This week I will relate a real life story from a subscriber to an Australian newsletter. This story highlights what is probably the biggest problem with newsletter story writers. This problem was identified in one of the comments, by Ralph, to last week’s blog.
In David Letterman style, to a drum roll, the NUMBER ONE BIGGEST PROBLEM with the great majority of newsletters, especially those that write wonderful emotive story copy, is: THEY VERY SELDOM PROVIDE SUBSCRIBERS WITH A SELL SIGNAL.
For a portfolio of capital to make profits in the market on a consistent and sustainable basis a number of ingredients are required: viz., entry, exit, risk management and position sizing, all of which have been covered in some detail in my blogs over the years. Here’s the kicker: as important as it is, the least important of all the ingredients for ongoing successful active investment is the entry.
And which do emotive copy writers spend the most effort on? You got it, the entry. And most give hardly any or no coverage of position size relative to overall investment capital, managing risk or when to exit.
This is especially so with stock market emotive story writers. They prey on one’s emotions and lack of knowledge through emotive writing, appealing to the reader’s fear of missing out.
You see, it is a total unknown when the brilliant moving story that they have written about a stock, commodity, geographical area or sector will unfold, IF EVER. So when is it time to exit? When all the story has unfolded or just parts of it and, if so, which parts? As long as the story hasn’t yet unfolded it is implied that the subscriber should hold until the story does unfold. It may never unfold! And here’s the really important fact: THINGS CHANGE!
One newsletter subscriber told us his story. I have heard many over the years but this one sticks in my mind as it was quite recent and his loss was large. Like many before him and I’m sure many after, he was sold hook, line and sinker into a stock by emotive story writing. As a result, he rode the stock price up from around 30 cents to $1.80, adding to his position along the way.
In the absence of any money management strategy provided by the newsletter, his emotions, in reaction to the emotive writing, determined how much capital he should place in this single position.
He was in a risk-less state of mind created by such a well written story about this particular stock, he could not imagine the possibility of downside. He was emotionally attached to the subjective story about the stock rather than being objective about his share holding.
In the absence of any sell signal and still emotionally attached to the story, he held and held… and rode it all the way down… and down… and down, waiting for the story about the stock to eventuate. It never did. Or it did and it just wasn’t anywhere near what the story writers had written. Or ….. THINGS CHANGED.
The stock now trades around the 4 to 5 cent level.
This investor lost $150,000!!
Exit criteria are absolutely necessary. If for no reason other than the number of variables that affect any one stock at any given time are far more than any investor can follow and comprehend all the time, be that an individual or otherwise. Certainly more than are contained in a well written emotive newsletter story!!
If you want stories, read a fiction novel. If you want to grow your portfolio capital, become objective and consistent by preparing and executing a well-researched, structured and rigorous process.
Gary – Great post. I too have a bad story about a newsletter writer. In this case thought I did it all right, but in hindsight was foolish, but the writer also badly let me down… Sorry about the length here but it may add weight to your points…
Basically I subscribed to a US newsletter where they issued buy and sell signals on US ETFs (yes, they issued sell signals). I trialled it with only part of my stock account for 6 months and did not follow all signals – which you need to – but made around 12% and was quite happy.
I was then in the midst of moving back from the US, and recognising I would not be in front of a computer for lengthy periods I set it up to autotrade the signals (you could do it thru my US broker).
Long story short I put all my stock account and much of my IRA into it and in the space of 4-6 weeks made a loss of 25% before I found out and pulled it all out.
It turned out that the newsletter writer stopped following his system and ran by the seat of his pants. He was in divorce proceedings with his wife and it all got too difficult for him and he had a heap of whipsaw trades. I pulled my money out and made a heap of noise with the broker such that they cut the autotrading of this guys systems. I lost around $15 000 – nasty but it could have been worse.
Moral of the story is that you need to be incredibly careful putting your money with newsletter writers. This guy basically did not do what he said he would – how would you know if another one will…Never put it on autotrade without very close supervision, in fact I would never do it, period.
One other point which I believe Gary has made which bears repeating is that with newsletter writers who advocate buying individual stocks they may have more winners than losers. But you could end up picking all the losers. I remember another newsletter writing actually saying how angry one of his subscribers was because she had bought all 5 of his losers and none of his 15 winners that past year.
A final point, be very wary of guys who claim proof of past success but won’t provide documentation. And if they do provide it sometimes it is falsified or theoretically traded. Particularly with options you can get very different pricing when you actually trade vs what may be displayed by the newsletter writer. eg. He/she claims they bought in at the open price of $1.50 but the bid ask actually was $1.35 – $1.65 and when you do it, well, you get $1.64 as your buy… or worse…
I would back Garys claims about the dangers of newsletters. There are some who are good no doubt, but I think its an enormous risk, and have the scars to prove it… Be very careful…
Port Phillip Publishing do a good job, they do give buy & sell signals. The stocks they tipped 2 years ago are now 6 baggers.
I do remember Garry that your portfolio did give a sell on BKN at 90 or so cents just before it went to $6.00, and there was no buy back into that stock by your portfolio.
Response to Comment by John:
Your reply gives me the opportunity to attempt to briefly explain the difference between a stock tipping mentality compared to a portfolio mentality to investing.
Active investors that are successful on an ongoing and consistent basis don’t need to make their profits in a particular stock or a handful of stocks to which they are attached.
To them it is irrelevant how well a particular trade did or didn’t do, just how well their overall portfolio is performing, as measured by their portfolio equity curve.
BKN definitely gave further entry and exit signals, using a medium term horizon, as it continued to rise in all it’s run-ups. It’s just that the particular portfolio to which you refer wouldn’t have take those signals BECAUSE THE PORTFOLIO WAS ALREADY INVESTED IN OTHER STOCKS THAT WERE ALSO RISING, possibly by more than BKN was at the time.
A portfolio mindset thinks like this, remaining unattached to particular stocks, following its processes. Whereas an ego led stock picking mindset is always looking for the big kills. Unfortunately the big kills happen in both directions.
BTW, BKN has never traded at 90 cents, certainly not after a run-up anyway. It got down to 94.5c as an all time low. Different stock?
I have always thought of newsletters like gym memberships. Although gyms do retain a number of regular die-hards for the long term, their reliance on turnover is critical. They know they can always count on human nature!!
I wonder how many eager new-starts would reconsider signing up for a long term membership if they knew what the stats were for those that drop out? Even better, if the results achieved when dropping out were known.
All too often, a gym membership is signed up with unrealistic expectations of reaching a certain goal within a short timeframe. Reality soon kicks in and causes disappointment and eventual cancellation. I believe that newsletters are no different!