"If this person can really predict the future moves of stocks, why is he telling me?"
Good question. I've asked it myself a thousand times. And it's not just me. That quote comes from Matt Kranz, who writes for USA Today.
And here's the kicker ...
Kranz isn't blasting some cheesy stockbroker or overpaid analyst. We know these guys are sketchy. USA Today is calling out the folks who publish independent financial newsletters.
Wait a minute, I read investment newsletters! Maybe you do, too. Who knows, maybe one or two actually make you money. It's been known to happen. Some of these "advisors" are decent, and a few are actually good at what they do.
But Kranz is right about one thing: Contrary to what they tell you, these guys don't have "some sort of magical power" that allows them to "accurately predict the moves of stocks and the stock market."
39,000% profits in 27 days!
OK, that's an exaggeration. But you've heard the promises. "Buy the next oil sands 10-bagger!" or "Profit from the coming terror!" I love those wacky headlines. Sometimes I even get sucked in myself. But I keep one hand firmly on my wallet. So should you.
Think about it. What if you "pay up," only to discover that some wise guy's "inside" contacts turned him on to ... General Electric (NYSE:GE)? Or how about Disney (NYSE:DIS) or Home Depot (NYSE:HD)? You guessed it; all three are among the "most-recommended" stocks as of Aug. 18, 2006, according to newsletter industry watchdog Hulbert Financial Digest.
Don't get me wrong; these are great companies, and probably decent investments right now. In fact, two of them are recommended in various Motley Fool newsletters. But inside information? Top-secret CIA contacts? Super-computerized proprietary stock-picking models? You must be joking. What's your next "hot technology" tip -- IBM (NYSE:IBM)?
So what
can
you expect?
Fortunately, I have a top-secret contact in the newsletter business. My old nemesis Tom Gardner helps investors ferret out undervalued, underfollowed small-cap companies. Tom stresses strong management, great business models, and valuation. But I think something else gives him an edge.
Tom gets his subscribers in ahead of Wall Street. I'm convinced that's why a dozen Hidden Gems doubled over the past three years, and why the average pick is up 27% (vs. 12.2% if you'd bought the S&P 500 instead). I know that sounds odd, especially since we've been told that the "big money" has all the advantages, but it's no accident.
For one thing, big players have big capital to put to work. Unlike us, they can't easily scale into great small-cap stocks -- no matter how much they love the business. With hundreds of millions or even billions to invest, most money managers can't buy smaller stocks without running up the price or biting off a controlling share of the business.
How to profit at Wall Street's expense
Of course, folks like us don't have to wait for a stock to meet some technical criteria before we buy. That's how small investors loaded up on Motorola (NYSE:MOT) in 1980. In 1990, it was Sun Microsystems (NASDAQ:SUNW), and NVIDIA (NASDAQ:NVDA) as recently as 2000. In 2006, we can still build our positions in smaller companies at our leisure -- ahead of most retail investors and the pros who really move markets.
The same is true today. The trick is consistently finding these stocks and having the courage to buy them, often with limited information and without prior confirmation from the Street. That can be scary business. And if you ask me, that's exactly where a trustworthy investment newsletter earns its keep -- and that's the value of a guy like Tom Gardner to investors like us.
I can't tell you his exact words, but a heavy-hitter in this business once put it to me something like this: "The main thing I look for in a great 'tip sheet' is that it brings me ideas I probably wouldn't have found on my own." You've got to admit he had a point.
Because nobody has a crystal ball
Honestly, if some "guru" really could see where the market is headed tomorrow, do you think he'd sell you a peek for the cost of a one-year subscription? Hardly. He'd be in Vegas, or out buying lottery tickets. That's the bad news. The good news is that a trusted newsletter advisor most certainly can help you ...
- Become a better, smarter investor in less time than you think.
- Outperform the Wall Street pros over the long term.
- Methodically build the wealth you want and deserve.
Maybe you can do it while wrestling the pros over a portfolio full of heavily traded large caps, but I doubt it. I'd say you stand a much better chance by straying off the beaten path to find your stocks and then letting the herd come to you. And most importantly, you don't want to be following conflicted Wall Street research.
Don't write that check!
At least, not yet. Having worked closely with both kinds, I'd take your typical newsletter writer over some conflicted analyst at a Wall Street firm any day. But that's not saying much. Either one can cause you a lot of grief if you're not careful. Heck, that's why there's a Motley Fool to begin with.
Fortunately, you don't have to commit for a year, or even six months, to prove it. You can try Motley Fool Hidden Gems for 30 days at no cost, with no obligation to subscribe. That way, you can see for yourself exactly how Tom and his team are beating the market so handily; you can even see all Tom's active and past picks. This way, the first lesson really is on Tom. To learn more, click here.
This article was originally published on July 12, 2006. It has been updated.
Paul Elliott doesn't own any of the companies mentioned. Of course, you can view the entire Hidden Gems scorecard with your free trial. Home Depot is an Inside Value pick. NVIDIA and Disney are Motley Fool Stock Advisor recommendations. The Motley Fool has a fulldisclosure policy.
