Expert: Paul Henneman - 2/3/2006

Question
This service advertises average beating yields on their selected stocks over many years.  Is their any  outside audit of these figures or does the investor just have to hope that they are telling the truth.

Answer
John,
   Thank you for your question! Yes, you have hit the problem on its head with regard to independent sources of research. Some of which are very good, some not. Valu Line is highly respected. But as any intro class to statistics will teach a college students, numbers can be presented in various ways, and not so attractive numbers simply left out. In general, I have found that Valu Line beats average performance of the market, but barely. It is a highly respected service and I don't mean to give the impression that they are anything but legitimate. But the returns simply are not there.
   Unfortunately there is no real standard when it comes to auditing numbers. There are a few firms out there such as www.InveStars.com who have built their entire business upon measuring research performance from as many firms as they can. However, even this is problematic because they have to decide upon a specific formula and way to measure. My own company, ValuEngine, provides our data to Investars for verification. But to be honest, they do not use our recommendations in the right way and so get inferior results. So even this is difficult. www.starmine.com is another service that does this.
   The only way to really get a handle on what a research firm can offer you is to read as closely as possible the numbers they do present, and be as critical as you can. For example, anyone can offer decent performance over a long period of time. But how volatile would your portfolio have been in say 2000 through 2002 had you been following their recommendations? If they offer 20 or more years of general performance, terrible performance during two years could wipe out your portfolio, but not be evident in the numbers.
    If you would like to follow up with me and provide some of the numbers you are looking at, I would be happy to provide some further opinions on what those numbers do represent, and what they are missing. There are several things I always look for, which some companies do not often provide, because it is difficult to get these numbers up: Draw downs: the maximum peak to trough drop, over at least the last 10 years. This would show how much the portfolio could have lost in a worse case scenario.
   More questions to ask: Are they giving complete numbers? For example, many research providers take their top performing picks or portfolios and quote those numbers. But the problem is you don't know which are the top performers before hand, so you only get that information if you guessed right on which advice to follow.
   I realize that I have not offered much in terms of a solution to performance numbers, just alot of problems. That is unfortunately the way it is. I do hope to hear more back if you wish to follow up with some examples,

Sincerely,
Paul Henneman
President
ValuEngine, Inc.
www.ValuEngine.com
www.VEReports.com
www.VEInstitutional.com