EVEN A casual reader of the business pages couldn't miss the full-page advertisement that ran in the Wall Street Journal recently: "4 Money Making Publications, full 5-Month Subscriptions, only $69," the headline promised. "Nothing Else to Buy! No Further Obligation!"
Indeed, like any bargain on hair-growing tonic or knives that never need sharpening, this looked like a deal too good to be true. After all, many investment newsletters charge hundreds of dollars per year.
But do they tell you anything you need to know?
For the most part, no, according to a five-year study by two finance professors, Campbell Harvey of Duke University's Fuqua School of Business and John Graham of the University of Utah's Eccles School of Business.
The professors compared the performance of the stocks recommended by 326 investment newsletters with the performance of the Standard & Poor's 500.
Long-term performance was studied for the period 1991-1995, and short-term performance for 1994 and 1995. The professors assigned each newsletter a grade from A to F.
The A group -- those performing in the top 10 percent -- made recommendations that could have earned investors annual returns averaging 12.6 percent between December 1990 and December 1995.
Not bad -- except that a portfolio invested in the S&P; 500 would have returned 16 percent each of those years.
In 1991-1995, only five of the 326 newsletters succeeded in beating the S&P; 500 by 3.5 or more percentage points per year.
Only four newsletters did that well in the 1994-1995 period. And just one newsletter beat the S&P; 500 in both the short- and long-term studies. (The complete survey results are available on the Internet at: http: //www.duke.edu/charvey)
Should you rush out and subscribe to the winners? No -- I'm not even going to list them. With a field of 326 newsletters, some would have to beat the benchmark by dumb luck.
And many earlier studies have shown that investment newsletters don't offer very good advice.
A study a few years ago showed that fewer than one in five model portfolios could match or beat the Wilshire 5000 in any given year. And the list of winners changed constantly, again suggesting that many of the top scorers just got lucky.
Even true professionals such as mutual fund managers or Wall Street analysts can rarely beat the market averages year in and year out. And many newsletter publishers are anything but pros.
This is an unregulated industry, and anybody with a word processor and printer can get into it. Many publishers operate out of their basements or spare bedrooms.
Newsletter publishing is also a faddish business, with newsletters springing up to cover "hot" industries such as technology or biotech. A narrowly focused newsletter may turn in a good performance while its target industry is hot, but only because a rising tide lifts all boats. When the market cools, many fad newsletters disappear.
Other newsletters slavishly follow market theories that are all their own or rely on exotic technical analysis that the reader can never penetrate. The publishers will attribute their failures to anomalous influences that kept the market from doing what it ought to.
If, despite all this, you find a newsletter tempting, don't (x subscribe until you've read a few sample copies and figured just what you want out of the publication.
At a minimum, a newsletter should provide information that improves your investment performance enough to pay for the subscription. Put to that test, most investment newsletters fail.
Bill Atkinson's investing column will resume in two weeks.
Pub Date: 2/24/97