If you are reading this and you are an active investor, you most likely subscribe to at least one fraudulent investment newsletter service. As a long time insider of the industry, I am going to reveal some of its most hidden secrets. Re-energized by the internet, giving investment advice online has taken a sharply negative turn. Quality is rare, and the investment scams are everywhere you look.
I will focus directly on investment newsletters and advisory services. Hopefully in the future I can mention fraudulent forex, derivatives, and binary services, which have really put a strain on the financial industry. Today, marketing is the name of the game. The landing page or the description page of the service receives more attention than the quality or model it actually sells. Some common luring techniques to get your credit card number? Fancy pictures, specific investment return examples and the all too common “Money back guarantee”.
Unstructured Vs Structured Newsletters
There are really only two types of investment newsletters or advisory services – structured and unstructured. An unstructured service is nearly impossible to verify, as it generally does not advise specific actions. For example, a macro economic outlook of the U.S Dollar might be very well written, but unless it says exactly when and what to buy or sell, the newsletter’s performance is nearly impossible to measure or audit over time. When signing up for such a service the source is everything, and some organizations such as Bloomberg or Interactive brokers can provide you with some quality material. However, the price usually reflects the quality of the service. In the end of this article I will reveal some great services which are affordable to anyone.
Now that we are talking about price, I can also mention free services, such as the common penny stock newsletters. In a very short and to the point explanation, if you pay nothing the service is bad. Finding alpha (another name for a profitable trading strategy) is extremely difficult, and giving this information out for free is simply nonexistent. If you hear of a great free service then rest assured that one of two statements is false; either the service is not really free, or the service is not really great. Penny stock newsletters are usually paid by a third party to promote a junk stock.
This brings us to structured investment advice, or a service which specifically states when to buy or sell. These are fairly easy to measure, which means you should always expect several years of performance. Most landing pages of newsletters contain advertisements of SPECIFIC trades as well as expanding paragraphs how amazing these recommendations were. This however means little in an advisory service that shoots out one recommendation each week. Its simple logic that one of those recommendations will hit big, but the real question is what were the losses leading up to that one great recommendation?
Not how much they earn, but how little they lose!
Greed and inexperience is what keeps the financial newsletter industry alive. When investing in a financial service such as an exchange traded fund (ETF), the return is crucial. However, an experienced investor will never let himself be blinded by return alone. Other factors to consider are the Alpha, the Sharpe ratio, the duration, the stock selection process and the risk tolerance, or performance in specific years. These factors are just as important to any veteran investor as the returns generated. So why are investment newsletters not treated with the same level of scrutiny? As mentioned before, greed and inexperience.
Now as you might expect, these investment services will most likely lose money on a consistent basis. The mere fact that the full historical performance is not readily available is without a doubt the clearest indication that the service is bad. Any good advisory service with a long term alpha generating strategy should be more than happy to reveal it and use it as a motivational tool to bring new subscribers in.
I would like to mention one service that for a long time was one of the few that did it right (and perhaps still is). Based on hedge fund fillings published by the SEC, insidermonkey.com developed a monthly small cap investment newsletter – and until the bear market hit them they had a good looking model (the strategy was flawed to begin with – but that’s a story for another article). What is most important to point out though is that they revealed all their historical picks and equity based on their strategy. Today their performance has rock bottomed, but to their credit they reveal that as well.
Looking at their performance I would not invest $10 in that advice (let alone their current $449/year fee), but I know that a reliable honest team stands behind this model. Their problem? The strategy is simply bad! It was likely designed by average financial quants or analysts based on bull market data from 2009-2012, and as a result was only reliable as long as the bull markets continued.
Designing a model requires extremely qualified financial modelers who can both back test and design a proper strategy and also model what will happen when say 100 or 10000 people invest according to that model. Similarly, what happens to a long only model in bear markets? Or the inverse? For example, while a small cap day trading strategy will be able to point out high alpha stocks, it might not work for more than one investor. Did the designer of that strategy take trading volume into account? How can he honestly expect 100 people to invest in the recommended stock at market open when its average volume between 9:30 and 10:30 is a mere 50 shares?
Here are some simple guidelines to help you navigate through and become a better data/information driven investor!
Every service you ever invested your hard earned money behind must show you its full performance history. An equity graph is the most reliable form of history. Understand how the equity is measured and decide if it is a suitable considering all restraints.
