Can you beat the market reading stock market bulletin boards?

Wednesday, Jul 27 2016 by
78
Can you beat the market reading stock market bulletin boards

If you are anything like me, when you started investing in the stock market you read furiously to generate ideas. I subscribed to every newsletter I could get hold of. I hunted high and low for stocks that had the capacity to change the world. I searched the web for proof that other investors were buying them. This led me to the big bulletin board websites.

As a UK investor, I found advfn, iii and lse where there seemed to be thousands of investors bantering on almost every stock imaginable. I lurked for months, intimidated by the apparent expert knowledge of all the loudest voices before gradually contributing myself. It was the most expensive mistake I’d ever make.

I’ll explain why it was so expensive for me in a short while, but it wasn’t just me. Reading bulletin boards may be the most expensive mistake that anyone makes.

Since my own calamities in 2008, I’ve taken a huge interest into how and why bulletin boards are able to so deceive us into losing money. A few years ago I decided to start tracking the performance of the 100 most discussed stocks on the most popular online bulletin boards. I first revealed this chart at the UK Investor Show and haven’t updated it since, but even so, the results are damning.

UKIS_2016_-_Managing_the_Monkey.jpg

It’s a picture of heart-wrenching ups and downs and consistent underperformance. For every story of someone who paid off his mortgage and sent his kids to private schools by ten-bagging on Rockhopper, there are hundreds of others whose crowd following have led to serious capital losses.

The typical punter investing in a collection of the most discussed stocks online would have been zeroing in on failure. A 10% average failure per year. So much for the wisdom of crowds !

Why do we get pulled into mob thinking?

It was the bull period between 2003 and 2009 that I used bulletin boards the most. I had some savings from my time as a wealth manager and had bolstered my funds with an inheritance after my mother passed away. Being Scottish, I had very good discipline ‘on the buy’. I never liked to overpay. At the time I used a strict rules-based purchase criteria that was very Jim Slater inspired, and for much of the period my exit rules were solid.

But Bull Markets create…

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Disclaimer:  

As per our Terms of Use, Stockopedia is a financial news & data site, discussion forum and content aggregator. Our site should be used for educational & informational purposes only. We do not provide investment advice, recommendations or views as to whether an investment or strategy is suited to the investment needs of a specific individual. You should make your own decisions and seek independent professional advice before doing so. Remember: Shares can go down as well as up. Past performance is not a guide to future performance & investors may not get back the amount invested. ?>


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56 Comments on this Article show/hide all

gus 1065 27th Jul '16 17 of 56
2

Excellent article Ed.

A couple of observations to throw into the mix - not least in the interests of disrupting the emerging "Group think" that BB's are in all cases bad and deleterious to your wealth!

The article implicitly assumes that activity on a bulletin board is necessarily "pro" the underlying stock. While I suspect this generally is the case (people gravitate towards and comment favourably on stocks they already hold), I have come across a few bb's where a well thought through counter argument has made me reconsider and decline a possible investment (must have been one of Grindertrader's before he stopped posting!). I agree sensible commentary is the exception rather than the rule but if you can be bothered to plough through the pantomime villain stuff there is the odd gem.

Over time, I have found one or two posters to be knowledgable and able to provide insight or indeed new information that has been beneficial in evaluating a position. Unfortunately, it takes time to weed out the few good from the many bad (as well as a pretty good memory) but for certain non-mainstream stocks I have found one or two posters whose opinions I value.

In a post earlier this year, I set out a comparison between two shadow portfolios; one a NAPs based factor portfolio, the other I characterised as a "guilty pleasures" portfolio. I provided a YTD review in mid-April here:-

http://www.stockopedia.com/content/a-tale-of-two-portfolios-127289/

While the latter portfolio was not entirely a product of bulletin board scuttlebutt, I will admit that one or two of the stock investments certainly had an element of "story stock" to them and were in some cases conceived from the germ of an idea from a bulIetin board or blog. I plan to do a further update later this year, but as of today the NAPs portfolio is down about 0.5% and the GP is up 52%. Obviously this is only a tiny sample, but either through luck or some monkey brain algorithm that I can't de-code, at least one distillation of story based stocks seems to be storming ahead.

Flippancy aside, I wholeheartedly agree with the sentiment of your article. To the unwary, BB's can be a minefield. At best full of the well intentioned but misguided story stock evangelists. At worst full of parties with a vested interest in pumping and dumping story stocks for personal gain.

Best,

Gus.

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purpleski 27th Jul '16 18 of 56

Thanks for an interesting article. I did subscribe to ADVFN when I first started investing (I liked all the flashing figures and colours) but I never got sucked into the boards as could not (and still don't) understand how they work. I stopped using ADVFN after a year and cancelled after two. They make cancelling very hard (it has to be done by letter) which says a lot about ADVFN. I would urge any newbie to avoid ADVFN, III or LSE.

As for Blogs I read SCVR, JIC, John Kingham and when I remember (he does not email or tweet) Naked Trader. But I use these mainly for education and a bit for ideas for further research. I have learnt not to try and match trades as I think that is futile.

