The madness of crowds? Why you should avoid Hargreaves Lansdown's most traded stocks

Definitely; thanks for this additional insight!

Thank you! I agree with you; the way I constructed the portfolios was taking a historic date, say the 9th of October 2016, and looking at what stocks HL had on its top lists on that day then using historic data calculating how the stocks from those lists performed until the next date I checked HL’s lists. In essence, I’m not testing stocks promoted today against historic data but stocks promoted historically against the relevant historic data.

Great piece of research. Thanks Zoe. Although to be fair to HL if you move across to the top 'most looked at' funds, Lindsell Train Global is number one on the list so they're better at highlighting funds than shares (so long as one overlooks their recent predilection for Neil Woodford...)

Really interesting, thanks Zoe :)

Hi Zoe,

  A fascinating piece of research, thanks for your hard work on this.

 The main takeaway from this, that this lists should be used with great caution (if at all), is a good one.

However I draw some very different conclusions on some of the more detailed points.

The most viewed list

You characterise the most viewed list by observing that nearly 25% have a Speculative or Highly Speculative risk rating, an average F-Score of just above 5 and an average StockRank of merely 60.5.

But, consider this :

• The market as a whole has 40% of stocks classed as speculative or highly speculative, so this list is (historically) less volatile than the market as a whole.
• The average F-Score for the market seems to be around 5 (although this presumably can fluctuate over time) so the list is either average or slightly better than average in this regard.
• By definition the average SR for the market is 50, so again  the list is better than average,

So the list manages to select a group of stocks that are slightly better than average (on the scores) and yet manages to significantly underperform the market over the test period – why should this be?

One conclusion could be that, the interest of the masses in these stocks, tends to mean that the price is over inflated at the time of initial observation – there may well be something in that.

However, I would conjecture that stocks often make this list (most viewed) because they have experienced some profound news (either positive or negative). If so I would expect there to be a much wider spread of outcomes (big gainers and big fallers) than the market as a whole. It would certainly be interesting to see if the data bears this out.

Performance versus the market has certainly been very volatile. There was substantial out-performance in late 2013 / early 2014, followed by significant underperformance later in 2014. (How much of this difference is driven by the outliers?)

By early 2016 there wasn’t much to choose between the list and the market in terms of cumulative performance, in fact the first three years look to be nothing but random. The list has done poorly since, but particularly in the last 12 months – is there a particular factor driving this?

Most bought and most sold lists.

 It does not surprise me much that the most bought shares have underperformed the market (and that looks to be fairly consistent over the period)

More interesting perhaps is that the most sold stocks pretty much tracked the market until mid-2017, but have dramatically underperformed in the last two years. IE the masses were selling fairly randomly early in the period, but have recently ‘learned’ to sell the right stocks (but still buying the wrong stocks) . Again it would be interesting to understand if this is just random chance, if outliers drive the average or if there is something else we could learn from.

I do not think the fact that 45% of the buys and sells are from the two most volatile categories is particularly meaningful given that the market average is 40%.

Neither does the distribution of StockRanks styles look particularly profound. Across the market as a whole the distribution between winning styles, neutral styles and losing styles is roughly in thirds and both the buy and sell lists match this pretty closely.

So whilst it may seem intuitive that “if investors had used Stockopedia’s website to research the StockRank Styles of the stocks in these lists, they could have easily avoided investing in badly performing shares.” I would not take that for granted as a fact. I do not dispute that the StockRank styles are predictive across the whole market, it should not be assumed that this automatically applies to a subset – it may even be that the SRs ‘interact’ with investor sentiment actually produce perverse results.

Rather for me the take-out would be to totally ignore these lists (in fact probably never look at them in case you are subconsciously influenced) and simply use the StockRanks to characterise.  The one exception to this might be to routinely avoid the “most bought” stocks as they do look to systematically underperform.

Zoe, clearly a lot of work has gone into this and I thank you for it. It proves once again that the formula has to be Quality, Value and Momentum which results in a high stock rank. I think we all make life difficult for ourselves searching for the elusive best shares to buy now when the Stockopedia algorithms have crunched the data for us. Thank you again. When will I learn to accept the stock ranks and spend less time at my computer and spend more time enjoying myself on the golf course?  Charles

In that case I totally was missing the point :-) Thanks for clarifying. Good blog!

It is also interesting that £BUR appears top of the list of shares being sold, whereas I just happened to look at IG this evening and see that 96% of investors in £BUR are long. Whether that indicates a change in sentiment in the days between the above and today or, possibly more likely, that IG users have a different approach to HL investors, who knows.

