4. Backtesting Results Many well-intentioned stock newsletter
publishers begin as individual traders who have purchased historical
stock data (fundamental and/or technical), and then created a trading
system that works very well over this historical database. Then they
go on to advertise the stock picks that their system generates via
their stock investing newsletter. The issue with this is something
called survivor bias, and the truly sad part about it is that the
publisher of the service may not even recognize it exists in their
system. So, how does survivor bias throw off systems that are based on
historical back testing alone? Most stock market data providers sell a
reasonably priced disk containing a decade or more worth of past stock
data. Most of the time, the data on the disk is restricted to
historical data on stocks that are presently traded. This means that
stocks which are no longer traded are not in the database, only stocks
that are surviving today are in the database. Why do some stocks no
longer get traded? Some are acquired by other companies, some are
taken private by shareholders, and many just go broke and go out of
business. You can see how this impacts a back tested system – the
results of the back testing do not take into account how the system
would have dealt with companies that failed, they only take into
account how they would have performed with stocks that were strong
enough to survive until today. This may explain why so many stock
newsletters get launched, and may have a brief record of outperforming
the overall stock market, only to roll over and significantly
underperform the stock market later on. If you are thinking about
following a newsletter with great back tested results, MAKE SURE their
data was not affected by survivor bias.
5. Risk Free Trials Many stock picking newsletters will give you a no
cost trial period to try out their service. Take them up on this, so
you can see if their trading method fits with yours. One problem with
many stock newsletters is that they call for you to give them a credit
card or some other form of upfront payment, before they will let you
have your “free” trial. Many times they say you can give it a try for
a month, and then they will begin billing you after that. This is more
of a sales gimmick than a risk free trial, in that some percentage of
people who sign up for the free trial and don’t like the service will
not remember to cancel their subscriptions, and will have their credit
card billed (usually the publisher will give a pro-rated refund upon
request). Once again, this gets back to the publishers belief in their
product – if they are truly offering a value added service, they
should not need your credit card information before you get to
participate in their free trial. If it is a great value, you will buy
it at the end of the trial period.
6. Timing of Performance Claims When it comes to evaluating stock
newsletter claims, not only do you want the publisher making actual
open market trades with their own money to substantiate their
performance claims, you also want to identify when they made their
trades relative to when you could have made your own trades on their
recommendations.  For example – an stock picking newsletter
publisher recommends purchasing ABC stock, and communicates it to
their subscribers through a website, email, fax, telephone hotline,
snail mail, etc. Then, immediately after they’ve sent the
recommendation to their followers, they go out and buy ABC stock in
their online trading account. No issue there, right? WRONG! Depending
on how they communicated with their subscribers, they could be buying
ABC stock minutes, hours, or even days before their subscribers buy
ABC stock. So here’s the scenario – they purchase the stock prior to
their subscribers, document the executed trade for their performance
claims, and then their subscribers all pile into the stock and send
the price up. When it comes time to sell, the publisher is also first
in line to get out, just before their subscribers selling pushes the
price of the stock down. Ideally, you want to find performance claims
based on delayed entries and exits, so the publisher is in the market
trading at the same time their subscribers could reasonably be trading
the online stock picking services recommendations.
As you can see, stock picking newsletters, and their performance
claims, should be evaluated before committing your time, subscription
fee, and stock market capital, into their recommendations. Hopefully,
this article has given you a few more tools to use when evaluating a
stock newsletter service.
Stock Market Index Secret Trading Method: http://www.stgetview.tk/