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

20th Aug '19 by Zoe Fujiwara

33 comments 8262 reads

Hargreaves Lansdown is one of the UK’s biggest investment brokers - and like other platforms, one of its eye-catching pages is its "Top of the Stocks" feature. You may have perused lists like this for interest or even made investment decisions off the back of them. But have you ever considered what lists like these really tell you - and whether they’re a route to easy profits or painful losses?

Lists of the most viewed, most bought, and most sold stocks can instinctively feel like a useful guide to what’s hot in the market. But our research shows that far from being a useful short-cut, these lists are right to carry very serious wealth warnings…

Hargreaves’ homepage reveals the top 5 most viewed shares and just one click away you can find the top 10 most viewed shares. This may seem innocent enough, and perhaps even very useful. After all, given the concept of the wisdom of crowds, the top 10 most popular shares could easily feel like somewhere you should be focusing your attention.

Well, that’s where you’d be wrong. Upon seeing this list, there are three actions you could realistically take.

1. You might trustingly decide to buy these stocks, rationalising that they should perform well as they might have strong momentum. You may reasonably think that you can even combat poorly performing stocks on the list on any one day by adjusting your portfolio quarterly or even weekly. Yet my research shows that even this will not be able to save you from poor portfolio performance.

Using the top 10 lists dating back six years, I have created a portfolio of these stocks and updated it quarterly (in January, April, July and October), graphing the performance in comparison to the FTSE All-Share Index. Both are given a base investment of £100,000 and rebalanced quarterly as and when there is new data on stocks. As demonstrated, such a portfolio would significantly underperform the FTSE All-Share Index.

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2. You might decide to do some research to determine whether or not the stocks are worth the hype. Perhaps you think there must be some reason for the popularity of these stocks and know to do your research before investing. Investors should, on the whole, be smart and rational. However, given the data I’ve…

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Carcosa

19th Aug '19

Seems a bit unfair to mention Hargreaves Lansdown specifically in the title and infer they are at fault by so doing. As you mention, other such brokers have pretty much the same list of shares.

I have yet to come across any convincing argument that crowd sourced share selections provides a quality list of shares in which to invest.

Of course, had you listened to Hargreaves Lansdown's 2019 portfolio picks then things would have been much better i.e.:

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Zoe Fujiwara

The thing is, even though we’ve focused on Hargreaves Lansdown, in a way this is a back-handed compliment. HL easily has the largest user base so there will be more traffic around their top lists compared to other brokers. And it's certainly the case that some lists - like the HL 2019 selections you mention - may pay off. But in this case, we've endeavoured to take a look at trends over a longer period of time and taking into consideration a larger selection of stocks which investors watch/buy.

xcity

I've never paid much attention to these lists.
Maybe I should.
Lesson seems to be to watch where the crowd is going and then go somewhere else. If the crowd always underperforms, then any random somewhere else would be better.

Nicowilson

Really interesting piece of research. Well done, and thank you.

Edward Croft

Zoe is interning with us this summer. She's going into the second year reading PPE at Oxford University. She's done some incredible research this summer... this piece on Hargreaves Lansdowne is just an inkling of what she's been up to. There's a really heavyweight piece of research coming on a different topic... give us a few weeks and we'll reveal.

thomas burke

Nick Ray

Seems to raise a lot of follow-up questions for me...

Why do most bought perform worse than most sold? The opposite pattern to what you might expect?

Why did most sold do as well as FTSE until 2017? What happened?

Most bought seem to have mainly suffered in 2014. What was the reason? Was it one particular spectacularly bad choice?

Funderstruck

Thanks Zoe, a very useful piece of work. It really does emphasise how many of HL's retail investors would benefit by investing first in Stockopedia rather than jumping into the market head first.

GrahamF

I don’t think that the brokers like HL describe these as “tips” so I’m not sure why you mention that they should not be used as tips.

The other thing that occurs to me, didn’t we know already that on average PIs under perform the market. (I don’t recall what evidence has been produced for that in the past). This is just an example of that. It would have been strange to find anything different.

We know that sentiment plays a significant part in the decision making process for many investors and that investors do not act independently of one another. So, this doesn’t really fit the wisdom of crowds principles anyway.

However, good news! Using the Stockranks can avoid these problems. Well, that may be true while the Stockranks are only used by a minority of investors, but if the vast majority of investors relied on the Stockranks would they lose their edge?

rick

Thanks Zoe, the conclusions seem instinctively correct. Lists of shares that include: Sirius Minerals, Burford, Thomas Cook, show that investors are attracted to falling knives like moths to a flame. Everyone loves a good story particularly if it appears to be - on sale! Twitter also confirms this, as investors pile in on the story stock de jour. Problem is that most of these stocks have fallen for a reason and continue to fall, so that the bargain becomes a trap.

Matthew Spurr

This seems like a really well put together post Zoe, I doff my cap.

But I did have a question about it. Surely if HL are saying these stocks are currently 'most viewed', 'bought', 'sold' etc they're referring to now (the present day), and not 10 or 20 years prior as you've backtested? As you know a stock might not have been a good buy last year, but this year it could be coming into its own. So is it actually a fair test to compare these lists of stocks based on historical performance? Surely they're on the list because of their current fundamentals/data as of the present day. It'd be interesting to follow up on this in a year's time to look back on how they performed vs. the FTSE all share index for sure!

I might well be missing the point here, and in any case I found this an entertaining read, so thanks.

DavidRoss

20th Aug '19

Thank you Zoe for this very thought provoking and interesting piece of research, much appreciated from a novice investor. ATB David

I mention tips simply because the top of the stocks are under the category of ‘Research and Tips’, hence mentioning they should not be tips. The point of this article is to simply point out these lists do not allow for the curation of a strong portfolio, whereas if you used Stockopedia you could create a much stronger portfolio. Regardless of sentiment, the wisdom of the crowds principle still holds; in general, the aggregation of decisions and information within a group should outperform an individual, regardless of whether sentiment is involved.

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

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Zoe Fujiwara

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