One of the perennial dilemmas for the DIY investor is how best to deal with the bombardment of buy & sell recommendations from offline and online media. These investment ideas or "tips" may be thrown in for free by newspapers, such as the Telegraph 'Questor' or the Times 'Tempus' columns, or TV broadcasts ranging from Bloomberg to Jim Cramer's "Mad Money". Alternatively, they may be part of a bespoke paid service, in the form of a subscription newletter like those offered by T1ps.com or a dedicated investment publication like the Investors Chronicle. There are even websites like ShareTips365 or Yahoo that aggregate share tips across industry experts, financial publications, brokers and newspaper columns.
As we've discussed elsewhere, it's important to constantly think about and improve your investment idea search strategy in order to maximise the "top of the funnel". So what place should newspaper tips or investment newsletter/tipsheets have in an effective idea origination strategy? Is it worth paying attention to them or, indeed, as some have suggested, should these kinds of tips actually be used in exactly the opposite way as a "Contrarian Indicator" (i.e. is it better to sell when they say buy?).
Two Questions
Essentially, there are two key questions worth considering:
1) Can a fresh newsletter recommendation (or press tip) impact stock prices? (Can tips move the market?)
2) Are you likely to make money by following these recommendation over a reasonable timeframe, after factoring in transaction costs (Do tips beat the market?)
As regular readers will know, we're all about empirical or evidence-based investing at Stockopedia. Reviewing the weight of academic research in this area, generally speaking, the consensus seems to basically a yes to the first question, but a fairly clear no to the second question (although see our caveats in the concluding paragraph).
Can Tips Move the Market?
Some newsletters (or newspaper columns) have very wide readership, potentially reaching hundreds of thousands of retail investors. A new buy or sell recommendation may therefore potentially be a significant market event, especially in the case of a smaller-cap company, leading to both price and volume spikes.
One study in 2001 by Schadler and Eakins studied the performance of stocks selected for Merrill Lynch’s “focus” picks. They found abnormal same-day returns plus abnormal returns in the two days in advance of the announcement. Similarly, Trahan and Bolster (1995)
