Why Your Favorite Penny Stock Newsletter is Failing You

If you are new to investing in the stock market you may have read a blog article or two telling you that newsletters are a waste of time – noting that it is extremely rare that one actually sees the same investment return as their newsletter’s model portfolio.  Although that may be true, what these naysayers will not tell you that the problem isn’t with the newsletter, the problem is with the investor.  How can that be when all you have to do is follow the newsletter’s instructions by the letter? The problem is that most folks don’t.  Just like with a well-regarded diet, it doesn’t take a lot of cheating for you to miss the mark.

So how do folks “cheat” on their newsletters? Here are the most common culprits:

Emotional Investment in a Position:  Newsletter authors no that when a position is not working out it’s best to cut losses early and move on to the next position.  That’s a hard pill to swallow for some investors who seem to feel that maybe sticking around just a few more days will get them back to par. Bad idea.  Newsletters look to re-coup losses quickly too. They just do it through a better position.

Selectively Picking Positions:  There is no newsletter that ever makes money on all of its positions. If you ever find one on the web that says so you should close your browser as quick as you would if your boss caught you on Facebook.  A newsletter is on track when the good positions are more numerous than the bad and make more money than the bad ones lose. The problem is that there is rarely any rhyme and reason to if the next position is going to be a winner or a loser.

Suppose you were at a casino and you saw that the nearby roulette table hit five reds in a row. If you were going to bet on the next spin would you bet on red, figuring that a streak like that has to continue, or would you bet black because the odds of the table hitting six reds in a row is extremely slim to none? The correct answer is that both of those strategies are ridiculous, since every spin of the wheel is a completely independent event  where the previous spins have no bearing on the earlier ones.  With all of the volatility associated with the equity markets you really should treat every newsletter position the same way. Waiting out a newsletter’s “bad streak” is as silly a waiting for red to show up on a roulette wheel. Bad idea.

Following Multiple Newsletters with the Same Capital: Talk about cheating! Using the same capital to follow two newsletters never works out. Whether you close out one position too early to chase another or miss out on a big win because all your capital was already tied up, they speak to the same adage – “When you try to do both, you are doing neither”.  I can almost guarantee that if you try to share capital amongst several newsletters your overall investment performance will be worse than the poorest performing newsletter. I chalk that statement up to my own experience.

Newsletters are a great investment tool. But just like dieting, getting the performance you want and expect requires emotional discipline. Before you start hating on the newsletter game, remember that maybe you need to “not hate the game, but hate the player”.

Happy Trading!

-Russ