Evaluate Stock- and Mutual Fund–Picking Newsletters and Websites

By Matt Krantz from Investing Online For Dummies, 8th Edition

You can find dozens of stock- and mutual fund–picking newsletters, websites, books, and seminars. They all make great pitches for why you need to pay to subscribe to their wonderful services.

By and large, many of the pitches you see for stock-picking newsletters and websites aren’t worth much, and you should be very skeptical before paying money for “systems” and “programs” that claim to be able to beat the market.

Before you sign up for a stock-picking service . . .

Before you pay a dime for any stock-picking newsletter or website, take the time to educate yourself about the specific service you’re considering.

Your first stop should be a column written by Mark Hulbert. Click on Hulbert’s name in a list of columnists. Hulbert is a well-known tracker of newsletter performance. Hulbert uses advanced performance-tracking methods to measure not only how well stock-picking newsletters perform, but also how much risk they’ve taken to get those returns.

After all, a 30 percent annual return isn’t that impressive if your portfolio swings up and down 80 percent a year.

Hulbert writes a number of financial columns at MarketWatch that are worth reading because he tells you about trends among stock pickers. If you want to look up how a specific newsletter scores in Hulbert’s ratings, you need to sign up for his Hulbert Financial Digest, which ranks more than 180 newsletters.

You can sign up by clicking the promotional link on his online column. The service costs $59 a year, but you can get a free 30-day pass.

If a newsletter or online stock-picking service you’re considering isn’t tracked by Hulbert, you should be skeptical. It might mean the service doesn’t want its performance to be tracked — perhaps for shady reasons.

Hulbert’s data shows how few newsletters actually beat the market on a risk-adjusted basis. For instance, during the 25-year period ending in July 2012, only 10 of the 32 newsletters tracked by Hulbert during that time period beat the market. And you can be sure that the other 22 still collected the subscription fees.

Use newsletters to your advantage

You might be wondering how the heck stock-picking newsletters could be at all helpful when they are often so wrong. Again, the contrarian approach might make sense, and it’s a strategy used by many professional money managers.

The simplest way to see what newsletters are saying about stocks and doing the opposite is by determining how many newsletter writers are bullish and how many are bearish. When newsletter writers are nervous about the market and selling stocks, that’s a signal to contrarian investors that now is a good time to buy stocks.

And when newsletter writers are bullish and buying stocks, these contrarian investors start to take money off the table by selling stocks.

Schaeffer’s Investment Research provides some of the information you need to be a contrarian. Click the Quotes & Tools tab, and then scroll down until you see the Investor’s Intelligence link under the Market Tools heading. Doing so brings up the Investor’s Intelligence’s newsletter indicator in both tabular and chart form, which tells you what percentage of newsletters are bullish and what percentage are bearish.