Five things to avoid in investing newsletters.
As owners of an investment research/newsletter service, we of course have to be aware of competitors. Unfortunately, the landscape is filled with ‘get rich quick’ advisories, or ‘ trading systems’ that promise ways to ‘ beat the market’ or ‘ trade like a pro’. Most of these just make us shake our head — sorry, folks, there is no easy solution to the market. In fact, if there was, letting others in on it would only dilute its potential, because more investors would then be doing the same thing, and returns would diminish.
So, while we know there are far too many promotional advisories out there, we were particularly dismayed last week, reading in the Wall Street Journal about Wealthpire in the U.S., which agreed to pay $1.5 million to settle allegations that it had defrauded subscribers. We thought we would highlight some things to watch out for when considering such services, and how investors can be “fooled.” 1. Greed Of course, the biggest factor in most self- inflicted investor problems is greed. Investment newsletters tout 1,000 per cent returns, or, in this specific case, 1,483 per cent returns to subscribers. Investors see the high returns, get greedy, and downplay the risks. Are such returns possible in the market? Sure they are. But they typically involve betting a lot on an expiring security such as options, or leveraging up on extremely risky penny stocks. You will only hear about the success stories. You won’t read about the investors who lost all of their money. 2. Precision numbers Psychologists have proven that, if a number has high precision, and repeated often, it is more believable. In other words, if a newsletter stock service was to hype to you that it could get you 87.26 per cent returns, and repeated this mantra often in its advertising, you might believe it more than if the service claimed it could get you 100 per cent returns. The precise number, with two decimals, seems more believable, somehow. Smart investors, of course, know that no one can predict re- turns with any accuracy, though, and simply ignore this type of hype. 3. Fear of missing out Many newsletters will offer “limited time” deals, and restrict deals to “the next 500 customers.” Creating a sense of urgency means investors may do less due diligence on what they are about to buy, for fear of “missing out” on a great deal. This is a classic move by advertisers and marketers, and something to be cautious on. In our view, nothing in the investment world needs to be rushed. Nothing at all. If you have a 10- year time horizon in your investments, and you should, you can take the time to slowly review all the options in front of you. Anyone, be it a newsletter or broker, that tries to rush you, should be ignored. 4. Confusing terminology Newsletters, and investment advisers alike, like to throw out lots of confusing terms to investors, which makes readers and investors believe they should leave their money in the hands of the “experts” who understand such things better. Lots of services like to throw out Warren Buffett’s name, because investors know him so well. By making an association with a well- known i nvestor, an i nvestment service’s perceived credibility goes up. One Canadian newsletter even states that Mr. Buffett would be the richest man in the world (not third) if he had followed that newsletter’s advice! 5. ‘ Trade like a pro’ myth Many services will promise to show you how to trade like an expert, reaping huge monetary rewards in the process. Of course, anyone who has followed my columns in the past ten years knows that trading — due to bid/ask spreads, commissions, and taxes — is not the best way to investment riches. Plus, with the majority of fund managers not even able to beat the market, maybe ‘ trading like a pro’ shouldn’t even be one of your investment goals.
Like in any i ndustry, there are some good investment newsletter services and some bad ones. Just keep your eyes open: many investors need advice, but too many forget the basics. Nothing comes easy: those claiming it does really don’t want to help you — they just want your money.