6/1/08

Motley Fool Stock Advisor Review

The Stock Advisor service is Motley Fool's flagship newsletter, run by Motley Fool founders Tom and Dave Gardner.


Content

When you log on to Stock Advisor, you're presented with an easy to navigate layout. There are three main links: to the latest newsletter issue (published once a month), the newsletter's performance (tracked from the April 2002 issue), and the best previously made recommendations to buy now. When on the current issue page, you can find a link to and read all the past issues, going back to April 2002.

The home page also features updates on past stock picks, as well as links to Motley Fool articles and discussion board messages relating to the newsletter's picks. There are also a couple of interviews with CEOs. These are outdated, the last one being from August 2006.

Each monthly newsletter issue, which you can view in html on the site or download as a pdf, ranges from around five to ten pages, and always contains an introduction, Dave's pick, Tom's pick, and something called "dueling fools." Many, but not all issues contain updates on previous picks, short articles of the same type as you'll find on the Motley Fool website for free (minus advertisements--both 3rd party and for Motley Fool services), a rare bonus stock pick, and/or reviews of Tom's or Dave's performance. Some issues have all of these, some have none.

Each month's introduction is written by Dave or Tom, and contains either something general about the market, the newsletter, an anecdote, or something similar to what you'll find on the Motley Fool site for free.

Dave's and Tom's stock picks are usually one page in length each. These are short blurbs on the reasons for buying the particular stock. The page also includes a brief summary of company data (location, website, market cap, etc). In the pdf version there is also a two year chart. For purposes of illustration and comparison, take a look at Value Line. Look at "Part 3--Ratings & Reports" in the samples section. Dave's and Tom's picks have a lot less in terms of the company's financials, and about twice as much in terms of text.

The Stock Advisor newsletter probably (hopefully) has much less of the analysis that Tom and Dave have actually done. The text portion usually amounts to under 1,000 words. This could be a good thing or a bad thing. On the one hand, as an investor (especially one paying for a stock recommendation service) you would presumably want to be given as much information as possible before making your decision. On the other hand, if you're already paying for stock recommendations, you probably don't feel like spending too much time reading and sifting through mounds of data. As long as the recommended stocks go up, most subscribers probably take the latter view.

Since each month's picks are Dave's and Tom's best ideas for the month, it is not unusual that the same stock gets recommended more than once, sometimes two months in a row.

The "dueling fools" portion of each issue usually concerns one of the recommended stocks in that issue, and perhaps the recommended stock's industry, or some general investing theme of one of the brothers in relation to the recommended stock. The brother who didn't recommend the stock(s) asks the recommender questions, attempting to flesh out the pros and cons of buying the recommended stock. This usually runs about 500 to 1,000 words. This section is meant to cover things neglected on the stock pick page, and perhaps ask some questions subscribers would have. The question/answer format makes for easy reading, which is a plus. The nature of the questions, however, is not very pointed. That is, the questions aren't meant to really point out the flaws of the stock recommendation. Rather, the questioner seems to know what the answers will be ahead of time.

The company updates section usually consists of a paragraph about each update of a past recommended stock. The update concerns company news, movement in stock price, industry developments, and the like. The number of companies updated ranges from one to ten.

Some newsletter issues contain a "best buys now" section. As mentioned earlier, this is also an easy to find link on the newsletter's homepage. "Best buys now" is a list of past recommendations that the brothers think are, well, the best buys now, besides their current recommendations. When there is a "best buys now" section in the newsletter issue, it is accompanied by a brief article (~300 words) about the stocks.

Occasionally, newsletters have sells of past recommended stocks. Since April 2002, the brothers have sold under 30% of their picks.

Besides the newsletter, there is a series of discussion boards. All the recommended stocks have discussion boards. There are also various boards devoted to different topics like investing philosophy, buying strategies, etc. Whatever you can think of, there's probably a discussion board devoted to that topic. Subscribers and Motley Fool employees post here. Think of the Yahoo! Finance boards without all the stupidity, name calling, etc, and with topics beyond just individual stocks.


Performance

Dave and Tom have a competition going, and their performances are measured separately. Pick performance is measured by the percentage increase or decrease in a stock's price from the time it was picked. Each brother's total performance is the average of all their gains and losses. This includes stocks they recommended last month as well as those recommended in 2002. As of writing, Dave's average is a gain of about 82%. Tom's average is a gain of about 45%. Dave's best pick so far has yielded a gain of 925%, and dates back from 2002. His worst pick is a loss of 88% on a stock recommended in 2003 and subsequently sold. Tom's best pick was made in 2003 and has so far yielded him around 580%. His worst pick, dating from 2007, is currently down 74%.

Performance is also measured as against the S & P 500, both for each stock picked and for the average return for each brother. For example, a stock picked in June 2002 is compared with the S & P 500 from June 2002.

For both brothers, the winners are handily beating the losers. Together (as of writing) they are outperforming the S & P by about 46%. As of writing, their recommendations have a total average gain of 64% since 2002. That makes for around an 8.33% annualized rate of return.


Feasibility

So, is it possible for an individual investor to keep up with all the Stock Advisor recommendations? Some stock gurus (e.g., Jim Cramer) recommend so many stocks that their performance doesn't matter, as retail investors don't have enough cash to make so many trades. What's the case with Stock Advisor?

