6 Tips For Evaluating A Stock Market Newsletters Performance

Many stock market newsletters look great when you read their marketing literature, especially when it comes to performance claims. By knowing what to look for, you can weed out the bad from the good. Here are 6 easy ways to tell if the stock market newsletter you are investigating is more about marketing hype than actual stock market performance, and how confident the publisher is in their product.

1. Review Their Past Trades

Many stock market newsletters will show you selected trade recommendations that did great in their marketing literature and on their web sites. As an informed investor, you should look past this obvious marketing hype, and look at their entire trading history. Most credible newsletters offer this data to potential subscribers. Also, make sure that they don't just throw a bunch of individual trade data at you, they should offer that level of detail, as well as at least monthly tabulations of how ALL of their stock recommendations performed together in a portfolio (the way they would have you trade their recommendations). If they have several model portfolios, then each one should have it’s performance data cataloged separately. An easy way to tell if an stock market newsletter is more about marketing hype than actual stock market performance is to see how easily you can get this data from them. They do have the data, and if it was at all compelling, it would be highlighted all over their marketing literature, not just a few trades that did well. After all, if they've spent a ton of money setting up expensive web sites, and sending out thousands of direct mail pieces, it would be pretty easy to include a table or a graph of how ALL of their recommendations have done since they started publication. If you can't get this data from them, it should set off warning bells - why won't they share it? (Probably because you wouldn’t purchase their stock market newsletter if you saw the data)

2. Find Out If They Invest Their Own Money In Their Systems

Some stock market newsletter publishers invest in their recommendations with their own money, while others merely publish paper traded hypothetical model portfolios. Paper trading is the practice of recording trade data based on a price that could have theoretically been achieved on a particular trading day (like a stocks opening or closing price), and using that to represent what a stock could have been bought or sold at. Two significant problems with paper-traded portfolios are that they do not always take slippage and commissions into account. More to the point of credibility - if an stock market newsletter publisher is not confident enough to put their own money into their recommendations, why should you be confident enough to put your money into their recommendations?

3. Performance Claim Timing

When it comes to evaluating stock market newsletter performance, not only do you want to see the publisher making real open market trades with their own money to document their performance claims, you also want to know when they made their trades relative to when you could have made your trades on their recommendations. Lets say a newsletter publisher recommends buying XYZ stock, and communicates it to their subscribers via a website, email, fax, telephone hotline, regular mail, etc. Then, after they've sent the recommendation to their subscribers, they immediately go out and buy XYZ stock in their trading account. No problem there, right? WRONG! Depending on how they communicated the message to their subscribers, they could be buying XYZ stock minutes, hours, or even days before their subscribers buy XYZ stock. So here's the scenario - they buy the stock before their subscribers, document the executed trade for their performance claims, and then their subscribers all jump into the stock and send it's price up. When it comes time to sell, the publisher also gets out first, before their subscribers selling pushes the price of the stock down. Ideally, you want to look for performance claims based on delayed entries and exits, so the publisher is trading at the same time their subscribers could realistically be trading the stock market newsletters recommendations.

4. Backtesting Results

Many well-intentioned stock market newsletter publishers start out as individual traders who have bought historical stock data (fundamental and/or technical), and then put together a trading system that works very well over this historical database. They then go on to market the stock picks that their system generates via stock market newsletters. The problem with this is something called survivor bias, and the sad part about it is that the publisher of the newsletter may not even know it exists in their system. Here's how survivor bias throws off systems that are based on historical back testing alone. Many stock market data providers sell an inexpensive disk containing a decade or more worth of historical stock data. Most of the time, the data on the disk is limited to historical data on stocks that are currently traded. This means that stocks which are no longer traded are not in the database, only stocks that are surviving today are in the database. Why are some stocks no longer traded? Some are acquired by other companies, some are taken private by shareholders, and many just go broke and go out of business. You can see how this impacts a back tested system - the results of the back testing do not take into account how the system would have dealt with companies that failed, they only take into account how they would have performed with stocks that were strong enough to survive until today. This may explain why so many stock market newsletters get launched, and may have a brief record of outperforming the overall stock market, only to roll over and significantly under perform the stock market later on. If you are thinking about following a newsletter with great back tested results, MAKE SURE their data was not affected by survivor bias.

5. Historical Results

Another area to be concerned with is the time frame that an stock market newsletters performance covers. The historical results should cover time frames that have both bull and bear markets in them, as well as non-trending market periods, so you can see how they performed in each scenario. Ideally, a newsletters performance results, whether only back tested or with real trading, should go back to at least the late 1990's. This will give you an idea of how the stock market newsletter performs in raging bull and bear markets, as well as trend less markets. Obviously, the more track record data you can review, the better.

6. Risk Free Trials

Many stock market newsletters will give you a free trial period to try out their service. Take them up on this, so you can see if their trading style fits with yours. One problem with many stock market newsletters is that they require you to give them a credit card or some other form of upfront payment, before they will let you have your free trial. Many times they say you can try it for a month, and then they will start billing you after that. This is more of a sales gimmick than a risk free trial, in that some percentage of people who sign up for the free trial and don't like the service will forget to cancel their subscriptions, and will have their credit card billed (usually the publisher will give a pro-rated refund upon request). Once again, this gets back to the publishers confidence in their product - if they are really offering a value added service, they should not need your credit card information before you get to participate in their free trial. If it is a great value, you will buy it at the end of the trial period.

As you can see, stock market newsletters, and their performance claims, need to be evaluated carefully before committing your time, subscription fee, and stock market capital, into their recommendations. Hopefully, this article has given you a few more tools to use when evaluating an stock market newsletter.

Lee Franzen is the President of Growthstock.com, Inc., which has published a web-based newsletter entitled The Growthstock Advantage Investment Newsletter since 1997. In addition to publishing this stock market newsletter, Mr. Franzen also manages a hedge fund. Comments and questions can be sent to lee@growthstock.com. We highly recommend reviewing the Growthstock Advantage Investment newsletter:

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