The truth about share tips: can you really make a profit from stock market pundits?

Whether you’re new to the stock market or a seasoned professional, one of the biggest challenges in investing is finding profitable ideas.

The good news is that there are plenty of journalists and commentators offering tips about what you should buy. But while these pundits might sound like experts – and their tips might seem like a shortcut to investment profits – there are no guarantees. In fact, a look at their track records suggests that many of them should come with a wealth warning.

In today’s frenetic, media-driven world, there’s a bewildering amount of information out there that can influence your investment decisions.

With equities promising the opportunity to achieve returns that simply aren’t on offer in any other asset class, it’s little wonder that individuals have gravitated to the stock market in recent years. Simple online dealing and trading tools mean that it’s easier and cheaper than ever before to get started in the stock market.

But with so many sources of conflicting news and opinion about what to buy, it’s tempting to reach for the ‘easy button’. And for many, that means listening to investment tips from people who are paid to come up with share buying ideas for a living.

The big question is whether this is really the cornerstone of a solid, profitable investment strategy that you can live with for a lifetime?

The answer is that while share tips in newspapers and magazines can turn out well, history shows that many of them are unreliable and may lose you money.

A brief history of the stock market ‘tip’

Three hundred years ago, Jonathan’s Coffee House was a bustling centre of trade in the heart of the City of London. It was the birthplace of what is now the London Stock Exchange.

Back then, brokers and investors would meet to trade ideas and investments. And it was here, in the early 1700s, that one of the first and most dramatic booms and busts took place: the South Sea Bubble.

A deal between the British government and the South Sea Company sparked a nationwide frenzy of share buying. It was a sorry tale of bad ideas, spurious companies, bribery, corruption and insider dealing.

Eventually it led to utter bust and destitution for many of the public who’d been swept up in the mayhem.

It was an early example of how the power of investment tips, suggestions and poor advice can wrong-foot the unwary.

In the present, share tips are still a staple of the financial pages. For those making their first forays into the stock market – and even experienced investors – tips can be a natural place to look for ideas.

Search the internet for “stock market tips” and you’ll be overawed by just how many tipsters there are.

Indeed, tip sheets and subscription newsletters have been around for decades. Some of these publications are well followed by loyal readers. The best of them serve up periodic ‘deep dive’ share write-ups, followed by regular updates.

Meanwhile, newspapers and magazines routinely offer buying ideas, typically covering hot stocks and sectors – especially those in the news. These ideas usually come with a good story and a captivating reason to buy into them.

Then there’s the annual highlight of the tipping calendar – New Year Tips. Every January, journalists and commentators in newspapers, magazines and websites serve up their best ideas on which companies they think are poised to outperform in the year ahead.

These tips can, and do, move share prices when they are published. Onlookers hoping to get in early on new ideas can momentarily send prices soaring. But those prices also retreat quickly when the excitement wanes and those new holders – who may have very little knowledge of what they have bought into – get bored and lose interest.

Crucially, while many of these tips are published by credible investment professionals, not all tipsters are made equal.

The facts about tips

Research by Stockopedia has found that the annual share tips from a selection of the most popular UK newspapers and specialist investor magazines tend to be inconsistent and underperform the market.

In our survey of their average returns, more than half were found to have underperformed the main stock market index (the FTSE All Share) in recent years.

This analysis is important because while many publications suggest that readers do further research before buying ‘tipped’ shares, it’s unlikely that this always happens. Anecdotally, we know from Stockopedia subscribers – of both experienced and inexperienced investors – that reading press tips can be the extent of their research before they buy a share.

The research looked at the New Year Tips from four national newspapers and three investment magazines to understand just how successful they had been. The publications included:

• The Guardian (2014-2019);

• The Times (2014-);

• The Telegraph (2017-);

• The Evening Standard (2017-);

• The Investors Chronicle (2014-);

• Shares Magazine (2014-);

• Money Observer (2015-).

The analysis involved creating a simulated portfolio for each publication using their tips dating back to the first year they issued a list (we went as far back as 2014). Each portfolio was equally-weighted and assessed after one year before being rebalanced with the newest share tips. The portfolios were benchmarked against the performance of the FTSE All Share.

To get a pure view of the share price performances we didn’t include any dividend returns, taxes or trading fees in the analysis. Note that in some cases individual publications use stop losses or suggest target prices for their tips, which can affect their overall performance – but we have not included those rules here.

So how did they get on?

One of the overall findings from this research is that there has generally been little consistency in the performance of tips from most of these mainstream publications over the past seven years.

• When it comes to beating the FTSE All Share index, five of the seven publications underperformed at least half the time.

• The lowest hit rate (of beating the FTSE All Share) were from The Guardian and Money Observer (now closed), which only managed to beat the index in 1 out of 6 years.

• Both The Guardian and The Telegraph managed an average negative return over their respective years (6 for The Guardian and 4 for The Telegraph).

• The highest hit rates were achieved by The Times and Investors Chronicle, both of which beat the index in 5 out of 7 years.

• The Times achieved the strongest average performance over time, with an average gain to date (end of October 2020) of 20.86% – an impressive performance.

• The Times also achieved the best one-year performance, with a 126.03% return in 2014.

• Apart from The Times, none of the publications has managed to achieve an average annual gain over time that’s in double figures.

• Among the worst single tips across the publications was the Evening Standard’s choice of Thomas Cook in 2019, which collapsed in September that year, wiping out shareholders.

• In the 6 years between 2014 and 2019, there were only 2 years (2014 and 2017) when the majority of publications beat the market. In the other 4 years the majority actually underperformed.

• Markets have been incredibly volatile in 2020 because of the Covid pandemic, yet all of the current tipsters are ahead of the FTSE All Share – but not by much (to the end of October). Money Observer’s tips were actually up by 13.14% at that point.

Don’t get tripped by a tip

Share tips – both in specialist tipsheets and in mainstream newspapers and magazines – have always been part of the stock market landscape. In their defence, legitimate tips and tipsters are highly unlikely to deliberately manipulate prices or offer bad ideas. This is an area that is carefully watched by regulators. Indeed, some tipsters enjoy a large and loyal following and have successful track records.

However, as a source of investment ideas, tips should be treated carefully. Our snapshot research shows that annual New Year Tips are inconsistent at best, and often underperform over time.

For those using them as a source of research to trade on, there is a risk of losing money. Doing your own research is essential.

Stockopedia