I’ll be the first to admit that I was a major skeptic when it came to investing newsletters. All it takes is some quick research to see many opinions and arguments against investing newsletters. But then I thought– if they don’t help people why would people buy them?
So I had to see for myself.
I’m glad I did. Some of the biggest criticisms against investing newsletters were put to the test. I figured, why not track some actual results and see how it does. Makes sense doesn’t it?
Instead of relying on these vague academic studies, I’d rather see the cold hard facts. For example, I’ve shared before about the downfalls of mutual funds, and how most mutual fund managers (over 80%) don’t even beat the market. But if you remember the conclusion, I recommended against mutual funds because of their expensive fees.
It all came down to the fees, because that is what had the biggest impact on individual investors. Performance varies depending on the manager, and I’m sure with some due diligence we could easily find a proficient mutual fund manager who beats the market.
But because mutual fund fees are so high, even with outperformance the investor is left worst off– most of the gains are absorbed by fees. That’s why I’m against investing in mutual funds.
How about investing newsletters?
It turns out that the studies on investing newsletters are very similar to mutual funds. Basically, the majority of investing newsletter writers don’t beat the market average, up to a percentage very similar to mutual fund managers.
In addition to that, many of the ones who do take significant drawdowns and risk. Meaning they have spectacular short term returns but then also lose more than the average during a downfall.
The only difference we are starting to see is that investing newsletters are much cheaper than mutual funds. If you are investing any little bit of significant money, the average cost per year of an investing newsletter will tend to be much less than a mutual fund charging 6% or more.
Again this brings me back to my original question: if investing newsletters aren’t helping investors make money then why are so many people buying them?
I decided to take a look at Porter Stansberry’s investing newsletter, the Porter Stansberry’s Investment Advisory. His company, Stansberry Research, claims to be the leader in investing newsletters.
Forget about the academic studies and let’s look at the facts. If you did an academic study of the average height in the world, you’d probably think that it’s highly unlikely that you will ever meet anyone over 7 foot. The numbers would tell you that anyways.
But if you happen to live in America, the chances of meeting someone over 7 foot are much greater (particularly around the cities that have NBA teams) than if you were somewhere else, such as China. A person in China could look at the same academic study and really believe that there aren’t 7 footers in the world, a person in a U.S. major city– not as much.
I tend to think that it’s very similar in investing research. I know for myself personally, I’m highly gifted in math. It comes very easily to me, to the point that I used to routinely win math competitions as a kid.
I’m not saying that to brag, but I believe a skill like that gives me a significant advantage over others in situations where math is important.
It leads me to believe that there can be others who are equally as gifted in the stock market. Therefore, the averages and academic studies wouldn’t apply to them. It’d be unfair to discredit them with this argument.
Which is why someone who claims to be the leader in investing newsletters is a great place to start. If they have the track record to back it up, then maybe others do too.
Testing an Investing Newsletter
To see if this newsletter truly helps investors, I had to put very strict requirements on the whole process. This keeps the full integrity I want to establish at the forefront.
While good past performance is nice, it’s never enough to predict future returns. However, past performance is very useful to see how the writer responded to situations.
It will also help me determine if I approve of the investing strategy implemented, and if I can see how capital will be protected in case of unforeseen crashes.
Not only did Porter’s newsletter have to help investors, but I wanted to see if it would help the average investor as well. I assumed that the average investor makes $50,000 a year and invests 10% of it every month, which comes out to $416.66.
This $416.66 had to be invested into a recommendation from Porter, if there was no recommendation then the amount was saved for the next month. If there were 2 recommendations that month, $416.66 was split and invested evenly.
If there were 3 recommendations, the $416.66 was split 3 ways, etc. Whenever there was a sell recommendation, that amount would be added and invested in the next month. This allowed us to quickly compound our returns, which we will soon see was monumental in achieving success.
The key part of this exercise was that I included taxes and transaction costs. Some of the biggest criticisms against investing newsletters is that after taxes and transaction costs, the additional returns are canceled out and you would’ve been better buying an index fund.
I had to see if this was true. So for every transaction, I added a $4.95 transaction fee. You can get this low of a fee through TradeKing . As for taxes, these were ignored for the following reason: If you trade in an IRA, your gains are tax deferred.