Volume Volume Volume
I cannot repeat this enough. Does the strategy limit its selection universe to stocks with a high trading volume? If not, then the strategy is likely un-executable in real market conditions, unless of course you are the only one receiving this information.
The Strategy Itself
This can get tricky and borderline dangerous. An investment newsletter might be very good and picking biotech stocks to short. But, if it recommends stocks that cost 50 cents and have a low market cap you can find yourself losing over 1000% of your initial investment in hours due to the volatile nature of these stocks. Here the model is good, scalable, and profitable. However the risk is too high, making it an unviable investment strategy.
Support is Key
Most services offer great support before you purchase, but none after. Want to cancel? Good luck. Make sure to write them an email asking for something they don’t expect and see how they handle such a request (for example “can you give me the daily standard deviation of your strategy in 2015”). This should give you some indication of the kind of support level you can expect once you sign up. A lot of the time the support reps on the other side don’t even know what std. deviation is, let alone can get you that data. A good support team will be able to answer any question regarding the service or strategy.
Data vs Big Names
Ask yourself who stands behind the service, and more importantly what data is the model based on? A good organization like Bloomberg or TipRanks will never market bad information. A lot of the time, the source of the data can play a much larger role in the value of the newsletter than the author or publisher behind the newsletter. I would rather invest in a social media sentiment based investment newsletter (good unique data via data-mining) by an unknown small firm rather than a technical analysis based newsletter by a supposed Wall Street guru (non-unique data accessible to everyone).
TipRanks Powered Investment Strategies
I have worked as a financial quantitative analyst at TipRanks for a while. Most the time our researched high alpha models generated through our unique data just don’t fit private investors, either because they can be bought by an institutional investor or they are too complex for private investors. With all of TipRanks’ data gathered by what are likely the most powerful algorithms in the web right now, we set out to develop a truly intuitive set of services. Before finishing, I want to mention just a few newsletters that stand out as my favorites and really give a good name to the industry.
The Daily Insider
The Daily Insider is the day trader’s heaven. We discovered a huge alpha between the day after an insider transaction and the market’s reaction to it. After back testing millions of insider transactions we were sure of this model’s performance. Going live the model outperformed our highest expectations. Our four long picks managed to return profits even in bear markets. To prevent this strategy from losing its profitability due to too many subscribers, this strategy will soon only be available via a waiting list.
You can find out more about the DailyInsider here.
This newsletter was a real challenge. We had to develop a strategy that finds mid+ cap stocks with a high volume and still outperforms the market. Because these stocks are so volatile, we found that market sentiment, most specifically blogger, analyst ,and news sentiment tent to be the biggest biotech movers. The strategy assumes a 100% long allocation between to stocks and a 50% short selling allocation to a biotech stock on the brink of plummeting. These recommendations come on a weekly basis and should be a part of any biotech portfolio, as they have proven time and again to be spot on.
You can find out more about the BioPortfolio here.
When developing the engine to generate BioPortfolio, we realized how much power bloggers and analysts have to move stocks down. This newsletter generates its short pick in a similar algorithm to the BioPortfolio, but of course is not limited to the Biotech universe. Based on the same underlying logic very large hedge funds short the same stocks recommended in the big short. The name was changed as inspired by the film depicting the financial crisis and those who predicted the real estate crash. The market right now is truly ripe for profiting from short selling.
You can find out more about the TheBigShort here.
This newsletter is by far the least popular (yes, brutal honesty), but actually it should be the most. Based on the SEC fillings of hedge funds each quarter, this newsletter constructs an All Star portfolio of the 10 most popular stocks amongst leading hedge funds. Through a tiny subscription fee, members can invest according to these leading institutions without paying any management fees. Unsurprisingly this model has been used by many investors for years, and has usually significantly outperformed the index. If you infuse your portfolio with the 10 most popular stocks amongst hedge funds, rest assured you are in good hands.
You can find out more about the GuruPortfolio here.
While I can’t reveal too many details, behind this service stands a genius who works at a big name high tech company. His model featured on AlphaAssetAllocation uses sector rotation to consistently outperform the index by investing in the best sector ETFs at any given time. We convinced him to share his information, and after a thorough TipRanks performance audit we added it to our growing list of services. Note the data analyzed here is done by a 3rd party, and is only audited by TipRanks.
You can find out more about the GoSector here.