Forbes: Evaluating Paid Investing Newsletters

Investment newsletters have been around for decades, but questions have always lingered as to their usefulness. We will examine the different types of investment newsletters, pricing structures and availability in an effort to help individuals determine whether or not newsletters can enhance their investment returns.

Types of Newsletters

Any analysis of investment newsletters must begin with an identification of what type of investing is being considered. Broadly speaking, investment newsletters might be broken up into the following categories: individual stock recommendations, market trading strategies, overall market/economic commentary and specialty newsletters (i.e. natural resources focus or real estate focus.)

Many newsletters offer individual stock recommendations based upon some valuation methodology. These newsletters often examine small-cap stocks or even penny stocks, on the theory that these are the securities most likely ignored by the larger Wall Street analysts. Although many of these newsletters tout the incredible gains they have experienced on some recommendations, it is important to examine an overall track record, taking into account performance over a long period of time as well as trading costs and tax consequences.

As with active fund managers, it is likely that the majority of newsletters are unable to outperform the broader market over the long-term; furthermore, it is exceptionally difficult to forecast ahead of time which newsletters will be the best performers. Investors might also wonder why an analyst with an exceptional ability to select undervalued stocks would choose to share that information with the general public. Investors considering newsletters that tout trading strategies should also ask themselves why the analyst is sharing this valuable information, especially when there are easier ways for an exceptional market timer to make a lot of money. Trading newsletters also suffer from a timeliness issue as recommendations may no longer be applicable when they are put into print.

The other two types of newsletters may have more value for investors. In the case of specialty newsletters, investors should beware that they are not simply buying into whatever sector is currently popular (i.e. technology stocks in the late 1990s.) However, some sectors may not be as heavily followed by large company analysts or may require a high degree of specialization. In these instances, a newsletter writer may be able to add value through their analysis. The final broad category of newsletter is those focused upon overall economic and market trends. The quality of these newsletters is dependent upon the analyst's ability, but some newsletter publishers have earned excellent reputations for contrarian thinking over long periods of time.