How Do You Pick Good Investments Out of Newsletters?
When David Galland approached me about writing an investment newsletter, I said, “I’m not a stock picker, I try to pick them out of newsletters. Sometimes I even screw that up!”. David asked me to explain.
In the late 1990’s I self-managed our retirement fund. The market soared; between 1995-2000 the S&P went from 500 to 1500. I felt like I was missing out as my gains were not keeping up.
Below is a graph of the S&P 500. (Courtesy of macrotrends.)
I subscribed to several newsletters, many boasting of extraordinary gains. I was deluged with stock recommendations that were sure-fire winners promising to make me rich.
I liked one author’s writing style. I’m paraphrasing one of his recommendations. “If you want a nice-juicy 10% dividend yield, buy this rock-solid utility. They have been around for generations. It’s the kind of company you would want your grandmother to own.”
I knew the company, I got a bill from them every month. In our area new homes were selling as fast as they were built, their market was growing like wildfire.
What could possibly go wrong?
The dividend was more than a CD. If the stock continued to rise, I’d make even more. I bought some. I touted it to friends when we got the first dividend check – I thought I was pretty smart. Another CD matured – I bought more, enjoying those juicy dividends.
Soon after, their stock crashed as they announced severe dividend cuts. They were over-leveraged; their cash flow could no longer accommodate their dividends. They had been in financial trouble for quite some time. I lost several thousand dollars.
I went back and dug out the newsletter. I bought the stock based on a two paragraph write up.
What was my mistake?
I trusted that every investment letter does good research. I was traveling 40+ weeks a year, working 70 hours a week. Time was at a premium.
I told David I made two bad picks based on newsletter recommendations that wiped out most of my other gains. The losses moved my retirement date back a few years. They were expensive and emotionally painful lessons; we are talking about real money and people’s lives.
When I suggest readers diversify and hold no more than 5% of their portfolio in any single investment, I’m hoping they learn from my experience.
David reassured me that they had a top-notch research team and I would not be picking stocks. I should never allow our analysts to make recommendations I wasn’t comfortable with.
I’m forever grateful to Vedran Vuk and Andrey Dashkov, financial analysts who taught me what real investment research entails. They spent months studying for their professional certifications and countless hours each month researching potential recommendations for our publication. Research is time-consuming and hard work.
The voice of experience
I know my limitations. I must rely on others. I’ve experienced the damage inadequate research can do. Even the best high-quality research cannot foresee the future perfectly.
Miller On The Money doesn’t offer a model portfolio. I can’t afford the kind of professionals I’d need, or the sophisticated tools for them to work with. I can share my experiences, both good and bad, and hope readers can learn from them, but I’ll leave the stock recommendations to others.
What do I look for in an investment newsletter?
Some research publications offered incentives for me to recommend them to my readers. Before looking for investments, we need solid, reliable sources. I don’t want any reader losing money because of shoddy research. How do I find good ones?
In four years, I’ve found three investment research affiliates that I am comfortable with. Here is what I look for:
Experience – I don’t want any editor on their learner’s permit. I look at their background, experience in the real world and credentials. Have they lived through good times and experienced market downturns?
Research versus hype – At Casey Research I wanted our readers to know as much about our recommendations as we did. When we trimmed down our newsletter, I never allowed them to cut back on the analyst’s section, I cut back my portion. I learned about two paragraph write-ups the hard way.
Is the research thorough? Did you learn about the company, their market and why they stand out from their competition? If the company is out of favor (a bargain perhaps?) what has changed that will cause them to move forward?
Be a Gordon Gekko – Remember Gordon Gekko from the movie “Wall Street”? Plenty of analysts tell us stuff we already know. Look for analysts who tell us things we don’t know.
Accountability – Many newsletters have a model portfolio, but do they highlight their winners and hide their losers? Are they willing to fess up and tell their customers why something went wrong with their recommendation?
Ownership – I like it when they invest along with their readers. We used to give readers a three-day head start. They could buy and sell ahead of us.
