How to Judge a Financial Newsletter

After 36 years of objectively comparing the performance of investment newsletters, The Hulbert Financial Digest ceased publication this year. Bottom Line Personal found Hulbert’s newsletter rankings to be so helpful over the years that we decided to ask its founder and editor, Mark Hulbert, to tell us how our readers can continue to assess the performance of newsletter advice…

My first suggestion is, once you have chosen an investment newsletter, sign up for a trial subscription, if available, and “paper-trade” the recommendations over that trial period—that is, carry out the recommended transactions on paper rather than actually investing. Pay close attention not only to whether your overall numbers match those quoted by the adviser but also such details as whether the execution prices you would be able to obtain in actual trading are close to what the newsletter reports.

If paper trading an adviser’s portfolio is too cumbersome, there are some rules of thumb that can be helpful…

Determine whether the adviser maintains a specific model portfolio. If it includes numbers of shares or portfolio percentages assigned to each holding, all the better. Other things being equal, if you have doubt about a newsletter’s trustworthiness, you should give more credence to the performance numbers from an adviser who does provide this information, since advice this precise makes it difficult to fudge the numbers.

I say this because I have found that outright lying about performance by newsletters is relatively rare. Far more common is spinning the numbers in a way that implies something that is false. It’s a good sign when a newsletter’s portfolio isn’t hypothetical but real world—and when the adviser offers to share brokerage statements with customers.

Be skeptical of performance claims that are based on the average return of a list of recommended positions. That’s because the order in which those recommendations were made makes a big difference. It’s theoretically possible that you could lose a lot of money by following stocks whose average return is quite impressive. For that reason, a newsletter should report its own performance based on the results that would have been experienced by a subscriber following its recommendations at the times that subscribers received the recommendations. 

When the newsletter makes performance claims, does it report the precise period over which the performance was produced and the assumptions used to calculate that performance? The more vague the parameters, the less weight you should give them.

Short-term performance is mostly noise. That means, when choosing a newsletter, you should pay barely any attention to recent performance and focus instead on returns produced over many years. My rule of thumb is 15 years, although there is no magical threshold for how long is enough.

If a performance claim seems too good to be true, it probably is. I’m amazed by some investors’ gullibility. Those who are incredibly shrewd elsewhere in their lives can become surprisingly naive in the face of newsletters claiming sky-high returns.