Many stock newsletter services look good when you read their marketing literature, claims on their websites, and print advertisements, especially when it comes to their performance claims. By knowing what to look for, you can keep from being disappointed. Below are six ways to evaluate your stock picking
One area to be concerned with is the period that an online stock newsletters performance claims covers. The historical results should cover years that have both bear and bull markets in them, as well as non-trending market periods, so you can examine how they profited in each type of scenario. Ideally, a stock newsletters performance outcome, whether only backtested or with real trading, should go back to at least the late 1990’s.
Do They Invest Their Own Money Into Their Newsletter’s Stock Picks?
Some online stock newsletter publishers invest in their stock picks with their own money, while others only publish paper traded model portfolios. Paper trading is the practice of using stock trade data based on a price that could have theoretically been received on a particular trading day (like a stock picks’ opening or closing price) and using that price data to represent what a stock could have been bought or sold at. Two important problems with paper-traded portfolios are that they do not at all times take slippage and commissions into account.
Review Past Trades
Stock picking newsletters are known for showing you pre-selected trade recommendations that outperformed the market in their marketing literature and on their websites – you’ve undoubtedly seen many of these ads yourself. As an experienced investor, you know to look past this blatant marketing hype, and to look at their complete trading history. Any credible online stock newsletter should offer this data to prospective subscribers. Also, be sure that they don’t only throw a bunch of individual trade data at you.
Many well-intentioned stock newsletter publishers begin as individual traders who have purchased historical stock data (fundamental and technical), and then created a trading system that works very well over this historical database. Then they go on to advertise the stock picks that their system generates via their stock investing newsletter. The issue with this is something called survivor bias, and the truly sad part about it is that the publisher of the service may not even recognize it exists in their system.
Many stock picking newsletters will give you a no-cost trial period to try out their service. Take them up on this, so you can see if their trading method fits with yours. One problem with many stock newsletters is that they call for you to give them a credit card or some other form of upfront payment before they let you have your “free” trial. Many times they say you can give it a try for a month, and then they will begin billing you after that.
Timing of Performance Claims
When it comes to evaluating stock newsletter claims, not only do you want the publisher making actual open market trades with their own money to substantiate their performance claims, you also want to identify when they made their trades relative to when you could have made your own trades on their recommendations. For example – a stock picking newsletter publisher recommends purchasing ABC stock and communicates it to their subscribers through a website, email, fax, telephone hotline, snail mail, etc.
When it comes time to sell, the publisher is also first in line to get out, just before their subscriber’s selling pushes the price of the stock down. Ideally, you want to find performance claims based on delayed entries and exits, so the publisher is in the market trading at the same time their subscribers could reasonably be trading the online stock picking services recommendations.