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Episode 2958:
Investment newsletters can provide valuable insights and strategies to outperform the market, but their success depends on aligning with your financial goals and staying informed. Understanding how they identify trends and opportunities empowers investors to make smarter, data-driven decisions.
Read along with the original article(s) here: https://www.caniretireyet.com/how-investment-newsletters-beat-the-market/
Quotes to ponder:
"Investment newsletters distill complex strategies into actionable insights."
"Success lies in understanding the principles behind the advice, not just following blindly."
"Being an informed investor means leveraging diverse resources to your advantage."
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[00:00:00] Have you ever noticed how a calm mind can really set the stage for a good night's sleep? That's the idea behind our new podcast, Good Sleep. Greg, our host from Optimal Relationships Daily, is here to help ease you into a peaceful night's rest with some positive affirmations. And these affirmations aren't just comforting. They can help ease anxiety and nurture positive thoughts, setting you up for true good sleep.
[00:00:25] So press play on Good Sleep Tonight, because a good tomorrow starts with a good night's sleep. Just search for Good Sleep in your podcast app and be sure to pick the one from Optimal Living Daily.
[00:00:40] This is Optimal Finance Daily, How Investment Newsletters Beat the Market by Darrow Kirkpatrick of CanIRetireYet.com
[00:00:50] You've probably seen the oversized envelopes in your mailbox. Get the prognosticator's latest picks. We were right about company ABC. Buy XYZ before it's too late. Lock-in returns of 400% or more. Inside you find a half dozen various size pieces of paper extolling the virtues of yet another investing newsletter, complete with testimonials, a mock-up newsletter, usually a lot of information.
[00:01:19] Usually missing any actionable information. And a pitch which includes a time-limited discounted offer with several bonuses. If you act soon. Sound familiar?
[00:01:31] If you believe that a low-cost, passive indexing strategy is the best investment philosophy for most investors, you may scratch your head wondering how these newsletter writers can make such brazen claims.
[00:01:44] You may even harbor some doubts and second-guessing, wondering if you ought to jump on the bandwagon for those promised double or triple-digit returns.
[00:01:54] The numbers and testimonials certainly look convincing. They couldn't print it if it weren't true, could they?
[00:02:01] How do they do it?
[00:02:03] As much as I endorse a low-cost, passive indexing strategy, I do believe there are some bright and or lucky individuals out there who can beat the market.
[00:02:14] For a while.
[00:02:16] In fact, over any time span you choose, 50% of money managers will outperform the market and 50% will underperform it.
[00:02:24] The trouble comes with trying to identify them in advance.
[00:02:29] It's easy enough to identify them in hindsight, just read the advertisements.
[00:02:35] The investing landscape is littered with the careers of hot money managers who turned cold.
[00:02:41] Vanguard, among many others, offers data showing that past performance is no indicator of future performance.
[00:02:48] It might even be a contra-indicator.
[00:02:50] In one study, more than 70% of U.S. equity funds that were in the first quartile, the top 25% of performance, dropped out of that quartile in the subsequent three years.
[00:03:03] So how do those investing newsletters get away with such claims?
[00:03:08] Here's one strategy.
[00:03:10] Buy 30 random stocks and record their purchase prices.
[00:03:14] Wait a while, then check the prices again.
[00:03:17] Again, the way statistics and markets work, you can be relatively certain that 15 of those stocks will have performed above average,
[00:03:24] and that three of those stocks will have performed in the top 10% of the market.
[00:03:29] So start bragging about your stock-picking prowess and outsized returns you earned on those three stocks.
[00:03:36] And don't mention the 27 others.
[00:03:39] In fact, this is so easy, let's start our own investing newsletter.
[00:03:44] We'll call it the early retirement sizzling stock selector.
[00:03:49] So where can we get a basket of 30 stocks?
[00:03:52] How about the popular Dow Jones Industrial Average?
[00:03:56] Let's say we bought a few shares of each component stock in the Dow back at the start of 2011.
[00:04:02] At the end of the year, we ran some advertising for our newsletter.
[00:04:06] Well, the top three performers in the Dow last year were McDonald's, up 31%, IBM, up 25%, and Pfizer, up 24%.
[00:04:15] Wow, incredible. We're geniuses.
[00:04:18] Man the presses.
[00:04:20] Double-digit returns from safe blue-chip stocks are possible even in a weak economy.
[00:04:25] But you must act now.
