Stock picking services and newsletters are often marketed as a way to get ahead in the stock market by identifying the next big winner. As investors we crave the rush of trying to find the next big 100 bagger stock.
However, the reality is that predicting which stocks will perform well in the future is a difficult task, and many of these stock picking services have a poor track record when it comes to accuracy.
The market is unpredictable.
One reason for this is that the stock market is inherently unpredictable. There are countless factors that can impact the performance of a particular stock, and trying to forecast which stocks will do well in the future is like trying to predict the weather. Even the most experienced analysts and investors get it wrong, and the track record of many stock picking services and newsletters reflects this.
Human beings have a natural tendency to try to predict the future, but research has shown that our ability to do so is actually quite limited. For example, a study published in the Journal of Behavioral Finance (https://www.tandfonline.com/doi/abs/10.1080/10508422.2016.1158341) found that professional analysts and experts are no better at predicting stock market movements than non-experts.
Another study, published in the journal Psychological Science (https://www.ncbi.nlm.nih.gov/pmc/articles/PMC5745101/), found that people’s predictions about future events are often influenced by their current emotional state and tend to be overly optimistic. This can lead to a phenomenon known as “optimism bias,” where people overestimate the likelihood of positive outcomes and underestimate the likelihood of negative ones.
These findings highlight the inherent difficulties of trying to predict the future, and suggest that relying on predictions or forecasts may not be the most reliable way to make investment decisions.
Yet Analysts Continue to Rely on Prediction, not Facts
Stock picking services often fail because they rely on predictions and forecasts rather than factual analysis. While it’s true that some stocks may be more likely to perform well based on certain indicators or trends, these predictions are often based on incomplete or biased information.
In my book “The Clean Guide to Investing Your Money in the Stockmarket” I talk briefly about an experiment I ran in early 2019 testing the outcome of predictions made by the UK’s top 5 stock picking websites and newsletters. In that study I found the accuracy to be extremely poor, close to the equivilent of simply flipping a coin.
For example, between 2017-2018 one particular very well know stock picking service repeatedly published articles regarding Quiz plc, a small FTSE AIM clothing retailer. The articles, the most recent of which was in June 2018, cited a number of reasons why readers should buy the stock.
- Revenue had been climbing
- The stock was cheap at £1.90
- It had a very promising future
- You would regret not buying the stock
In my opinion, none of these points are reason enough to invest in a stock.
This website/newsletter made no mention of any of the factors that mattered. Was it profitable? What was it doing with those profits? Were profits rising or falling? What were the expenses of running the business? Were they rising or falling? What was the companies growth strategy and did they have a track record of accurately executing that strategy? Was it working? Did it carry any debt? What was the debt level relative to the companies earnings power?
None of this was ever addressed.
Stating a stock has a positive future is a matter of opinion. Advising that you’d regret not buying the stock is again, a matter of opinion. The articles were always opinion heavy and light on actual meaningful facts.
When they did speak of facts they spoke in terms of ratios, which on their own mean very little. They spoke about revenues climbing, which whilst factual it alone tells us very little about the performance of an underlying company. It shows us that they’ve been able to find more business. But the FTSE is full of companies with rising revenues but an acute inability to run profitably.
So I carried out my own analysis on Quiz. Upon review I found a company that had climbing revenues yes. It had a share price of £1.90 yes. But the promising future was highly debatable when I discovered that the expenses of the business were steadily rising since their IPO in 2016. Rising from 85% of the profit in 2017 to 99% in 2019. The company profits were tumbling as a result.
So it was of no surprise to me to find that in October 2018, just 4 months after the last article pushed by this stock picking website, the price fell off a cliff from £1.90 down to £0.45 in one month. A loss of 70% in value in just one month.
Imagine all those who bought the stock based on this recommendation. Imagine the thousands of pounds lost buying a slice of this business at £1.90 only for it to be worth £0.45p weeks later. Before Covid19 came along the stock had fallen further to 16p. It still sits dead at 15p today some 3 years later.
No Vested Interest
Another important consideration is that analysts and experts who work for stock picking services and newsletters often have no vested interest in your success as an investor. While they may claim to have insider knowledge or access to special resources, the reality is that they are paid to generate content and sell subscriptions, not to ensure that you make money.
This lack of alignment of interests can create a bias towards making bold predictions or recommending high-risk stocks in order to grab attention and drive sales. As a result, these analysts may not be as concerned with accuracy as they are with making headlines or boosting their own reputation.
In contrast, if you are doing your own research and analysis, you have a personal stake in the success of your investments. This can incentivize you to be more careful and thorough in your analysis, and to take a more long-term approach to building a portfolio of assets you own.
In summary, while stock picking services and newsletters can be a useful source of information, it’s important to be aware of the potential biases and incentives that may influence their recommendations.
By contrast, a more reliable approach is to focus on factual analysis, examining the financial health, management, and growth potential of a company to determine its long-term prospects. Focus on doing your own research and analysis to make informed investment decisions.
Stock picking services and newsletters can be tempting, but their track record for accuracy is often poor. A more reliable approach is to focus on factual analysis and do your own research to identify growth stocks. While no approach is foolproof, this approach is likely to produce better results in the long run.
Focusing on factual analysis of both the financial performance of a business coupled with understanding the growth strategy of a business is precisely what has led to my hand-picked selection of UK FTSE stocks achieving a combined 14.9% annual average return since I started in 2014. This incorporates the tough years of 2020 and 2022, without which the average would have been far higher.
It is my strong belief that the casting aside of predictions and opinions on the future of a stock is an important first step to improving your stock selection process. Instead, the focus on factual analysis bodes far greater results and will significantly improve your odds of success.