Is it worth listening to newspaper tips or investment newsletters?

Sunday, Sep 08 2013 by
13
Is it worth listening to newspaper tips or investment newsletters

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)

Unlock this article instantly by logging into your account

Don’t have an account? Register for free and we’ll get out your way

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. ?>


Do you like this Post?
Yes
No
14 thumbs up
1 thumb down
Share this post with friends




7 Comments on this Article show/hide all

toddwenning 8th Sep '13 1 of 7
6

Having worked on a number of newsletters (one of which was based in the UK) and studied the industry for some time, I think you make some fair points.

A few points to add:

At the end of the day, some investors aren't comfortable going it alone (not a bad thing!) and prefer to have a professional guide to make suitable recommendations/investment selections, keep their emotions in check, and promote counter-cyclical investment decisions. Unlike handing money over to a fund manager or financial advisor to make the decisions, however, newsletters allow investors to retain full control of their money (you ultimately decide to follow the recs or not). So they can be a nice middle-ground for individual investors looking for advice but wanting to retain full control. 

The main thing to bear in mind with a newsletter or tip-sheet is that you're buying into the person (or team) making the investment recommendations as much as you are the strategy. As such, it's critical to understand their investment processes. Short-term investment performance is more luck than skill, but over time a good investment process should bear good results. 

Consistent with your article, the most valuable newsletters and tip-sheets will be transparent (to the extent they aren't harming current subscribers), have an established strategy, and be equally forthcoming about wins and losses. If they're tipping smaller-cap shares they should have a policy about minimising "pops" after the recommendation goes public (e.g. by limiting the # of subscribers, etc). Having an established community of investors around the service that allows frequent interaction between members and the newsletter advisor is also a good sign as it promotes transparency and accountability. Finally, a good newsletter will also have an extensive education component to it and seek to make its members smarter. (The best compliments I ever received from former subscribers is that they learned enough to invest fully on their own.)

All this is to say that there are good newsletters and bad newsletters just as there are good funds and bad funds and you should dedicate the same amount of background research into a newsletter as you would a fund. Investors looking for simple idea generation may not benefit from newsletters as much as those looking to buy into a particular strategy guided by a proven professional, but I think there's room for both types of services in the marketplace. Just remember to DYOR!

Best,

Todd

 

Blog: Clear Eyes Investing
| Link | Share
UK Value Investor 9th Sep '13 2 of 7

Thanks for the mention chaps! I think you and Todd have both made some excellent points about the use and selection of 'tipsters' and newsletters. I can't really improve on what Todd has said, especially about transparency of the system being used, and that investors DYOR on top of whatever you read. If only investment managers and funds were as transparent as some of the model portfolios out there!

Thanks

John

Blog: UK Value Investor
| Link | Share
croax 22nd Jul '14 3 of 7

I saw a website last week which plans to track the returns of share tips - www.dailyuksharetips.co.uk . At the moment though the website is looking a bit empty to say the least...

| Link | Share
rick 22nd Jul '14 4 of 7
1

"Newsletters with poor past performance are more likely to go out of business". This may be true but this does not stop many stock picking failures to go on and open a new newsletter.

I think some distinction needs to be made between the most long established investment newsletters/periodicals and the "tip" sheet de jour (often offering free "advice").

Some of the former are reasonable, have a process, have track records or even investment funds associated with them.

Many of the stock recommendations in the later (tip sheets) are more speculative AIM Tech/ Oil &Gas names, would appear to have very defined pop-then-drop share price profiles. Buyer beware because this is a zero sum game.

Even worse is the host of free advice one accumulates from subscribing to various investment products/services.
This tends to find its way to your email inbox. Here are a few headlines of stuff you might want to avoid

"Today's Tip"
"5 AIM investments to buy NOW"
"3 investments to sell NOW"
"Win £15,000 .."
"This simple change could make you a lot of money"
"Trade with an 85% Success Rate"
"I'm up £20,120 in three weeks"
"Why investors should be worried about the coming Crash"
"A hot share tip"


| Link | Share
Fangorn 22nd Jul '14 5 of 7
1

Keeping tabs on all these "Tipsters" is often a great way to get some ideas to then go an do some further research on. Sometimes there's a gem - often a reasonable quality name.

But definitely not worth following blindly in my opinion.

| Link | Share
Asagi 22nd Jul '14 6 of 7
1

An important article. I have several thoughts.

One would be that part of the problem for tipsters is that they frequently have to produce tips at a certain frequency and volume such as one a week.

The problem is that
a) in good markets, many shares are fully valued. I feel that UK smallcaps have been in such a position for the last year. This makes it difficult to i.d. winners.

b) in poor markets, when there are loads of bargains around, they can only pick one share when a basket of five picks would likely do better.

The New Year tips are probably better therefore as frequently the tipsters being asked have not exhausted their ideas in previous weeks.

What I also love is the way that so few (if any?) equity analysts quit to become full-time investors. Kinda tells you something.

Regards,

Asagi

| Link | Share | 1 reply
jjis 23rd Jul '14 7 of 7

In reply to post #84907

Hi Asagi - I was what you describe as an "equity analyst" - well a fund manager actually and did quit and now invest on my own account full time. I provide some details, blog commentary, a check list and resources for free on my website. I note also that John Rosier who was also a fund manager has posted on here regularly, has done something similar and is actually running a subscription "newsletter" type service on his site.

"He who knows he has enough is rich."   Lao-Tzu

Website / Blog : Compound Income

Twitter: @CompoundIncome

| Link | Share

Please subscribe to submit a comment




About Stockopedia Features

Stockopedia Features

Stockopedia Features covers in-depth stories on strategies, companies and themes that are relevant to online investors. Investing is hard work. We don't try to over-simplify complex concepts - we prefer to try to help you navigate the detail.  more »


Stock Picking Tutorial Centre



Let’s get you setup so you get the most out of our service
Done, Let's add some stocks
Brilliant - You've created a folio! Now let's add some stocks to it.

  • Apple (AAPL)

  • Shell (RDSA)

  • Twitter (TWTR)

  • Volkswagon AG (VOK)

  • McDonalds (MCD)

  • Vodafone (VOD)

  • Barratt Homes (BDEV)

  • Microsoft (MSFT)

  • Tesco (TSCO)
Save and show me my analysis