It sounds almost intuitive that a person with the road map to riches wouldn’t be willing to share it with you. Yet the allure is hard to resist. Somewhere, there’s someone with a secret investment. That secret investment is just waiting to be snapped up by you. If you can just get your hands on the name of that company, you’ll be rich. Right? Not so fast.
Even though most of the newsletters tracked by the Hulbert Financial Digest perform well, most newsletter subscribers don’t do as well as the advertised success rate of the publisher. Why not? Let’s face it: if getting rich were as easy as signing up to an investment newsletter, then everyone would be wealthy.
As soon as the best-performing investment newsletter was discovered, the world would beat a path to its door. It would end up with more customers than any other entity on Wall Street. That’s not the reality of it, however. The reality is that most investors fail because of:
- Position sizing
- They invest emotionally, instead of rationally
Position sizing refers to the amount of money being invested. Your average newsletter investor is an amateur. If they were a professional, they wouldn’t need someone else’s analysis. They would do their own. So, because the person is an amateur, they end up diving head-long into the newsletter’s model portfolio without understanding why it works. They don’t have the amount of money needed to invest the way the newsletter recommends.
Often, it’s a catch 22. In order for the investor to be successful, they need to invest according to the newsletter’s recommendations and position sizing. However, to get the amount of money required for the newsletter’s model portfolio, they need to already have been successful.
Sometimes, investors don’t diversify the way the model portfolio is diversified. They hedge bets that don’t need hedging. They go for the "safe" investments, ignoring the high-risk stocks. Or, they only go after the high-risk investments out of a desperate need for ROI. In both cases
Even if investors can overcome position sizing and investing on emotions, they’re still confronted with the timing of the recommendations. Many newsletters’ recommendations tend to be triggered when there is extreme pessimism. The market starts selling off, investors are selling into a declining market (thus losing money). Some investors panic. They don’t know what to do. They’re not experienced enough to play the dollar-cost averaging card so they never become fully invested in the newsletter’s model portfolio recommendation.
Investing requires skill. There’s a reason why people like Warren Buffet have been consistently successful over many years. It’s not luck. He didn’t have someone feeding him the answers every year. Neither can you. You have to roll up your sleeves, study the companies you’re investing in, and make good judgment calls about whether the company is a good long-term investment.