In a nutshell, if your discount broker charges you $7.50 per trade, then to just match the S&P500 return using the STS system, you would need to invest $2000 in every recommendation. If you factor in a 35% tax bracket for short term gains, then the minimum amount increases to $2150 per recommendation. (In order to get the 31% ROI, you would need to be investing at least $200,000 per trade). Since the maximum number of positions held at one time is 501, you would need $950,000 (or probably $700,000 in a margin account) to buy each of the recommendations. This is not something for the small time investor. Furthermore, making 1100+ trades a year does take time, and that is only to match the S&P 500.
So while the 31% (by my calculation - 36% by their's) ROI sounds good, it looks like those with $1 million will only be able to get 1/10 of that amount. But, even that isn't true. It all has to do with how the ROI is calculated. With the S&P 500, if I have $1 million to invest, buy it and hold it for 14 years, I will average 4% per year. In other words, at the end of 14 years, I would have $1.73 million. However, using the STS system, if I dedicated $1 million and bought $2000 of each reccomendation for 14 years, I would only have $1.035 million at the end of 14 years for an average annual return of 0.26% - less than 1/100 of the 31% nominal ROI. Why? Because with the S&P500, my money is fully invested the entire time, so all of the money is constantly growing. With the STS system, only a portion of my money is invested at any one time (although the entire amount is needed for the few times when 500 positions are open). I did an analysis and found that 75% of the time, less than 20% of the $1 million is actually invested.
Well, why not divide the extra amongst the stocks that are owned? That would increase commisions as portions of the stock would need to be sold to invest in new recommendations. What about investing the money in a money market? Well, most brokerage accounts do this, and those money markets have a return of 0.5-2%. Granted this would increase your overall ROI (of the entire $1 million) from 0.26% to 1.8% (assuming a 2% money market), but if your money market account is making more than the STS system, why not just invest in that. And therein lies the problem with almost every stock trading system. The ROI boasted about is based on hypothetical accounts and only considers the amount actually invested in the stock picks, they do not reflect how a real investment account would operate.
The question and answer section glosses over this issue indirectly. One question was whether a mutual fund could be set up. The answer given is no because the large sums of money ($50 million+) would cause to large of movements in individual stocks. I disagree. The reason it wouldn't work is because the mutual fund would hardly ever be fully invested. If you look at any mutual fund's holdings, a small portion (5% or less) is kept as cash to take advantage of new positions. When a stock is sold, something else is almost always bought immediately. The STS system doesn't work like this. The system may spit out 0 recommendations or 200 recommendations in a single day. Based on my review of their published recommendations, there would almost always be a significant (80-90%) cash reserve in the fund (which is needed to capitalize on the trade recommendations) that severely limits the earning potential. In other words, while the STS system has a 31% ROI in theory, if it were started as a mutual fund, that would plummet 2-3% or less because the funds in the account would largely remain uninvested.
Up to this point my analysis relied on the assumption that all recommendations were acted upon. The STS founder admits that this is not practical for most people, so let me test some of the statements that he makes such as choosing as many as 20 positions to approximate the return or that someone with as little as $10000 could profitably participate. Remember, stock systems get their money from selling the stock system not necessarily from actually trading with the stock system. So, it is in their best interest to make the system as "workable" for as many people as possible. If they started off by saying that you needed $1000000 to just match the S&P 500, then they wouldn't get many people buying.
Without a system (which would need to be analyzed separately) to select which of the STS recommendations to act on, I selected randomly. First, I picked every third, ninth, and eighteeth recommendation to determine how much difference the ROI would change. The nominal ROI per trade was 0.86%. For every third recommendation it was 0.83%, for every ninth recommendation it was 0.73%, and for every eighteenth recommendation it was 0.89%. Some below, some above, but no changes in an order of magnitude. Remember, that when I put the STS system into actual account conditions, the return I calculated was 1/100th of the return from the S&P500.
To test it for actual account conditions, I chose an account with $300,000 and a commission of $5 per trade.
Per Trade ROI
Maximum # of Positions
Actual Annual ROI
Not so impressive compared to the S&P500. It does appear that the more money per trade, will increase the ROI. However, the total funds needed will increase as well. In fact, after going over 50+ scenarios using their recomendations I am of the opinion that there is no way to even beat the market over the long term with the STS system. Sure, you may be able to for one or two years, but throwing darts is just as effective as a method for choosing stocks. Bottom line is that the STS system requires too much money to be held in reserve (ergo not making money).
And frankly, that is the problem with almost every stock picking "system" out there that I have examined. 1) Too much cash is left on the table for the next stock that may come along. 2) The constant changing of positions severely desreases the return from commissions and taxes. That is why long term investing has remained tried and true for centuries.