[00:04:27] So what's the catch?
[00:04:29] The catch is that we had to pick 30 stocks to get our three winners.
[00:04:34] And those 30 included big losers like Bank of America, down 58%,
[00:04:39] Alcoa, down 44%,
[00:04:42] and HP, down 39%.
[00:04:44] And nobody really knows ahead of time which of the 30 Dow stocks will be the winners or losers.
[00:04:49] The readers of our hypothetical newsletter will have to choose or guess for themselves.
[00:04:55] Or they could just buy all 30 Dow stocks, otherwise known as passive index investing.
[00:05:02] See how that works?
[00:05:03] Here's a real-life example.
[00:05:06] In one of my many attempts to accelerate the retirement process,
[00:05:10] I subscribed for several years to a certain value-oriented investment newsletter.
[00:05:15] This particular one was highly ranked by an independent third party as having achieving
[00:05:21] superior investment returns out of hundreds of other newsletters over a period of decades.
[00:05:27] How could I go wrong?
[00:05:29] Here's what I found.
[00:05:30] The newsletter covered literally hundreds of stocks,
[00:05:34] and it issued detailed instructions for buying and selling in virtually every issue.
[00:05:40] It was essentially running an actively managed mutual fund,
[00:05:44] and I would have to reproduce that on my own,
[00:05:47] at monumental time and expense,
[00:05:49] to have any hope of achieving the same returns.
[00:05:52] Further, the strategy for buying and selling,
[00:05:55] though loosely based on valuation metrics,
[00:05:59] often seemed to boil down to the manager's gut instincts,
[00:06:02] so it wasn't really something I could reproduce at a smaller scale on my own.
[00:06:07] The average individual cannot effectively manage dozens,
[00:06:11] much less hundreds of individual stock positions,
[00:06:14] without making it a full-time job.
[00:06:17] In the end, I abandoned nearly all investing newsletters and active management approaches
[00:06:22] for simple, safe, reliable, passive index investing.
[00:06:27] And as a side benefit, I now have a little less to read each month.
[00:06:31] But please don't conclude that investing newsletters have no value.
[00:06:35] In fact, I learned something about value investing from the one mentioned,
[00:06:39] and I credit another newsletter,
[00:06:42] Richard C. Young's Intelligence Report,
[00:06:45] with much of my early investing education.
[00:06:48] Dick's conservative, patient, low-cost, value-oriented philosophy
[00:06:52] is fundamental to my investing worldview.
[00:06:55] But the primary value of a good newsletter or blog
[00:06:58] is the regular reminder of investing fundamentals,
[00:07:02] not the stock picking, which will be difficult,
[00:07:05] if not impossible, to replicate on your own.
[00:07:11] You just listened to the post titled,
[00:07:14] How Investment Newsletters Beat the Market,
[00:07:17] by Darrow Kirkpatrick of CanIRetireYet.com,
[00:07:21] and I'll be right back with my commentary.
[00:07:23] I think this post hits the nail on the head
[00:07:26] as to why I prefer passive investing in low-fee index funds
[00:07:30] to stock picking.
[00:07:31] Now, I don't think there's anything particularly wrong with stock picking.
[00:07:35] In fact, I've heard of investment clubs
[00:07:37] where members pick stocks together
[00:07:39] and share the burden of studying
[00:07:41] the various companies they're considering investing in.
[00:07:44] As someone who reads and talks about money every day,
[00:07:48] it might surprise you that I'm not interested
[00:07:51] in reading earnings reports
[00:07:52] and SEC filings all day long
[00:07:55] to inform my stock picking.
[00:07:56] I just don't want to work that hard
[00:07:59] when it comes to investing.
[00:08:00] I prefer a simple strategy of set it and forget it,
[00:08:05] buy and hold.
[00:08:06] It may be possible to do very well
[00:08:09] with individual stock picking,
[00:08:11] but it would require a high interest level
[00:08:13] and time to study various company movements.
[00:08:16] I already have three jobs.
[00:08:18] I really don't need another one.
[00:08:20] If you're like me
[00:08:21] and want to learn a simple way to invest,
[00:08:24] my favorite book on the topic
[00:08:25] is called The Simple Path to Wealth by J.L. Collins.
[00:08:29] And that should do it for today.
[00:08:31] Have a happy rest of your day
[00:08:32] and I'll see you in the Thursday show tomorrow
[00:08:35] where your optimal life awaits.