However, I look for more. My analysts were emotionally committed to our readers and their portfolios. They took personal responsibility, checking on each company regularly. That emotional commitment will show through each month when they do a portfolio review.
Who does the analysis?– Some newsletters hire analysts who do all the work, and the editor takes credit for it. I’ve heard of cases where editors sign their name with minimal, if any, review. Might that have happened to me when I followed some bad recommendations? I want as much ownership of the product and commitment to the reader as I can find.
Cite their sources – I was surprised to learn Vedran and Andrey regularly listened in on earnings conference calls. They were routinely contacting the “investor services” departments of not only our holdings, but also our prospects. They emailed them and expected/received responses in writing.
I feel analysts that regularly cite their sources are credible.
Understandable write-ups – Our readers are regular people. How many times have we read a research recommendation and ended up saying “huh”?
I have little use for recommendations written in a language only members of the Fed would understand. If I can’t easily understand the write-up, I look elsewhere.
To change an old commercial, don’t buy because E. F Hutton recommends something, buy because you believe it’s a darn good investment. Never buy an investment you don’t fully understand!
Realistic recommendation – I appreciate when the editor recommends how much you should invest based on their model portfolio. Good ones advise caution, not betting the farm on
any single pick that will make you an instant zillionaire…
Never shirk our own responsibility
I’m uncomfortable with brokerage houses or financial analysts relying predominantly on computer programs. A “financial analysis” should be more than filling out forms, feeding the data into a computer and diversifying among (fee-based) company managed funds.
If you delegate research, delegate to someone who is doing top-quality research, not a computer programmer who is instructed to direct your money into as many of their fee-based funds as possible.
What do I do today?
I read each newsletter thoroughly with highlighter in hand. If something looks interesting, my job is to not only look at it as a potential investment, but also see how/where it fits into my portfolio.
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Then I do my own analysis:
Does it look solid? A retirement portfolio should be focused primarily on preservation of capital. Is this a solid company or fund?
Look for confirmation. I look in the model portfolio of the other affiliates. Occasionally I will find overlap. If more than one respected analyst recommends the pick, it adds to my comfort level. I’ll check with my online broker and see how they rate the candidate.
Is the income worth the risk? We need a combination of income and safety. Is the income and anticipated appreciation worth risking my capital?
Does it offer any type of inflation protection? A CD or bond provides income but zero inflation protection. A stock price may rise; particularly if the company is in a position to quickly pass through inflationary price increases to their customers.
I have stock in a fuel distributor serving residential customers. When the price of fuel goes up, they can immediately pass through their cost increases. Look for a balance in your portfolio.
Can I exit my position quickly? Our recent article “Are Investors Trapped?” discusses the potential of a real liquidity crisis in a quick market downturn.
While I have investments in mutual funds, I realize exiting my position quickly could be very difficult. Given a choice, I prefer positions that I can go online and exit immediately.
One final reminder
I thought I was too busy and didn’t need to do any research on my own. I lost money and set my retirement date back a few years. The money I lost was gone forever. Using solid resources for investment research is a tremendous tool for all investors. It’s OK to delegate, but never abdicate our responsibility. It doesn’t take that much longer to do our homework to make sure we are safe.
On The Lighter Side
Last weekend Jo and I went to Prescott hoping to catch some fall colors and go to the Farmer’s Market. Everything was still green, no fall colors. We really love the Farmer’s Market. The local ranchers do a good job and the selection is terrific.
I mentioned we bought a new Blackstone Griddle and we love it. We are cooking on it 3-4 nights a week.
We bought some home-grown beef and a nice selection of veggies that will end up on our dinner table in the next week or so.
Jo took a photo of all the veggies that will be finding their way to our dinner table in the next week or so. She slices them up, shrink-wraps and freezes them so they will last for some time.
I’ve never been much of a grill person, but I am doing a lot of cooking on the griddle and it is a lot of fun.
This week’s humor is supplied by friend Phil C.
For some reason, this next one cracked me up!
Until next time…