The value of newsletters recommendations according to Hulbert

In an article on 3 03 2010 or as a PDF doc.1576  on his blog dealing with active management, Hulbert makes the following comment:

 How hard is it to beat the market? My three decades of tracking investment advisers has shown that, over long periods of time, about one out of five advisers are able to do better than simply buying and holding an index fund. While that means it isn't impossible to outperform the market over the long term, the odds are stacked against us. (emphasis added)

This is a highly significant observation. Here is an expert who over his long his career has followed investment newsletters, and who estimates at 20% your chances of beating the market by following the recommendations of newsletters.

 And that's not all. Maybe you are thinking that even if these newsletters missed the boat in their specific recommendations, but least they probably help their readers in anticipating major market directional changes. But unfortunately this is not the case:

It's one thing to say now, with the benefit of hindsight, that the stock market in March 2000 was wildly inflated and ready to plunge. It's quite another to have predicted it at the time. The same goes for the end of the bear market one year ago. I designed my pop quiz to illustrate just how much Monday-morning quarterbacking is going on. It turns out that none of the markets timers I monitor were able to call the last decade's market's major turning points. Source Hulbert or as a PDF doc.1577 10 03 2010 

For other lessons from Hulbert, read a 1999  text by Mark Buck doc.1578:

 Hulbert gave his audience a very valuable message, which we might sum up something like this:

Keep your expectations realistic. Don't expect miracles.Recognize that if you’re trying to beat the averages, the odds are heavily stacked against you.When you’re looking for investment guidance, trust neither your own emotions nor the claims of newsletter publishers promising very high returns.Remember that the world’s best investor can produce 23 percent annual gains, Hulbert said. If you can achieve 20 percent over your lifetime, you will be wealthier than you have any right to expect, he added.

In summary, the probability of success by relying on investment newsletters is probably somewhere between 0% (identifying major market directional changes) and 20% (beating the market long term through individual stock picking). Our conclusion: newsletters have little financial value for the typical individual investor. This does not surprise us since a review of recommendations available for free to the public by financial journalists and other market commentators  (see our previous commentary Market Timing- not so easy ) reached the same conclusion (the conclusions of CXOAdvisory, on which our prior commentary relied, have not changed their views; see CXO Advisory or as a PDF doc.1579 and CXO Advisory2 or as a PDF doc.1580). But at least in the latter case, it is free information, unlike newsletters that one must subscribe to.

Investor sentiment

 It is not surprising, given the limited value of newsletter recommendations, that others would try to use the recommendations of newsletters as a contrarian indicator: buy (sell) when the recommendations are negative (optimistic). There are in fact two companies who calculate such data for investors.

• The Advisors' Sentiment Repo rt 
• The Hulbert Stock Newsletter Sentiment Index  (see also a recent commentary by Mark Hulbert or as a PDF doc.1581 and the site HubPages or as a PDF doc.1582 ).

In summary, simple statistics indicate that the Hulbert Stock Newsletter Sentiment Index has little or no predictive power for stock returns over the short and intermediate terms. There may be regimes of low HSNSI values that weakly indicate elevated short-term stock returns.

Conclusion

Investment styles or techniques which seek or promise to beat the market can sometimes lead you to unusual places. Investment newsletters are one such area. They are not regulated, they promote an active approach to investing that gives little weight to modern theories of efficient markets, and statistics indicate that their recommendations have little financial value. If you have reached the point you where you are considering relying on investment newsletters recommendations for your financial decisions, maybe it is time to reassess your own investment philosophy.