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Behavior and Performance of Investment Newsletter Analysts: A Review of Alok Kumar’s Research
Investment newsletters remain a popular tool for individual investors seeking market guidance. In their empirical study, Alok Kumar and Vicente Pons examine the behavior and performance of newsletter analysts based on data from 353 investment newsletters issued between June 1980 and November 2001. The study provides essential insights into the effectiveness, timing ability, and strategic behavior of newsletter recommendations, offering valuable lessons for investors navigating modern financial markets.
Asset Allocation: A Trend-Following Bias
One of the central findings of the study is that newsletter analysts primarily allocate assets based on past market returns, particularly when deciding between equities and cash. Rather than incorporating forward-looking macroeconomic indicators, most newsletters react to recent price movements, following trends rather than anticipating them.
This reactive behavior raises concerns about long-term strategy robustness. While trend-following can work during momentum-driven markets, it may fail during turning points or high-volatility periods. The lack of macroeconomic context in these strategies suggests a limited strategic depth in many newsletter recommendations.
Overall Performance: Passive vs. Active Approaches
A critical finding of the study is that, on average, investment newsletters underperform passive strategies. This aligns with broader academic research showing that buy-and-hold investing often yields better risk-adjusted returns than frequently adjusted active portfolios, especially when accounting for transaction costs and fees.
However, not all newsletters are equal. Active newsletters, which change asset allocations frequently, and contrarian newsletters, which adopt positions opposite to prevailing sentiment, show statistically significant market timing ability. These sub-groups occasionally outperform, particularly in volatile or transitional market conditions.
Timing Ability and Performance Persistence
One of the most important contributions of the study is its high-frequency analysis, evaluating daily recommendations rather than just monthly performance. This granularity uncovers that many newsletters demonstrate real-time responsiveness to market shifts, capturing short-term price movements more effectively than low-frequency strategies.
More notably, Kumar and Pons find evidence of performance persistence: newsletters that performed well in the past are more likely to continue outperforming. A strategy that follows the average recommendations of historically top-performing newsletters can yield a risk-adjusted excess return of 2.56% per year. This highlights a potential edge for investors who track and selectively follow the best-performing analysts.
Implications for Individual Investors
This study provides practical takeaways for investors considering the use of newsletters:
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Don’t follow blindly: Most newsletters offer little alpha relative to passive investing.
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Track performance over time: Investors should evaluate newsletters based on their historical accuracy and consistency.
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Identify specialist strategies: Active and contrarian newsletters may offer higher potential returns, particularly in specific market conditions.
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Use newsletters as tools, not crutches: Investors benefit more when newsletters are used to supplement independent research, rather than replace it.
Key Strengths of the Study
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Robust dataset: Covering over 20 years of data from 353 newsletters.
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Empirical rigor: Utilizes daily frequency for precise timing analysis.
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Practical insights: Offers actionable implications for retail investors.
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Explores heterogeneity: Differentiates between types of newsletters instead of generalizing.
Conclusion
Alok Kumar and Vicente Pons’s study, “Behavior and Performance of Investment Newsletter Analysts,” offers a balanced and data-driven perspective on the use of investment newsletters. While most fail to consistently beat passive strategies, a select group—particularly active and contrarian newsletters—demonstrate real market insight and timing skill. The research encourages investors to approach newsletters strategically, focusing on performance persistence and timing ability, rather than assuming all expert recommendations are equal. For investors willing to do the work, selective engagement with top-performing newsletters may offer meaningful alpha.
