It’s that time of year when financial magazines and newsletters analyse their past share tip performance and give their New Year tips. Are the tips worth picking up or even reviewing?
One approach you might think would be effective would be to simply back those publications who had the best historic performance. One review I picked up on Twitter (I am not sure of the original source) gives the Investors Chronicle (IC) as the winner in 2019 with a 37% return with The Independent bottom of the table. However, the performance varies from year to year – for example the IC had a negative year in both 2017 and 2018, while the Guardian had negative returns in all three of the previous years. Perhaps not many investors read the Guardian?
One problem of course is that the tip writers may vary even within a publication from year to year and few put their names to the articles. In essence backing the share tips based on the “form” of the publications or the writers is not going to work. Even if the writers stay the same, and their “styles” of investment such as a focus on growth or value, what works one year might not work in another.
Another failing is that some writers rely on advice from well known fund managers who tend to “talk their own book”. So the Questor column in the Daily Telegraph, written by Richard Evans, tipped Bioventix (BVXP) as “AIM stock of the year” on Friday (10/1/2020). That was after talking to Keith Ashworth-Lord of Sanford DeLand Asset Management who has a big holding in the company. The share price rose 9% on the day this tip was published which as a holder of the stock I am quite pleased with, but I would not previously have rated it as other than a “hold”, personally.
Many share tips in the national media and reputable investment newsletters will rise in price on the day the tip is issued – indeed even before you have got up for breakfast. Investors then pile in further over the next few days and if you follow that herd you are going to lose money. After a few weeks, when the company’s performance does not instantly shoot up or there is little news, the speculators lose interest and the share price falls back again.
It’s worth pointing out that it does of course depend on whether you are a long-term investor or a short-term speculator. Such share price movements may be great for speculators, most of whom I suspect lose money, but for long-term holders like me share tips can be positively dangerous. My approach is therefore as follows:
I use share tips as ideas for research. Only one in ten is worth more analysis and if I consider it worthy after that I would buy a few shares and see how the company and its share price develops. Most companies fail on the “due diligence” phase. I am not a “plunger” who bets a lot on any new holding. I am looking to find companies that I can hold for the long term and in which I wish to take an opening position. Apart from anything else, moving a lot of cash out of existing holdings to invest in new ones is often a mistake, I have learned from past experience. It’s the syndrome of “the grass is greener” syndrome, i.e. picking new investments you don’t know much about but which someone else thinks are a great proposition, and abandoning ones that you do know.
What are the kinds of tips that I avoid?
Firstly I hate the “recovery story” kind. These are where a company with a pretty dismal historic performance has improved analyst forecasts (which is what most tipsters focus on). For example, Investors Chronicle has Burberry (BRBY) as one of their 2020 tips. The supporting article has lots of positive comments about the changes taking place in the company and its “transformation”, but a quick look at the financials gives me doubts. Revenue in the last 3 years, which is a key metric for any retailer, was static or falling and the forecasts for the next two years are only slightly higher. Earnings per share follow a similar pattern. Even under new management, is this a growth business or a just another rather mature company in a crowded sector (revenue about £3bn) flogging expensive clothes to suckers? Is there any real innovation or growth above inflation taking place is the key question?
Another example of a recovery story is Momentum Investor tipping Marks & Spencer (MKS) based on their move into on-line groceries via the joint venture with Ocado. But the wisdom of this tip was soon disproved after the company issued a trading statement on the 9th of January with dismal figures for clothing sales. The share price is down 12% since then. Too many “skinny fit” men’s trousers was one problem as the company tried to be more fashionable so that’s just another management failure partly arising from the sclerotic supply chain at the company. Tipping shares can be a quick lesson in humility of course which is one reason why this writer does not do it. Let those who get paid for their alleged wisdom continue to do so though so we can have the occasional laugh at their folly.
Window supplier Safestyle (SFE) was tipped as a recovery story by ShareWatch but is likely to still make a small loss in 2019. Are profits really going to come back in 2020 and will investors regain confidence in the business and its management? I do not know the answer to those questions so I am unlikely to invest in it.
Secondly, I ignore sudden enthusiasm for boring companies. Another of IC’s tips was Johnson Service (JSG) which provides textile rental and cleaning services – hardly a new business and one that I doubt has barriers to entry. The company is growing, but on a forward p/e of 19 and relatively high debt, I cannot get enthusiastic.
Apart from drain-pipe trousers, something else I used to favour in the 1960s that is back in fashion is ten pin bowling. Two companies that were tipped by Momentum Investor and mentioned in Investors Chronicle – Ten Entertainment (TEG) and Hollywood Bowl (BOWL) may be worth looking at. TEG (which I hold) was also tipped by ShareWatch. These companies are changing from not just being bowling alleys but indoor family entertainment centres with other games available and good food/drink offerings. Some also stay open long after the pubs have shut. You can see why they are experiencing a revival in demand with more centres opening. The key with share tips is to follow the new trends, not the old ones.
Thirdly I ignore tips that back racy stocks already on high valuations. For example Shares Magazine tipped Hotel Chocolat (HOTC). This is a chocolate retailer that seems to have a good marketing operation and decent revenue and profits growth but on a prospective p/e of 45 it seems too expensive to me. The slightest hiccup would likely cause a sharp drop in the share price so there looks to be as much downside risk as upside possibility to me.
Lastly, I ignore tips in sectors I don’t like or businesses I do not understand – the former includes oil/gas and mine exploration, airlines and banks. Shares magazine tipped Wizz Air (WIZZ) and Lloyds Banking (LLOY) for example but they are not for me. Businesses I do not understand might include some high-tech companies with good stories of future potential but no current profits.
To reiterate, share tips are useful for providing ideas for research but blindly following them is not the way to achieve superior investment performance.
Preferably share tips should confirm your views on shares you already hold – such as Bioventix, Ten Entertainment and several others I hold which have been tipped in the last couple of weeks. That may be a reason to buy more, but not in any rush.
As regards other tips like the best countries, or the best sectors, or whether to invest at all based on economic forecasts or Brexit prognostications here’s a good quotation from John Redwood in the FT this week: “The safest thing to forecast at the beginning of the 2020s is more of the same”. An economist with real wisdom for a change.
Of the shares mentioned, the author holds Bioventix and Ten Entertainment group.
Roger Lawson (Twitter: https://twitter.com/RogerWLawson )