Investment newsletters are some of the most ubiquitous financial products on the web. But do they add any real value? Does anyone actually make money using them?
For most retail and and non-professional traders, the answer is a resounding no.
How many times have you read a newsletter touting picks with grandiose headlines? “XYZ stock is primed for 300% returns!” “This undiscovered stock could be the next 10-bagger!”
Astute and seasoned investors run far away from this sort of spin. These headlines are the work of master marketers whose goal is to tap into the greed center of our brains. They want us to run out and buy these stocks based on pure emotion. Forget about planning the trade! They don’t care if you make money in the long term. They have no real skin in the game. Even if you lose, they still win.
It is IMPOSSIBLE to achieve long-term success in the markets on picks alone.
Remember, a pick is only the beginning, only an entry. You still need to know where you should exit the trade if it goes against you. What factors invalidate the original thesis? The newsletter rarely mentions this part of the process.
You also have to know where you’ll take profits. How many times have you bought a pick, only to watch it go in your favor and then make a round trip back to where it started? Or even worse below the point at which you bought it? The newsletter rarely mentions this either.
How much of the pick do you buy? Do you go all in? How does it fit into your overall portfolio? Does it reduce your net exposure to the broad market? Does it increase it? Yep, crickets once again in the newsletter corner.
There are many questions left unanswered in the typical retail newsletter. This is why long term, you cannot win on picks alone. Think about it like this, investing in the market on a pick alone is equivalent to taking off in a plane without knowing how to land. No one in their right mind would do that. Do not expose your precious capital until a solid plan is in place for how to navigate and control it. Success comes from having a comprehensive process that is applied to the market consistently. Investing requires a battle plan, one where every contingency is accounted for.
Even with the most sophisticated and rigorous analysis, we never know which trades will eventually win or lose. The markets move a lot more randomly than people think. Yes, we can make educated assumptions on market direction. And yes we can control risk. But we must realize, even so, there is no guarantee of success.
Long term prosperity comes from not becoming too focused on any one pick. What creates success is the cumulation of many picks executed using a controlled process. Overtime, with enough disciplined applied, we let the process compound our wealth.
Though despite all the reasons to not trust newsletters and picks, it’s unfair to say they offer zero value to the investment process. When approached correctly, they can actually help add real edge.
Instead of focusing on picks, use newsletters as a source of idea generation. Use them to help you understand the world and what other players are thinking. Many times you’ll find articles that contradict your own thesis on the markets. Instead of dismissing them immediately, use the opposing view to challenge your own beliefs. Dig deeper into the reasons why you believe what you believe.
Remember, ideas are only as good as your ability to plan and execute on them. Without both key elements, a newsletter pick or tip will only damage your portfolio.
Co-Founder of Macro Ops, Trader, Poker Player, Game Theorist, Volatility Specialist