Stock-pickers: True humanitarians or nothing special?
A: Imagine having some sort of magical power that allowed you to accurately predict the moves of stocks and the stock market. What would you do with that power?
With that kind of crystal-ball power you could be wealthy beyond comprehension. With just a few trades, you would quickly be one of the richest, most powerful and successful people in the world. You could buy any car, boat, plane, house that tickled your fancy.
But instead of capitalizing on your gift, would you publish a newsletter that told the world what you knew? Just out of the kindness of your heart, would you exchange the ability to amass a fortune rivaling the Gateses' or Rockefellers' to share your knowledge? Yes, you could charge a subscription fee for the newsletter, but it would hardly earn you the amount of money you could make by predicting the market's moves. And that's not to mention the problem that by spreading your insights to the public, your edge would be eroded as traders take advantage of your information. For instance, if everyone knew Google would jump from $85 to $400 in less than two years, the price of Google would immediately get pushed to $400 by investors.
Think about it another way. If your neighbor found an oil well in his backyard, would he invite the neighbors over to start pumping and taking his crude. Not likely.
But that's kind of the paradox when it comes to stock-picking newsletters. The writers of newsletters often go a great job building a case for their tremendous stock-picking prowess. And it's certainly true they will have good calls from time to time out of sheer luck or fortune. Before you plunk down your cash following a stock-picker's advice, you need to ask yourself: "If this person can really predict the future moves of stocks, why is he telling me?"
Luckily there's a service that keeps the stock-picker newsletters honest by tracking their performance. The Hulbert Financial Digest, a service of MarketWatch (a partner of USA TODAY), does a great job tracking the advice dispensed by various newsletters. You can subscribe to print or online editions of Hulbert Financial Digest.
Hulbert's data show just how difficult it is for the publishers of newsletters to beat the market. Hulbert provided a list of the best performers over the past 25 years, though March 31. The results are fascinating. Of the top five best newsletters over the past five years, only two topped the stock market measured by the Dow Jones Wilshire 5000 index once risk was factored in. Keep in mind that these are the best newsletters.
I'm not saying there aren't any good newsletters. In fact, the performance of newsletters looks much better if you only look at them based on five, 10 or 15 years.
But again I ask you, do you really think someone who knows what the stock market will do will share it with you? If so, I have a newsletter I'd like to sell you.
Source: USA Today
