton Avenue, Yardley, Pa. 19067.)

The investment-newsletter industry, like many others, has its bad apples and its questionable practices. Mr. Burke notes that many advisers will hedge so that if their main recommendation is wrong, they can always cite an appropriate quote that says just the opposite. There are also those who prefer vague generalities, since, as Mr. Hulbert notes, ''it is hard to pin jelly to a wall.''

More and more newsletters feature ''hot line'' services, which dispense investment updates and tips via recorded messages. The advantage, Mr. Hulbert said in a recent article in the American Association of Individual Investors Journal, is that you get the newsletter's recommendations immediately instead of waiting for it to come in the mail - by which time the recommendation may well have exhausted its envisioned potential.

A drawback to hot lines, however, is that you end up competing with thousands of other investors to do the same thing and this can mean your order is executed at a poorer price. To compensate, Hulbert suggests waiting until after the opening price of the day to execute an order and placing a limit of 1/2 to 3/4 of a point above the opening price for buying or selling.

Sometimes newsletters become spectacularly successful and able to influence the market, as the Granville Market Letter was able to do with its sell signal in 1981. One of the most influential today is the Zweig Forecast. Perhaps the most long-lived and thorough is Value Line.

Given the nature of the business, individual analysts try to earn - and then protect - their reputations for investment advice. This means that newsletters often begin life with daring, clearly articulated theories and then become mired in hedging and excusemaking.