Many online stock picking services look good when you read their marketing literature, web site claims, and advertisements, especially when it comes to performance claims. By knowing what to look for, you can keep from being scammed. Below are 6 ways to tell if the online stock picking service you are investigating is more about marketing hype than actual stock market performance, and how confident the publisher REALLY is in their product.
1. Review Past Trades
Online stock picking services are known for showing you pre-selected trade recommendations that outperformed the market in their marketing literature and on their web sites. As an experienced investor, you know to look past this blatant marketing hype, and to look at their complete trading history. Any credible online stock picking service should offer this data to prospective subscribers. Also, be sure that they don't only throw a bunch of individual trade data at you. They should offer that level of detail, as well as at least monthly tabulations of how ALL of their recommendations performed together in a portfolio (the way they would have you trade their recommendations). If they have multiple model portfolios, then each one should have performance data tabulated separately. One easy way to see if an online stock picking service is more about marketing hype than real stock market performance is to see how easily you can obtain this data from them. They do have this data, and if it was at all compelling, it would be broadcasted all over their marketing material, website, and advertisements - not just a few trades that did well. Realistically, if they've spent a ton of money setting up expensive web sites, and sending out thousands of direct mail pieces, buying advertisements on the web, on TV, in magazines, etc., it would be pretty easy to include a table or a graph of how ALL of their recommendations have done since their system went live. If they refuse to give you this data, or give you a story about how the data is irrelevant because trade timing of subscribers is different than their own trade timing, it should set off warning bells - why won't they share it? (Probably because you wouldn't purchase their online stock picking service if you saw the data)
2. Find Out If They Invest Their Own Money Into Their Service's Stock Picks
Some online stock picking service publishers invest in their stock picks with their own money, while others only publish paper traded model portfolios. Paper trading is the practice of recording stock trade data based on a price that could have theoretically been received on a particular trading day (like a stock picks' opening or closing price), and using that price data to represent what a stock could have theoretically been bought or sold at. Two important problems with paper-traded portfolios are that they do not at all times take slippage and commissions into account. More to the point of trustworthiness - if an online stock picking service publisher is not convinced enough to put their own cash into their recommendations, why should you be confident enough to invest your hard earned money into their recommendations?
3. Timing of Performance Claims
When it comes to evaluating online stock picking service claims, not only do you want the publisher making actual open market trades with their own money to certify 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 online stock picking service 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 subscribers, 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. Then come sell time, 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.
4. Backtesting Results
Many well-intentioned online stock picking service 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 online stock picking services. 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 an 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 are some stocks no longer 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 online stock picking services get launched, and may have a brief record of outperforming the overall stock market, only to roll over and significantly under perform 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. Historical Results
Another area to be concerned with is the period of time that an online stock picking services performance covers. The historical results should cover time frames that have both bull and bear markets in them, as well as non-trending market periods, so you can examine how they performed in each type of scenario. Ideally, a newsletters performance outcome, whether only back tested or with real trading, should go back to at least the late 1990's. This will give you an idea of how the online stock picking service performs in raging bull and bear markets, as well as trend less markets. Clearly, the more track record data you can review, the better.
6. Risk Free Trials
Many online stock picking services 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 online stock picking services 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.
As you can see, online stock picking services, and their performance claims, need to be evaluated cautiously 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 an online stock picking service.
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