From Canadian Business
Twist and tout
Some investment newsletters love to boast about their record for picking stocks. Don?t
believe them.
By Derek DeCloet | Nov. 12, 1999
The world?s most famous investor, Warren Buffett, has a track record that turns most
mutual fund managers green with envy. His holding company, Berkshire Hathaway, has
bested the Standard & Poor?s 500 index almost every year since 1965. Yet the last
time Buffett beat the index by 20%, Ronald Reagan was a rookie president, homes in
Vancouver sold for about $100,000 and Canadian Business was attacking the Trudeau
government for its National Energy Program.
So if you?ve ever read an investment newsletter, you?ve probably been amazed by the
ridiculously high returns some of them claim to have produced. One such newsletter, the
Kamloops, BC-based Buy Low, Sell High! Small-Cap Canadian Stocks Review, says
its picks achieved an "average potential gain" of 78.9% in the year ending June 30. Very
impressive, especially when you consider that the market suffered a huge blow during
that period. Another newsletter, Bunka?s Outsider?s Overture, produced by BC-based
writer Chris Bunka, boasted earlier this year that its 1997 picks went up by a whopping
177.5%. That?s incredible enough. What makes it even more extraordinary is that
Outsider?s Overture covers speculative mining stocks?and 1997 was the year the
Bre-X scandal sent junior mining companies into the toilet. Either these guys are
geniuses, or they assume we?re idiots.
Unfortunately for investors, it?s usually the latter. Mark Hulbert, a US financial publisher
who tracks the performance of investing newsletters and prints the results every month
in The Hulbert Financial Digest, says the vast majority of stock sheets fail to beat the
market, never mind crush it by 100% or more. In fact, those astronomical "returns" are
usually the product of creative mathematics. For example, newsletters will sometimes
ignore their worst recommendations when calculating their performance. Or they will use
extremely short-term results?a 20% jump in their stocks over a few weeks, for
example?and extrapolate that into an "annual" return, as though such high returns were
sustainable.
One of the most popular tricks is to calculate the return based on the stock?s
subsequent high. For example, Buy Low, Sell High! recommended Nevada Star
Resource Corp. (VSE: NEV) in September 1997, when the mining exploration
company was trading at 29½ per share. The following February, the stock soared to
70½ and the newsletter started to brag about its pick?s sky-high return of 141%. But
Nevada Star quickly came back down to earth, and as of Oct. 15, 1999, it was trading
at a mere 15½?down 48% since the newsletter?s recommendation. That?s not unusual.
According to Hulbert, if you actually constructed a portfolio based on the newsletter?s
advice between January 1998 and August 1999, you?d have lost 36% a year.
So how do you explain the discrepancy between Hulbert?s findings and the enormous
returns the newsletter boasts of? Well, if you?re Buy Low, Sell High! publisher Al
Budai, you don?t. "I?m not sure how he?s calculating that," responds Budai. "Who?s to
say most of our subscribers didn?t get out [of those stocks] with gains of 50% or
100%?" If they did get out at the right time, it?s no thanks to Budai?he doesn?t give sell
recommendations (although he will tell you when he thinks a stock is overvalued).
In an attempt to prove Hulbert wrong, Budai sent Canadian Business a list of 45
companies he recommended to Buy Low, Sell High! subscribers between September
1998 and July 1999. A few of them, such as Janna Systems Inc. (CDN: JANA) and
Mosaic Group Inc. (TSE: MGX), did rise impressively. But suppose you bought 100
shares in each one of his 45 picks and then sold them all on Oct. 15. After discount
brokerage commissions, you?d be in the red?a far cry from the "above-average
investment returns" Budai promises in his advertising.
Similarly, no investor could achieve the magical 1997 returns claimed by Outsider?s
Overture. (Publisher Chris Bunka uses the same trick as Budai?calculating a stock?s
return based on its subsequent high. "It seems to be the industry norm," he explains.)
We looked at seven stocks that Bunka was touting as "strong buys" that fall. If you
bought all seven and held them for six months, you would be down about 34%; if you
held them for a year, you?d have lost almost 60% of your money. And that?s before
you factor in trading commissions.
That?s not to say that investing newsletters have no value. Some of them have every
reason to brag. The Investment Reporter, a Toronto-based publication that covers
blue-chip stocks, has thumped the TSE 300 over the past decade. But it?s the
exception, not the rule. Just remember Hulbert?s warning: if a newsletter editor says
he?s a better investor than Warren Buffett, "ignore it."
The newsletters:
Bunka?s Outsider?s Overture
Monthly newsletter on speculative resource and technology stocks, many of them listed
on the VSE
the hype
Claims its 1998 picks returned 33.8%, while its 1997 selections achieved an
"outrageously good" 177%
the truth
The only thing "outrageous" here is the bogus method publisher Chris Bunka uses to
calculate his performance
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Buy Low, Sell High!
Small-Cap Canadian Stocks Review Picks four "undervalued" stocks a month, most of
them less than $5 per share
the hype
"Over the past year, the stocks featured in The Buy Low, Sell High! have achieved an
average potential gain of 78.9%"
the truth
Don?t believe it. Like Bunka, publisher Al Budai uses creative mathematics to come up
with such great results. Independent analysis shows this newsletter actually delivered an
annualized loss of 36% for the 20 months ending Aug. 31
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The FutureStock Review
Three 24 year olds in Delta, BC select a mix of small-and large-cap companies
the hype
"Outperformed every mutual fund in Canada during 1998" with a 62.2% return.
Featured in June on CTV News as a Success Story
the truth
The 1998 returns are legitimate. But the newsletter has yet to prove it can do it
consistently?it?s only been publishing for 18 months. Through mid-October, its 1999
picks were up 22% before commissions
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The Investment Reporter
A committee of stock-pickers gives weekly advice on blue-chip Canadian stocks
the hype
"The best friend the Canadian investor ever had," with results that have consistently
beaten the TSE
the truth
Pretty impressive. According to independent tracking, an investor following its advice
would get returns of 11% a year in the 10 years ending Aug. 31. The TSE 300?s
performance in that time was 8.5% annually (including dividends)
canbus.com |
