| What did your money actually earn? |
Everyone who has read my books or blog knows I have always been skeptical of financial advisors and stock picking services. They publish spectacular returns and people eagerly sign up expecting they’ll soon be able to give up their day job. But all is not as it seems.
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It’s the money that matters
Suppose you’re shown two numbers:
- Strategy X: +956%
- S&P 500: +192%
If you had invested $10,000 in each, most people would expect their account to look something like this:
Podcast
- Strategy X: $105,600
- S&P 500: $29,200
And, of course, you would assume your account would be worth more than three times as much as if you had simply invested in the S&P 500.
One Simple Question
But before you part with hundreds – or even thousands – of dollars to join Strategy X ask one simple question:
How were these numbers calculated?
What exactly does the 956% measure?
It may simply represent the average return of hundreds of individual recommendations made over many years. Some recommendations – such as an early NVIDIA – might be up well over 10,000%, while others lost money.
But did your portfolio own every recommendation?
Did it own the early NVIDIA?
Did it hold it for 15 years?
But what about my account . . ?
But here’s the question that really matters:
Would an investor’s account also have returned 956%?
Yes, in theory. But only if you invested equal amounts in every recommendation and held every stock for exactly the same period. The problem is almost nobody invests like that.
- You may have joined the service years after it started.
- You may not own earlier recommendations.
- You probably don’t buy every recommendation.
- You probably invest different amounts.
- You may sell some winners early.
- You add money over time.
Their accounts will almost certainly produce a different result.
The Stock-Picking Trap
Some stock-picking services recommend ten or more stocks every month. After ten years that could amount to more than a thousand recommendations. If just one of those turns into the next NVIDIA, it will dramatically lift the average return of all recommendations.
But what if you didn’t own that stock?
The Average Trap
When you look at what these stock-picking services actually say:
“The average return of our recommendations is…”
They don’t say:
“The average subscriber earned . .
Or
The average subscriber account grew by . .
So they are not actually misleading anyone, but presenting their results in a way that is easy to misinterpret.
If your account doesn’t match the advertised performance, the obvious explanation is that you bought different stocks, invested different amounts or held them for different lengths of time.
The Takeaway
The lesson is simple. When you see a spectacular performance claim, don’t ask:
“How much did the recommendations make?”
Ask instead:
“What did the average subscriber actually earn?”
They are two very different questions.**
Until somebody starts publishing the second figure, I’ll continue to regard spectacular recommendation returns as little more than smoke and mirrors.
To the markets . . .
A very uneventful week (market-wise) with only 3 and a half trading days. Major indexes are going sideways in a consolidation pattern – and we know that these can go on for months. Will it this time? Maybe – maybe not. But we are not approaching an ITM Out signal just yet.
SPY Charts
More consolidation this week – almost 2 months going sideways. Still no direction.
Longer term it is still on the upper bound of the trading channel.
SPYG Charts
Also going sideways – consolidation pattern.
Longer term right in the middle of the trading channel.
QQQ Charts
QQQ also is consolidating.
Longer term still clustered around the top bound of the trading channel.
VIX (Volatility) Chart
Still in low volatility territory.
ITMeter
The week ahead . . .
This week’s spotlight shifts to the Federal Reserve. Following last week’s employment report, investors will be looking for further clues about the direction of U.S. interest rates. The minutes from the June FOMC meeting will be scrutinised for any change in the Fed’s thinking on inflation and future policy.
With the economic calendar relatively light, markets are also likely to focus on the start of the second-quarter earnings season, while continuing to monitor developments in the Middle East and their potential impact on oil prices and inflation.
Monday
- S&P Global Services PMI (Final)
- ISM Services PMI
- Investors assess the strength of the U.S. services sector following last week’s employment data.
Tuesday
- U.S. Trade Balance
- Markets continue to position ahead of Wednesday’s FOMC minutes.
Wednesday
- Wholesale Inventories
- Consumer Credit
- FOMC Meeting Minutes (key event of the week)
Thursday
- Weekly Jobless Claims
- Existing Home Sales
- PepsiCo earnings
- WD-40 earnings
Friday
- Delta Air Lines earnings
- Markets digest the week’s Fed commentary and prepare for the broader earnings season beginning next week.
The Futures . .
Are looking quite positive, but still 12 hours to market open.
Trade the tide not the waves
Heather
Your turn now . . .
Would you rather know the average return on recommendations – or the average return actually earned by subscribers?
I’d love to hear your thoughts in the comments.
2 Responses
Hope you’re feeling better • congratulations new house • I would run it by ChatGPT first – then Gemini • finally Claude… ( reminds me of – sitting in my office 90’s and receiving a call from a salesperson who was offering the best million dollar insider deal – my question to them “ if you had the golden goose
( scenario ) why would you need me or why would u be sharing it with me…
( question ) which they had no answer for. If it sounds too good to be true …
R
Hey Randy – definitely on the recovery trail, should be driving in 2 weeks (hopefully). Loving the view at the new place – massive terrace where I watch the sunset over the ocean practically every noght. Only thing wrong is it is winter here – and I usually go travelling to avoid it. Next year! (already booked my ticket to Pairs in April!).
Re the GPT / Gemin / Claude solution – very good idea. I use them as editors – ‘tell me any mistakes I have made and make sure all my facts & calcs are right ‘ – I think they are great.
x
h