As mentioned, each Gardner gives you one stock pick per month, and sometimes there is a bonus stock pick. The average is close to a total of two picks per month. Most people can probably devote a portion of their income toward buying two stocks a month. Whether it's practical depends on broker commissions and amount invested. I go into this in detail in the cost section below.


Cost/Practicality

A Stock Advisor subscription is currently $149 per year. If you buy stocks based on the newsletter's recommendations, you should probably include brokerage commissions in the cost. If we assume $7 a trade, and you buy every recommendation (24 a year), that's an extra $168 a year (this does not include selling stocks, buying bonus picks, or buying previously recommended stocks that the Gardners call "best buys now"). So, if you buy all the regular recommended stocks, the service will cost you $317 per year. If you buy the bonus picks, "best buys now," and sell your positions, you'll obviously have more broker commissions and your total cost in using the service will be higher.

Before going to practicality, it should be noted that brokerage costs can be reduced. For example, TradeKing has commissions of $4.95. Sharebuilder has $4 commissions for automated orders (the fee for selling, however, is $9.95). Besides fee differences, different brokers have other advantages and disadvantages. For instance, at TradeKing, you can set a limit order for that $4.95 trade, but you cannot buy fractional shares. So, let's say you want to invest $500 in each recommendation. If the stock costs around $17 a share, you can either buy 29 shares (for $493) or 30 shares (for $510). Or, you can wait for the stock to drop to $16.67 and buy 30 shares. It's hard, without fractional shares, to invest a specified dollar amount. With Sharebuilder, in contrast, you can buy fractional shares (use your entire dollar amount), but you can't specify the price, and can only buy once a week. There are other brokers, of course, and they have their own advantages and disadvantages. All this is to say that in analyzing the practicality of following the Stock Advisor service there are many factors to consider and, for sake of simplicity, certain assumptions (broker fees, dollar amount per trade, number of trades, etc) have to be made.

So, I'll analyze the practicality with two examples. The first one will have the assumptions outlined above: $7 a trade, and you buy 24 stocks a year, selling none. The total cost here, as mentioned, is $317 a year.

For the second scenario, let's say you pay $4 in broker fees, and everything else is the same as above. Here, you'll pay $96 in broker fees. Your total cost will thus be $245 a year.

As a rule of thumb, your total investment expenses shouldn't be more than 2% of the amount you're investing, as far as practicality is concerned. In the first scenario, you have to invest $15,850 a year ($700 per month, $350 per stock) to keep your expenses at 2%. In the second scenario, you have to invest $12,250 per year ($400 a month, $200 a stock) to keep your expenses at 2%.

Taking the second scenario, if you normally invest $12,250 or more a year and have at least the additional $245 a year for the costs, then the Stock Advisor service is practical for you. If you cannot afford to invest this much, for example, if you are unable to save at least $12,495 ($245 in costs plus $12,250 investment amount) a year or $1041.25 a month, the Stock Advisor service is not practical for you.


It may also be useful to compare Stock Advisor with what you'd pay to invest in a good mutual fund. We can, after all, look at the Gardners as managers of a mutual fund. If you buy all their picks, it's like investing in a mutual fund.

Consider for example the T Rowe Price New Asia Fund (PRASX). Its five year (similar period as Stock Advisor) annualized rate of return is 31.34%, and it has an expense ratio of 0.93% with no transaction fees. The fund's minimum initial investment is $2,500. Subsequent investments must be $100 or over.

As another example, take Fidelity's Spartan International Index fund (FSIIX). Its five year average return is 19.07%. The fund sports an expense ratio of .2% and no transaction fees. Its initial minimum investment is $10,000. Subsequent investments must be $1,000 or over.

Both of these funds, it seems to me, would be more practical for individual investors, not to mention more profitable. Past performance does not guarantee future performance, obviously, but the same can be said for Stock Advisor. So long as the mutual fund's managers are the same now as they were during the period of the performance considered, the comparison between the mutual fund and Stock Advisor is apt.

Bottom Line

If we look at Stock Advisor as a mutual fund, you can find better mutual funds out there (in terms of returns and expenses). That is, there are better places to put your money than Stock Advisor. Note, though, that the more successful a mutual fund is, the harder it is for its managers to continue their performance. This is because the more successful the fund is, the more money it has. The more money it has to invest, the harder it is to grow at the same rates.

One may argue that Stock Advisor shouldn't be compared with mutual funds or other investments. Rather, it is a place where you're suggested stocks, on which you should do further research. Fair enough. But if you're paying someone else to recommend you stocks, they're supposed to be better than you at doing research. Otherwise, what's the point of paying them for it? If they're better than you, what good will your own research be to you? If you have to determine, on your own, which of the Stock Advisor recommendations you should buy, then it seems as though you have to know which recommendations are better than others. Again, if you're capable of making such determinations on your own, why are you paying others to do research? If this is the case, save the money, and find your own stocks.

If you're paying for stock recommendations because you don't want to do further research, then you're investing in a mutual fund. That you have to make the individual stock trades yourself does not void the comparison. As such, there are better mutual funds out there.


If you want to find out (potential) newsletter picks for free, check out the Stock Gumshoe. My review is here.