My Yahoo!Investment Newsletters 101
NEW YORK - Why investment newsletters? And why is Forbes helping its readers to access them?
Investment newsletters are the irregular troops, the guerrillas, of the investment world. There are always an indeterminate number hiding "out there," behind bushes, rocks and arcane investment theories. They actually come in all shapes and sizes, but typically the only ones that Wall Street hears about are run by charismatic showmen like Joe Granville of The Granville Letter. On stage at an investment seminar, Granville once dropped his tuxedo pants and pointed to stock symbols printed on his boxer shorts, culminating with a delighted cry of "And here's Hughes Tool!" Wall Street prefers subtler showmanship--oak panels and private planes. The Street's attitude to investment letters has been dogmatic and dismissive.
And the financial media, interestingly, has tended to follow Wall Street's lead. For years, the Wall Street Journal would not accept any advertisements from investment newsletters, presumably because it thought they were frauds. Similarly, Burton Malkiel has roundly dismissed investment newsletters in all seven editions of his book, A Random Walk Down Wall Street.
This dismissiveness is a big mistake. To be sure, there are investment newsletters and tout sheets whose sole purpose is to promote certain stocks like PR firms. However the same criticism can be made of Wall Street firms like Merrill Lynch (nyse: MER - news - people ) and Morgan Stanley (nyse: MWD - news - people ). Some investment letters have research departments as big and earnestly number-crunching as many small brokerage boutiques, such as Charles Allmon's Growth Stock Outlook or the Dow Theory Forecasts. For another thing, it is simply an unpalatable truth in life that, just as paranoids can have enemies, so also can snake-oil salesmen have snakes once in a while. Or oil.
What made dismissing the investment newsletter business untenable was the advent of Mark Hulbert and his Hulbert Financial Digest (HFD) monitoring service in 1980. Hulbert's service provided the first-ever objective monitoring of investment newsletter performance--previously a cloud of confusion, conjecture and con tricks.
But it wasn't just Wall Streeters and financial journalists who dismissed investment newsletters. The established orthodoxy among academics who study the stock market was "the "efficient market hypothesis" or EMH--the view that the market reflects new information so fast that neither investment newsletters nor Wall Streeters are able to outguess it in the long run. This implies that the most logical course is to fire your investment adviser, buy a diversified portfolio and hold it through thick and thin.
Mark Hulbert's work has inclined him to different conclusions. These can be expressed in two simple laws:
Hulbert's First Law:
It is E-X-T-R-E-M-E-L-Y hard to beat the market over time. (Corollary: If anyone says he consistently makes spectacular profits, don't believe him.)
Hulbert's Second Law:
It may be hard. But it can be done. (Corollary: We know who does it.)
This is in line with more recent work in academe, which focuses on the so-called "anomalies" in the efficient market--peculiar areas where the market does not seem to discount information immediately, and can be exploited to achieve superior returns.
In fact, one of the first of these anomalies to be documented was the superior performance of an investment newsletter, Value Line Investment Survey, and its rating system's top-ranked Group One stocks. It was written up as early as 1971 by a leading EMH theorist, the late Fischer Black, then of Massachusetts Institute of Technology. "I continue to be amazed," he said when I asked him about it in 1985, by which time he had joined Goldman Sachs (nyse: GS - news - people ).
Today, Value Line is one of the handful of newsletters that have beaten the market (including reinvested dividends) over the entire 21 years that Hulbert has been active. (The others, as of 9/30/01: Al Frank's The Prudent Speculator and Dan Sullivan's The Chartist and Burton Berry's No-Load Fund-X.)
Compared to the investment newsletters, Wall Street is at a disadvantage in finding these anomalies. There is the conflict of interest: The stockbroker is concerned about commissions, the client about capital gains. Investment letters are prepared to give sell signals; the investment banks shrink from them because it upsets their underwriting clients. And there is the inevitable bureaucracy of large organizations: it makes innovation very difficult. By contrast, investment newsletters can (and do) try anything they feel like immediately. They present every conceivable investment technique and style.
This is why we say that investment newsletters are the guerrilla troops of the financial world--Wall Street irregulars. Mark Hulbert tracks their footsteps across the investment minefield. By following them--and halting if they terminate in a smoking crater--you can see what techniques work as well as which would be right for you (two very different things). No more important work is being done anywhere in the investment industry today.
And if it seems surprising that this discovery was made by an ex-philosophy student with his personal computer, remember that two farm boys from Ohio invented the airplane.
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