In addition to contributing to Penny Logic, I am the managing director of Exceptional Outcomes (EO), which is a consulting company that works with folks who write stock newsletters. Through EO, we help them with their marketing and we help them with their credibility. Although stock newsletters pay for our lunch each day, we believe that investors need to be aware of the tall tales that some newsletters speak to – such as thousand percent gains over a period of days. Such tall tales don’t help investors use newsletters to their best advantage and they are definitely not good for the overall credibility of the industry. With that said, the next time you read that a newsletter provided its subscribers 6900% gains in two weeks, here are some things to look out for.
The ‘Classic’ Sell at the Peak: This one could go without saying, but It always seems that newsletters know exactly when to sell a winner, right? They never seem to sell to soon or hold on a bit too long. At the time of writing this post, our own 3-for-5 Project model portfolio has provided a return of about 125% over an 18 month period. Since we use a model portfolio for transparency, we hypothetically speak to how we would manage cash flow in a portfolio and when we would get in and out of every trade. I calculated that if we somehow miraculously got out of every long trade at the very top, the same model portfolio’s return would be 876%. Pretty impressive, right? To this day I can’t time a stock’s exit perfectly and neither can most newsletters. “Up to a 200% gain” has a nice ring to it though. Most newsletters don’t provide a model portfolio, and that is OK. With that said, it does allow for certain “monopoly money” liberties you should watch out for.
Imaginary Compounding: I had a potential client ask me to take a look at his company’s landing page to see if we could help increase their conversion rate. One thing his page spoke to was how he alerted his subscribers to over 8000% in gains in a two week period. I did the math and it really came out to a little over 30% if all the advice was traded on (which to be fair, isn’t a bad return for two weeks’ time). What caused the discrepancy? I won’t go into the exact details out of respect for the person, but it had to do with the issues of allocation and compounding. Almost all the promotions were going on simultaneously – as if magically the subscriber could put all their capital into each promotion one at a time and get in at the each low and out of each high. If a subscriber is presumably allocating their capital across four or five promotions, you can’t get away with compounding the absolute best gain of each promotion. Sounds like a third grade math error, but you would be surprised how many newsletters try to pass that nonsense along.
Invisible Volume: On the evening of February 8th of 2013, scores of penny alert subscribers received emails on how they missed an “opportunity of a lifetime”. Tamir Biotechnology (ACEL) rocketed in price that day, opening at 0.001 and hitting a high of 0.07 – that’s a 7000% gain. Think about that! How would your life be different if you invested your life savings and made a 7000% gain in one day? Well, what most newsletters didn’t speak to was the fact that only 4500 shares were traded – that’s about $5 worth. Could you have in fact round-turned $1,000 worth of stock on that “million dollar day”? Probably not. One lucky trader did turn that $5 into $343 though.
Forgetting to Mention the Split: I personally bought a few thousand shares of FreeSeas Inc. (FREE) on February 12th, 2013. Just two days later the price increased by 1000%. Not too shabby, huh? Well the thing I didn’t add was that the 1000% price appreciation was due to a ten to one reverse stock split. I didn’t make a dime, but I didn’t lie – the price did go up by 1000%, right? I don’t see this kind of cooking going on too much with newsletters, but it does on occasion happen. In some cases you can blame it on a bozo who isn’t watching the farm well enough. In either case, be sure to hit the unsubscribe link on that one, because you are reading pure trash.
Penny newsletters can provide their readers some great insights. If we didn’t think so, we wouldn’t be in the business. But there are some newsletters that don’t appreciate the fact that shenanigans like the ones listed above end up increasing their overall cost per subscriber and degrading their newsletter’s life cycle. Both of those things cut into their profitability. The next time you are hunting the web for a newsletter I hope you keep these thoughts in mind. Checking our own real-time newsletter would be appreciated too!
Happy Trading,
Russ