There is no information on Stockopedia on market strength, positioning and innovation/R&D. So if you want to trash these top bought/sold lists I suggest you drop your momentum screen and concentrate on financial, economic and market fundamentals - this would make Stockopedia extremely valuable as a tool.

The emotional investor would rather buy a new low than a new high, except for after a long period of out performance where Fear Of Missing Out kicks in.  The emotional investor will tend to sell at a new high, and potentially buy back higher, generating further momentum. The emotional investor will tend not to sell losers until the point of maximum despair. They might even refuse to take a loss at all. The emotional investor will fold a recovery at their break even. Finally the emotional investor loves a good story, especially one that involves them getting richer.

What doesn't help the London market, and thus the UK investor generally blind to the rest of the world, is the paucity of genuine secular growth companies; were they to exist the buy lists would probably look somewhat better, perhaps showing a high beta rather consistent awful performance.

The list published by Hargreaves Lansdown are as much use as a chocolate tea pot.
Further, the research published by Hargreaves Lansdown is superficial and targeted at zombie investors.
The only technique for identifying shares to buy and those to sell has to be factor based and based on comparison of different stocks.
The reader is strongly advised to refer to Charlie Munger's Investing Principles Checklist as available on the Stockopedia web site.

have you ever read thinking fast and slow, it talks about anchors, if a company is well below a previous price it maybe cheap or it maybe a deteriorating crap stock.

To break free of anchoring is really hard to do, shops do it all the time in their 'reduced from' promotions (30% off 60% off etc), it gets your attention, the product wasnt worth it at the original price and still may not be at the reduce price but you find yourself comparing the two prices and nothing else

I fell for it before reading the book, I brought Mulberry based on its blown out price, however since i did its done sod all, i think i've fallen for the anchoring bias

@Nicholas - yes there's a lot of factors we can continue to add, and do have plans to add. 

Odd though to associate most bought/most sold with the momentum factor.  Momentum is the strongest anomaly in finance... and it's outperformed the more pure 'fundamental' factors Quality and Value since inception. 

The below is based on annual portfolios across the deciles... it's a few weeks old. 

Great piece of analysis, thanks Zoe.

I don’t doubt the overall trend here. But to offer a partial defence of HL users.... there may be a small portion of them who use the platform for their speculative bets. They have their safe money invested in funds elsewhere, and use broker platforms for stocks they choose themselves, which are normally the “fun” ones with perceived large pay offs. 

Admittedly that won’t be everyone - probably a small portion - but it would make the overall figures worse. 

Nevertheless, you can’t disagree with the overall message. Treat any stocks on these lists with caution and do your research!

Good article Zoe, highlighting the danger of following the crowd!

However I must come to HL's defence and say that these lists are not share recommendations or buy tips. As you mentioned in one of your responses: "I’m not testing stocks promoted today against historic data but stocks promoted historically against the relevant historic data."  HL does not promote these lists as buy or sell recommendations they are there purely for information purposes on the most traded shares on a given day.

I think you raise an excellent point in this article though in that following the crowd rarely results in outperformance! The StockRanks are a much better tool to help select winning shares!

The question to ask is "why is this stock in the most viewed/traded list"?

The reasons differ. Having a large shareholder base is obviously one. Lloyds with its huge Halifax shareholder base (due to de-mutualisation some moons ago) is one, BT with its massive staff share programme is another.

The sheer size of the stock capitalisation is another reason why there may be so many shareholders. e.g. Vodafone, Lloyds, BT.

Then there is "being in the news" - Burford ticks the box on this one with its fall from grace and consequent fear. Others will attract the greedy as speculative plays like miners.

So, given there are real reasons beyond company features as to why the companies may be in the lists, I'm not sure you can draw many inferences.

An excellent piece of research and an interesting read.

I wonder if anyone has done any research into the performance of unit trusts recommended by Hargreaves L compared to their underlying sectors - I have been increasingly of the opinion that there are some very ropey contenders in their recent recommendations for Wealth 150 (now 50), having plotted a few against other trusts in the same sector as those recommended... including, of course, funds managed by Woodford.

Thought-provoking and direct. Of course maybe HL could make it even clearer that these lists are for information and interest only but definitely not recommendations. Indeed HL rarely give advice unless the client specifically requests it though their comments section is a useful starting guide prior to DYOR ,preferably through Stockop.

Hi Peter

I give in, will you tell me where I find the checklist please?

Thanks

3rd Man - Searching Stockopedia (using the search box at the top of the page, in the middle) for “investing principles” finds a few things including this https://www.stockopedia.com/co...​