Wall Street misleading Main Street is nothing new. Stockbrokers are just salesmen. Investments newsletters are even more so. When looking at the returns stated by investment newsletters, many probably assume that they can take the statements at face value. I mean, how could an investment newsletter blatantly lie to the public? Fairly easily, it turns out.
See, promoters of investments and investment newsletters do not need to abide by the same regulations as some others in the financial industry. When comparing performance to an index such as the S&P 500, and investment newsletter could make its gains look like they’re whooping the index, when, in reality, they’re not. Jason Zweig wrote about it in one of his recent Intelligent Investor columns in the Wall Street Journal. One of the most interesting examples comes from TheStreet.com, in which it’s claimed that the Action Alert PLUS service doubled the return of the S&P 500. However, this is only when you consider dividends for the stocks chosen by the service, but exclude them from the S&P 500. That’s not really fair comparison. It’s comparing apples to oranges. When both portfolios include dividends, then TheStreet’s performance beat the S&P 500 by just 0.9% since 2002.
In April, TheStreet.com sent out an email urging readers to subscribe to Action Alerts PLUS, a trading-tip service from The Street’s co-founder and CNBC host James J. Cramer. Douglas Zitzmann recently posted it on his Fumbled Returns blog.
Sent out under Mr. Cramer’s name, with the subject line “My portfolio is CRUSHING the S&P 500,” the email said Action Alerts PLUS is “producing some truly incredible results.” From Jan. 1, 2002, to April 1, said the email, the portfolio’s “total average return has averaged more than DOUBLE the return of the S&P 500.” An accompanying bar graph showed the S&P 500 returning 15.5%, versus 39.2% for Mr. Cramer’s portfolio.
Incredible indeed, if you include dividends for Mr. Cramer’s portfolio and exclude them for the S&P 500. With dividends, the total return of the S&P over the same period was 38.3%. Viewed this way, Action Alerts PLUS didn’t double the market’s return; it squeaked past by a cumulative 0.9 percentage point. That is before tax and before the annual subscription fee ($299.95 the first year).
To read more, I highly recommend you check out the article here.