Finally on books I have just read "Deep Value Investing" by Jeroen Bos and "There's Always Something To Do" about Peter Cundill by Christopher Risso - Gill. Both fantastic value investing books which I think are well worth reading and show the benefit/advantage of ignoring the crowd.

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VegPatch 27th Jul '16 19 of 56
4

Thanks Ed, interesting thoughts.
For those that are wondering about LEAST discussed stocks, they tend to be those in the FTSE100, regarded as boring and with more perfect information embedded in their shareprices. On the contrary, the most discussed tend to be small mid caps, as Ed points out - "Story" stocks. Its also because these shares are less well covered by City analysts, so the educated (or even uneducated) investor can find out a few facts that are others dont know and can feel part of the debate.

Most of my investment and SIPP portfolios have core holidngs in large and mid cap companies, typically 'boring' cash compounders with the odd smattering of interesting small cap growth or recovery positions added in. Like most I read SCVR to get a few ideas. You just have to have your antenna up for when you feel shares are over hyped. Where then does the marginal buyer come from then? It reminds me of the famous anecdote of Joe Kennedy (or JP Morgan, no-one seems to know) who sold their entire holdings of equities right before the 1929 crash after they received investment tips from the shoe shine boy.

I think a rules based portfolio is good for some investors as it makes the investor become more dispassionate / rational, however I try and combine the 2 approaches. I screen for cheap good quality shares with proven 'moats'. But then, unlike a rules based approach, I investigate the companies and pick only c15 which I hold for the long term and dont rebalance much as this involves frictional trading costs. These shares eg Imperial Brands, BAT, Sage etc have all compounded way ahead of the market. Occasionally they do get expensive but i tend to hold for years. I also look for seriously mispriced small cap companies - recovery or growth. The dangerous ones tend to be growth where everyone gets carried away. There are real herds here. I prefer to look at recovery situations which are seriously unloved, especially where they have some asset backing or where there is a proven business going through a tough time or just been hammered by the market eg CLS Holdings at the moment, Bovis a couple of weeks back at 0.8x net tangible assets, Cambian.....Higher risk certainly

As with everyone, there is no "Right" approach. See what suits you personally.

If a rules based approach is the only way forward then logically Ed should close down the discussion page as it is losing investors money. But he wont do that because he knows most of his paying members like the discussion pages and avidly read SCVR. They would go elsewhere and his business profits would fall. So Ed, what are you going to do ? close it down in all of our interests ....Go on I dare you !

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VegPatch 27th Jul '16 20 of 56
1

Ps the last comments were seriously tongue in cheek before I get accused of being a Troll or whatever !

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Edward Croft 27th Jul '16 21 of 56
1

In reply to post #144516

If a rules based approach is the only way forward then logically Ed should close down the discussion page as it is losing investors money. 

I did say this... 

Read Blogs rather than Forums - blogs are often written by independent thinkers who come to decisions from their own research rather than groupthink.

This is a blog isn't it? 

;-)

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VegPatch 27th Jul '16 22 of 56

Touché !

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nigelo 27th Jul '16 23 of 56
7

For me, the most interesting nugget in this entertaining article is that Ed was able to amass savings as a wealth manager despite not being a particularly good investor. That's the financial services industry in a nutshell!

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FREng 27th Jul '16 24 of 56
3

In reply to post #144453

Professional Services: Sunflower Counselling.   

It's true that I have seen some sad looking sunflowers, but Is there a market for that? 


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Edward Croft 27th Jul '16 25 of 56
7

In reply to post #144555

nigelo - absolutely ... "Where are the customer's yachts?"

The City is a savings skimming machine.   I'm going to be blogging about a friend's portfolio and coming to precisely the same conclusion next week.  Everything i've learned about successful investing I've learned SINCE leaving the City. 



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Edward Croft 27th Jul '16 26 of 56
8

PS - just wait till you see what we've got lined up for next week ... on whether you can beat the market buying Broker "Buy" recommendations... it's even worse !!!

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Rob Davies 27th Jul '16 27 of 56
1

Excellent article Ed. Of course it applies to the traditional mainstream printed press as well.
Your piece should be required reading for every investor.
As always Ben Graham got there first when he said that in the short term the stock market is a voting machine.

Fund Management: VT Smart Dividend UK Fund
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Paul Scott 27th Jul '16 28 of 56
8

In reply to post #144435

Hi Carcosa,

As regards Paul's SCVR it is in some ways a self-fulfilling prophecy. If Paul says buy/sell in regard to a very small cap/illiquid share then his opinion carries some weight and others will adhere to his suggestions thereby increasing or decreasing the share price accordingly

I don't think there's any evidence of that at all.

For a start, I NEVER say buy or sell! My reports are just giving a personal opinion on whatever results or trading statements have been issued that day. So it's very different from a tipping site.

Also, the shares I report on are already moving in price, because it's their results day. Plus I focus on the biggest price movers of the day. So people might think it's me moving the price, but actually I'm only writing about it because it's already moved a lot in price.


