Excerpted from Bogle on Mutual Funds by John C. Bogle, pages 162-164

As the industry booms and the number and diversity of funds proliferate, a remarkable number of mutual fund newsletters have come into being. Most recommend individual funds selected from the total fund universe; several limit their recommendations to funds in a single fund family. The quality of their advice is uneven at best. Some are valuable and helpful, but most are worthless or even counterproductive.

Despite the warning that you can't judge a book by its cover, my initial judgment of these advisory services has been shaped largely by the quality of their promotional efforts. Most use glossy brochures with headlines that either promise easy wealth or predict impending disaster. These examples, all direct quotations, illustrate the hyperbole:

• A millionaire-maker (the highest I.Q. on Wall Street?) outsmarts the market, again... makes 28 straight correct calls [on the direction of the stock market] against odds of 268,435,456 to 1.... Get aboard one of these 10 hot undiscovered growth funds.

• Don't let a mediocre mutual fund SHRINK your biggest dreams! Using nothing but the most conservative, safest, most consistent mutual funds, we have reaped an average gain of +14.1% per year for the past 18 years. [Note: the offered advisory service had been in operation for just five years.]

• Absolute winners for next year, plus the "double-digit-returns-forever investment strategy."

• 100 days to inevitable wealth... seven best mutual funds now.

• America's #1 mutual fund expert... one of the world's highest paid investment advisors at $1,800 an hour... reveals the hottest no-load mutual funds... produced an average annual return in excess of 50% per year... send your profits into hyperspace.

• COMING MUTUAL FUND DISASTERS [picture of volcano erupting]... 8 out of 10 fund investors will be in the WRONG FUNDS in 1992. But here's how you can come out 30% richer and sleep better at night, too.

Alas for the newsletters, these claims of past success can be evaluated. The Hulbert Financial Digest does exactly that. It measures the returns achieved by a hypothetical investor, in effect, by following each adviser's recommendations over time. During the ten years ended December 31, 1992, for example, the cumulative total return of the average adviser in operation for the full period was +139.9% for the period, a rate of +9.1% annually. For the Wilshire 5000 Index of the total stock market, its cumulative return was +318.6%, a rate of +15.4% annually. That these results seem to defy the law of averages and the rule of regression to the mean is hardly a compliment.

During that decade, only three of the 36 advisers in operation during the full period outpaced the unmanaged index of the total stock market. Things took a turn for the better during the five-year period then ended, however, and 20 out of 87 advisers outpaced the unmanaged buy-and-hold index. These figures suggest that an investor who follows the advice of a newsletter has at best just a little better than one chance in five of adding value and at worst about one chance in twelve. These are not very good odds. They surely do not suggest that advisers as a group add to the returns, achieved by investors who stay the course.

Yet the dream of easy riches, however seldom fulfilled, lives on. The number of advisory newsletters has grown from just 24 in 1980 to 135 at the end of 1992. It must be a very profitable business. But even at a typical subscription cost of $150 per year, a newsletter consumes 0.60% of the return on a $25,000 mutual fund holding. Thus, the newsletter would cost more than the $125 all-in annual cost of owning a mutual fund with a 0.50% expense ratio. All newsletters cost the investor good money; most offer dubious value.