Personal Business: Investing
HITCHING YOUR PORTFOLIO TO A NEWSLETTER
John Klosterman has a thing about stockbrokers: He doesn't think they safeguard the interests of small investors. So when the 61-year-old computer consultant wants financial advice, he turns to Dick Davis Digest, an investment newsletter. It was after studying Davis's recommendations last year that Klosterman scooped up shares in Federal National Mortgage Assn. and later a Fidelity bond fund. The result? His FNMA stock has more than doubled, while the Fidelity fund has risen nearly 20%. "I can't recall having ever done that well with a broker," muses Klosterman.
Score one for the newsletters. For decades, many Wall Street professionals have viewed newsletter writers as little more than charlatans and cult heroes lacking the proper pedigrees to dispense financial advice. Indeed, the vast majority of advisory letters--like most mutual funds--have consistently failed to beat the market.
EARLY SIGNALS. But for every defrocked pundit such as Joseph Granville, whose uncanny predictions were followed by disastrous calls and ignominy, there's a host of newsletters with admirable long-term records. And for investors who have become disenchanted with brokers and want to make their own investments, financial newsletters can provide valuable market insight, along with other sources of information.
For instance, if you had taken your signals since 1980 from the Chartist, a twice-monthly publication put out by Dan Sullivan, your port-folio would be up 665% vs.the 536% return for the Dow Jones industrial average.Sullivan achieved his gains by studying not the fundamentals of companies but technical indicators that analyze price and volume trends of stocks. Sullivan selects stocks that have high "relative strength"--those rising fast-er than the market. He then adjusts his exposure to the market according to whether his portfolio of stocks istrading above or below its 200-day moving average.
Good newsletters are not cheap--and some bad ones can be pretty expensive, too. A subscription to the best monthly letters, which run a dozen pages or so, can easily top $200 a year. In part, thatis because none of the letters accepts ads.
With more than 800 publications on the market--including titles devoted exclusively to California bonds and water stocks--there's now a letter catering to almost every whim. Want to canvass the whole field? You can do so through Select Information Exchange (212 247-7123), a New York-based clearinghouse for hundreds of newsletters eager to provide samples to prospective subscribers. Twelve bucks gets you 20 sample letters of your choice and $69 gets you more than 200.
Two publications--newsletters about newsletters--can help you cut through the clutter: the monthly Investor's Digest ($29 a year, 800 327-6720) and the biweekly Dick Davis Digest ($120, 305 771-7111). Both serve as Reader's Digests of the industry, providing capsulized summaries of stock picks and market musings gleaned from dozens of the more prominent advisory services. Each excerpt also contains the address and phone numbers for each adviser, almost all of which will gladly mail you a free sample or low-cost trial upon request. If possible, request an old issue to see what the adviser was recommending six months or even a year earlier.
Be wary of advisers reporting outlandish returns from recent years. Letter editors are exempt from Securities & Exchange Commission registration, unless they also manage investments. "The old adage that if it sounds too good, it probably is, applies to the newsletter business," says Steven Halpern, editor of the Davis Digest. "There's almost an inverse relationship between the hype and quality of a service."
GYRATIONS. Fortunately, there is an arbiter of these claims: The Hulbert Financial Digest (703 683-5905), a monitoring service that analyzes returns for the model portfolios of nearly 130 newsletters. A five-issue trial to Hulbert's monthly letter, just $37.50, gives you a peek at its rankings for the past three, five, and eight years. Hulbert also measures how much risk each adviser takes to achieve returns. That can help you decide whether you can stomach the gyrations a letter's recommended stocks might take.
One of the best long-term performers has been the Value Line Investment Survey ($525, 800 634-3583), which provides commentary on economic and financial trends and employs its vaunted system for rating stocks. In the 12 years since Hulbert began rating letters, Value Line's picks have gained 621%, vs. 536% for the Dow. But much of those gains came during the early 1980s, and in the first six months of this year, the service was down 8%, vs. the Dow's 6% gain. That has prompted some to question whether Value Line's system has become outdated. Ironically, in the past three years Value Line has been upstaged by Value Line's OTC Special Situations Service, whose 97% gain was nearly double that of its parent.
Conservative investors would also cotton to Geraldine Weiss's Investment Quality Trends, which uses a system of buying blue-chip stocks when their yields (a company's dividend as a percentage of its stock price) are at or near historical highs and then selling when they approach historical lows. Recently, Weiss has become bearish about most stocks and is recommending electric utilities with low debt and dividend payouts that top 5%. Weiss started her letter with a friend 26 years ago after her economics degree failed to land her more than a secretarial job on Wall Street. For years, she chose to conceal her gender, signing her newsletter "G. Weiss."
DISK-DRIVE ALERT. Rather roll the dice on hot growths than frumpy blue chips? Louis Navellier's MPT Review may be your letter. Applying the precepts of Modern Portfolio Theory that he learned from California State's MBA program, Navellier looks for companies with growing profit margins and rising earnings trends. Navellier's approach has been volatile but profitable: Last year's blistering 84% return has been followed by a 13% drop in the portfolio value so far this year. His current hot stock: Maxtor,the maker of computer disk drives, which Navellier thinks will surprise Wall Street with dramatically higher earnings.
Another top performer has been BI Research, which Tom Bishop produces every six weeks or so from his rural Connecticut farm. He toils as an accountant by day, using his lunch hour and evenings to pore over annual reports. Bishop's forte is special situations--small companies that are the low-cost operators in their fields, for instance. His current favorite is Rally's, the Louisville hamburger chain.
One newsletter that could prove particularly timely in the current economic climate is George Putnam's monthly Turnaround Letter, which trolls for opportunities among the wreckage of the 1980s. During the first half of 1992, Putnam's portfolio jumped 39%, among the best of those ranked by Hulbert. A former bankruptcy lawyer, Putnam currently is keen on Digicon, an oil-and-gas industry supplier that emerged from Chapter 11 a year ago.
As they say in the investment business, past performance is no guarantee of future success. That's true for brokers, too. The $200 you shell out for a newsletter could be a small price to pay for the insights of an adviser not dependent on trading commissions.Dean Foust EDITED BY AMY DUNKIN