Smashing article Ed! I'm sure we've all had plenty of bulletin board nightmares.

I would add that bulletin boards are very useful to short sellers. When I shorted Afren, after working out that the equity was toast, due to bond obligations, I amused myself by reading the utter garbage that bulls were writing about the shares on advfn. It soon became readily apparent that these people were completely unsophisticated, and had no idea what they were doing - they didn't understand the basics of investing, or company accounts. So it was easy money.

Same with Globo, and Quindell. The bulls were utterly clueless, which they amply demonstrated on bulletin boards.

Whereas a totally silent bulletin board is very often a wonderful confirmation that you've found a hidden gem, if your fundamental research points to it being a gem. What it means is that, over time, other people will discover the gem, and they'll be buyers. So that pushes the price up.

A busy bulletin board full of muppets is a serious bear signal in my view - usually the stock will collapse in price sooner or later.

Regards, Paul.

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Hot Socks 27th Jul '16 29 of 56
3

thought this was a great article. there has been a lot of talk of the wisdom of crowds recently, for example following the failure to predict the referendum result, and I've not seen as clear an analysis as your four criteria for identifying wise/not wise crowd. Seems really perceptive to me - although that could of course be my behavioural bias wanting to agree with all the authoritative previous comments saying how good the article is ...!!

If I could have the temerity to add one thought my own (admittedly easier said than done) first rule is simply don't get greedy - find some decent companies to buy and hold until they stop being decent companies, avoid doing too much and avoid doing anything really dumb. that should beat the market by a few points each year and keep compounding. Learn to love watching the dividends come in!

Let someone else chase the ten baggers - if they get lucky good for them, when I get to lie on a beach in the sun with a cool beer I enjoy it I don't begrudge the guy sailing past in his yacht ...!!

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PhilH 27th Jul '16 30 of 56

In reply to post #144612

I'm interested in this don't get greedy concept.

You don't have to chase ten baggers and you don't have to settle for beating the market by a few points each year.

I want to smash the market and I think you can do that with low risk by searching for ten double baggers rather than chasing ten baggers.

Since 2013 I have cashed in on five double baggers (Kentz, Cellavision, GFT Technologies, Let's Gowex & Sprue Aegis) and I hold several stocks that are currently up over 75% (Corteceira Amorim, Meet Me, Adesso, Trigano) and my average gain for current holdings is 36%.

Sprue Aegis was a triple bagger and Meet Me has doubled in under 3 months.

Professional Services: Sunflower Counselling
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pka 27th Jul '16 31 of 56
3

There is one bulletin board that I find occasionally has some useful comments, which is the Investment Trusts and Unit Trusts board on the Motley Fool website:

http://boards.fool.co.uk/investment-trusts-unit-trusts-50097.aspx

If one followed some of the posters on that board's tips on buying certain high-quality investment trusts that happen to be on higher than average discounts to their Net Asset Values at the time of the post, I expect one would beat the market by a few percent a year over the long-term.

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shipoffrogs 27th Jul '16 32 of 56
1

Excellent article. Those graphs are fascinating.

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Paul Flanagan 27th Jul '16 33 of 56
4

I set up a test portfolio 6 months ago with the 20 most discussed bulletin board stocks in it. Currently it is down 23%. In contrast after 6 months my real life diversified stockopedia portfolio is up 0.5% (excluding dividends).

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TerryHancock 27th Jul '16 34 of 56

I wrote down two points I read in an investment article some while ago (cannot remember the author) which are fixed to the side of my screen....

1 Do nothing is the best advice for everyone almost all the time.

2 Market sentiment and fundamental values are completely different parts of the decision making process.

I think your article is great and bang on the money, I like that there is solid data here to prove the point, it is possible to make money on BB stocks with iron discipline and exquisite timing - on the other hand you could just take up poker.

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Hot Socks 27th Jul '16 35 of 56
2

In reply to post #144615

PhilH - Good for you, maybe a slight alteration to my maxim is needed. Don't get greedy unless you're definitely smart enough to get away with it.

I don't think Sprue Agis has ever doubled in price let alone tripled since it was listed on AIM and its now trading well below its 2014 float price so you must have super timing and traded it on ISDX before it transferred to AIM, and Meet Me is a US micro cap I think? That's a lot less risk averse and a heck of lot smarter than me, and I've no problem admitting it. You keep going and I'll keep not getting greedy ...





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PhilH 27th Jul '16 36 of 56
2

In reply to post #144639

Yup I had Sprue on the ISDX.
And I bought into Meet Me in early May as it broke out. High Quality and Momentum scores.

It's not really being clever it's just timing the purchase of stocks that fall out of my screens.


P.S. I'm quite transparent about my performance ... my fantasy fund mirrors my personal purchases with the exception that unfortunately I didn't have a starting fund of £1m. See http://www.stockopedia.com/fantasy-funds/philhs-fu...

Professional Services: Sunflower Counselling
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