In short, if you don’t understand stock tips – like lottery tickets, they tacitly overpromise but usually under-deliver – you shouldn’t be investing. Specifically, if you heed them then you’re the patsy.
What Is a “Tip”?
“Tipping,” says Investopedia, “is the act of providing material non-public information about a publicly traded company or a security to a person who is not authorized to have the information with the intent to gain some sort of benefit. As long as the information is accurate, tipping can produce huge profits for an investor who acts on it when performing a securities transaction. In most cases, it also leads to unfair gains for the tipper because of pre-arranged agreements to share the trading profits. Tipping is closely related to insider trading.”
This article DOESN’T use words like “tip,” “tipster” and “tipping” as Investopedia does. Stock tips, in the sense that I conceive them, are the financial market version of junk food. They can be habit-forming and certainly don’t bolster your financial health; crucially, however, I’m neither overtly contending nor tacitly implying that any tipster on Livewire spreads inside information or is in any way doing anything illegal.
Instead, I use these words as my dictionary defines them: to tip is “to predict as likely to win or achieve something.”
Specifically, by my conception a stock tip is an idle (that is, empirically flimsy or logically baseless) assertion that a stock will in the short term outperform a market index. It offers the allure of immediate gratification to those who overweight current information, i.e., whose attention span is short.In The #1 stock picks for 2021 (4 January 2021), for example, Livewire “invited some of the country’s finest stock-pickers to put on their tipping caps and pitch which companies they believe will soar to fresh highs over the next 12 months.”
The problem is two-fold. First, a pitch (which is the form that most tips take) is a far cry from – indeed, it’s the antithesis of – thorough analysis.
A pitch is a very brief, superficial and upbeat story, i.e., a gaggle of soft words which distracts attention from its absence of convincing hard numbers (in the form, for example, of audited financial statements). Investing in reaction to a “pitch” is the exact opposite of due diligence.Second, stocks’ prices generally fluctuate randomly over periods of 12 months or more (see, for example, Do earnings drive stocks’ returns? 22 January 2024). In other words, today’s prices don’t foretell prices one month or a year hence. As a result, unless we assume that tipsters possess some special ability to divine the future, which I showed in Experts can’t predict yet investors must plan: What, then, to do? (23 November 2020) is extremely doubtful, we have no reason to expect that tips will systematically outperform.
Indeed, given tipsters’ overconfidence (which my analysis will substantiate) and overconfident people’s chronic tendency to over-promise and under-deliver, which my past articles have demonstrated, we have strong reason to expect that tips will generally underperform.Tipping, like short-selling, is short-term speculation – and speculation is a mug’s game. For reasons I’ll detail in the conclusion, none of the forthcoming should be regarded as criticism of Livewire or its readers (as opposed to some of its “expert” contributors, who’re falsely implying that they’re prescient).
For the moment, it suffices to say that I don’t censure newsagents for selling lottery tickets; nor do I criticise supermarkets for selling junk food: in each case, they’re supplying a legal product which consumers wish to buy.
How to Experience Disappointment: Follow the Crowd’s Tips
It’s been more than five years since Livewire published The 10 most tipped stocks for 2019 (17 January 2019). That’s long enough to assess these tips’ worth both from a long-term investor’s and a short-term speculator’s point of view. To do so, I
- compiled total return data (that is, dividend plus capital gain, and taking into consideration issues and buybacks or shares) since January 2016 for each of these nine most-tipped stocks (in August 2021, one of them, Afterpay Ltd, announced that an American company, Square Inc. – which renamed itself Block Inc. in December 2021 – had agreed to purchase all of Afterpay’s shares; as a result, Afterpay delisted from the ASX in February 2022);
- weighted each of these nine series (Livewire readers’ #1 pick received a weighting of 1.0, the #3 pick (Afterpay ranked #2) a weighting of 0.8, … and the tenth a weighting of 0.1) and computed a single, weighted total return index for these nine stocks. (Results are substantially the same if equal weights are used);
- assumed that the tips were compiled in December 2018 and assigned the number 0 to this month;
- assigned sequential numbers (-36 for January 2016, -35 for February 2016, …, and -1 for December 2018) to each month during the three years before the tips’ compilation;
- assigned sequential numbers (1 for January 2019, 2 for February 2019, …, and 60 for January 2024) to each month during the five years since the tips’ compilation.
As a benchmark, I computed a total return index for the S&P/ASX 200.Figure 1 and Figure 2 plot key results from these exercises. To abate short-term fluctuations, Figure 1 expresses each month’s total returns as compound annual growth rates (CAGRs) over the previous 24 months. For example, from January 2016 to January 2018, the tipped stocks’ weighted average CAGR was 24.8% and the Index’s was 13.1%, and so on for each successive month to month 60 (January 2024).
Figure 1: 24-month CAGRs, Most-Tipped Stocks versus Benchmark, January 2016-January 2024
Figure 1 shows that during the 12 months before (-12 to 0 on its x-axis) and after (1 to 12) the experts issued their tips, the most-tipped stocks always and significantly outperformed the Index; thereafter, they increasingly underperformed. These tips’ shelf-life, in other words, has been short-term.The Index’s returns are trendless – its best-fitting regression line has no slope – whereas the most-tipped stocks’ returns fall steadily over time (its regression line is strongly negative). During the 12 months before and after December 2018, the most-tipped stocks’ weighted CAGRs exceeded 30%; since the end of 2021 (months 36-60) they’ve averaged 4.1%.