As such, our money can be compounded without being hindered by taxes. So right off the bat we’ve already debased one criticism of investing newsletters.
Now that taxes and fees are taken into effect, it’s time to see how Porter Stansberry’s Investment Advisor fared against the S&P 500 index fund.
But before I do that, there is one more restriction I had to add. I wanted to see how Porter’s picks did in both bear and bull markets. Instead of cherry picking a timeframe, I picked a constant one BEFORE I knew any of the results.
This protects the data from being manipulated by hindsight bias. I picked the time period January 2008 – December 2013. I thought of this period as the best because we get to see how the recommendations were during both a bear and bull market.
We get to see how Porter reacted to the great financial crisis of 2008, and how he was able to protect the portfolio while the general public saw 50% losses or more.
The results are in.
Results: Stansberry vs. S&P 500
At the end of the time period, $29,583.33 was invested. Just buying and holding the S&P 500 every month resulted in $43,460.79. The investor following Porter Stansberry’s Investment Advisory would have $48,189.71. You can examine the details for yourself in this spreadsheet: Stansberry’s Advisory 2008-2013.
We can conclude several things from this data. First thing is that the S&P 500 index resulted in a CAGR (compounded annual growth rate) of 11%. Porter Stansberry’s Investment Advisory resulted in a CAGR of 12%. You might be thinking that this doesn’t seem like much. But consider how much the difference really can be.
The time period we examined was just about 6 years. Much too short to be a full investing career, but long enough to make some valid conclusions. For example, this 1% difference in CAGR. How would it affect the average investor?
Let’s take the above example again, but specify that our average investor is 25 years old. Remember that he makes an average income of $50,000 and invests 10%. What kind of results will he have by the time he is 65?
Well if he only invested in the S&P 500 index, and returns remained constant at 11% CAGR, he would have $3,229,083.75 by the time he retired.
The same average investor who followed Porter Stansberry’s Investment Advisory with 12% CAGR would have $4,295,644.00.
Now you can see the difference between just 1% in CAGR. It adds up to $1,066,590.25 over the lifetime of the investor, and this is with just an average income.
A person who makes more than $50,000 a year would see a much bigger difference than even the $1,066,590.
Keep in mind that this all assumes that the S&P 500 will continue to soar at all time highs like it does now. This is one of the best times ever to backtest an S&P 500 index strategy because the index has never been higher.
Consider if our average investor happened to retire at a time when the S&P 500 was in a bear market instead of the bull market we tested at. Suddenly, the gains would be 50% less or greater than we are seeing in this test.
This test is basically a best case scenario for the indexer. And it still loses by $1,066,590 to the investing newsletter!
On the contrary, Porter Stansberry’s Investment Advisor doesn’t rely heavily on the S&P 500 or need a bull market to return such gains. You see, because there are more transactions, most of the gains are realized.
Since the gains are already realized, they compound at a much faster rate because they can be immediately employed in a new recommendation. As long as the recommendations are good, as Porter’s were, the capital will grow extremely fast.
Another reason this strategy works so well is that the Stansberry newsletter implements a 25% trailing stop loss. At any time, a recommendation can only lose at most 25%.
Contrast this to the S&P 500 index strategy, which can experience a drawdown of 50% or more at any time. Although the fund is diversified, it is still at risk to lose more money.
This downside exposure proves that the S&P 500 index is even more at risk to market timing than is Stansberry’s Investment Advisory. Market timing is not a game you want to play, especially as you near retirement.
Investing Newsletter vs. Critics
Despite the common criticisms against investing newsletters, this newsletter has defied all of them. Taxes were a non-issue due to using an IRA. Transaction costs were low enough to still earn the investing newsletter a 12% CAGR. Risk of capital was and still is less than an index due to the trailing stops.
Remember that all of these tests are based on an average income. For someone with a higher income, the transaction costs eat up even a lower percentage of the returns. This would further increase the CAGR of the investing newsletter.
With these cold hard facts in place, it’s hard to argue against Porter Stansberry’s newsletter. This skeptic is convinced.