Consequently, although the most-tipped stocks’ average CAGR (17.5%) greatly exceeds the Index’s (9.0%), most of this outperformance occurs “pre-tip” (before month 0); “post-tip” (after month 0), the outperformance virtually disappears (Figure 2).This result leads me to wonder (subsequent analysis will corroborate my suspicion) that these were tipped simply because they’d risen so strongly during the preceding several years. If so, that hardly demonstrates that tipsters are prescient! Quite the contrary: they fixate on the recent past and assume that it’ll continue into the next 12 months. Rather than suppose that the hefty gains of the past will regress towards the Index’s returns – which Figure 1 shows they do – they mistakenly assert that they’ll continue.
Figure 2: Average CAGRs, Pre- and Post-Tipping, Most-Tipped Stocks and the Index, January 2016-January 2024
From the point of view of those who bought these “tipped” stocks, these “post-tip” returns are in two senses disappointing. First, they’re dramatically lower than “pre-tip” returns (average CAGR of 10% versus 31%). Secondly, they’re little higher than the Index’s “post-tip” CAGRs (average of 7.8%).
How to Underperform: Heed the Crowd’s Large Cap Tips
Summarising 5,137 of its readers’ responses, on 11 January 2021 Livewire published The most-tipped large caps for 2021. Three years isn’t long enough to assess these tips’ worth to a long-term investor (for that reason, I extended the number of “pre-tip” months), but it’s more than enough to ascertain their value to short-term speculators. For these nine (again, after Afterpay was tipped its takeover removed it from the list) large caps, I replicated the steps described in the previous section; Figure 3 and Figure 4 summarise the results.
They corroborate the results of the previous section. Figure 3 demonstrates that during the 24 months before but just 6-8 months after Livewire published the tips, the most-tipped stocks consistently and significantly outperformed the Index; after 12 months, however, the most-tipped stocks increasingly underperformed. In other words, these tips’ shelf-life is even shorter than those in Figure 1.
Figure 3: 24-month CAGRs, Most-Tipped Large Cap Stocks versus Benchmark, January 2017-January 2024
The Index’s returns throughout these five years remained steady – its best-fitting regression line continues to have no slope – whereas the most-tipped stocks’ returns continued to decay increasingly over time (its regression line remains strongly negative).
Consequently, although the most-tipped stocks’ CAGR (mean of 15.9%) greatly exceeds the Index’s (8.0%), all of this difference – and more – occurred “pre-tip.” “Post-tip,” the average difference doesn’t merely disappear; it reverses.
In other words, the most-tipped large caps greatly outperformed before Livewire’s respondents tipped them – and mildly underperformed thereafter (Figure 4).
Figure 4: Average CAGRs, Pre- and Post-Tipping, Most-Tipped Stocks and the Index, January 2017-January 2024
How to Dependably Lose Money: Heed the Crowd’s Tips about Small Caps
Summarising “nearly 5,200” readers’ responses, on 13 January 2021 Livewire published The most-tipped small caps for 2021. Once again, I replicated the steps described in the two previous sections; Figure 5 and Figure 6 summarise the results. As it was with the most- tipped stocks in 2019 and the most-tipped large cap in 2021, so it remained for the most-tipped small cap tips in the latter year: their returns fell steadily over time; as a result, the regression line remains strongly negative.
Figure 5: 24-month CAGRs, Most-Tipped Small Cap Stocks versus Benchmark, January 2017-January 2024
In The myth of small-cap outperformance (14 July 2023) I wrote: “’investing’ in Aussie small-caps is like gambling: the longer you play and the bigger your bet, the more you’ll underperform the house.” Figure 5 shows that during most of the 24 months before Livewire published the tips, the most-tipped small caps mostly (and often significantly) outperformed.
From month 0, however – that is, from the moment these stocks were tipped – they increasingly underperformed; in other words, these tips had no shelf-life. After two years (beyond month 24) they generated CAGRs of -20%.
Figure 6: Average CAGRs, Pre- and Post-Tipping, Most-Tipped Small Caps and the Index, January 2017-January 2024
Consequently, the most-tipped small stocks’ CAGR (overall mean of 1.2%) greatly lags the Index’s (8.0%). Moreover, all of the small caps’ positive return occurred “pre-tip” (average of 20.8%). “Post-tip,” it collapsed to a mean of -12.2% (Figure 6). That’s a cumulative loss of 48% and total underperformance vis-à-vis the Index of 77%!
Another Reliable Way to Lose Money: Heed the Tips of “Experts”
“A handful of niche companies were tipped among the most compelling post-COVID investment opportunities at a recent ORAH Fund event,” Livewire noted in Fundies’ top 5: medtech, payments and aeronautical (30 November 2020). “Professional stock-pickers from top-performing asset managers,” it gushed, “participated in a professional investor webinar earlier this month. Each participating investment specialist was this year asked to detail one of their portfolio picks, a handful of which are revealed and discussed briefly below.”
I selected ORAH’s ASX-listed picks, together with those in Fundies’ most-tipped stock picks 2021: First-half leaderboard (5 July 2021), and with one exception (these tips weren’t ranked, so I didn’t weigh them) analysed them in the same way as the preceding picks. For this crop I averaged the tips’ dates such that December 2020 is month 0. Results appear in Figure 7 and Figure 8.
Figure 7: 24-month CAGRs, Experts’ Most-Tipped Stocks versus Benchmark, January 2017-January 2024
“The ORAH Fund,” according to Livewire, “is a fund of funds aiming to produce risk-adjusted returns in excess of a composite benchmark comprising 50% of the MSCI World and 50% of the ASX 300 Index.” If the picks indicate the accuracy of ORAH’s aim, then it’s generally wide of the mark. Figure 7 shows that during the ca. two years before these alleged oracles released their predictions (months -22 to 0), these most-tipped stocks tracked the S&P/ASX 200 Index. They continued to track it almost two years (months 1-20) after they were tipped.
Figure 8: Average CAGRs, Pre- and Post-Tipping, Experts’ Most-Tipped Stocks and the Index, January 2017-January 2024