Register For Our Mailing List

Register to receive our free weekly newsletter including editorials.

Home / 130

Investment newsletters: making sense of stock recommendations

Investors find themselves awash with financial information. It flows from an array of sources – the ASX, companies, journalists, brokers and colleagues – imploring investors to buy or sell a dizzying array of securities, from blue-chips to small-caps and everything in-between.

While many investors turn to financial planners and fund managers to make sense of it all, the growth of SMSFs shows that some people prefer to do it themselves.

And by their side is often an investment newsletter.

Do newsletters deliver results?

These scribes – and there’s no shortage to choose from – promise to guide investors through the financial maze. But which ones add value? And, how can an investor cope when inundated with hundreds of stock picks a year, often from the same newsletter?

Outperforming the market has never been harder. An incredible 90% of the world’s data has been produced in the last two years according to IBM. It is a major driver behind the ‘paradox of skill’: absolute investor skill has risen but relative skill has fallen.

Before 1990, 14% of US equity mutual funds delivered true alpha (or outperformance), according to University of Maryland research. By 2006, the outperformers had dwindled to just 0.6%, even as the total number of mutual funds had increased. By 2014 in Australia, the majority of active managers in all categories (barring small-caps) failed to beat their comparable benchmark indices over the three and five-year periods, according to the SPIVA Australia Scorecard.

In this environment, expecting a hot stock tip to lead to riches is an unrealistic expectation – yet this is how many investors use investment newsletters.

The upside down funnel

Too many investors begin with stock recommendations and only then begin the research process by evaluating a security’s underlying fundamentals.

It effectively creates an upside-down funnel which limits the breadth of investment choice and leads an investor into unwitting behavioural biases. These include confirmation bias (where investors overvalue information that confirms pre-existing beliefs) and availability bias (where investors give greater weight to recent information).

Instead, investors should take a step back and first define their personal investment goals and beliefs.

It need not be a complex exercise. The starting point to finding out who you are as an investor can often mean defining who you’re not.

For example, most SMSF trustees have a long-term investment horizon, want to generate income, and don’t want to risk heavy capital losses. This type of investor should be wary of investment newsletters which have a track record of returns built on recommending volatile or speculative stocks.

Knowing who you are ultimately rests on a knowledge of the fundamentals. At its core, stock picking advice begins with an analysis of a company’s financial data. Analysts run those numbers and, in combination with their own qualitative view, rate a stock a ‘buy’, ‘sell’ or ‘hold’.

Most investors don’t pay enough attention to those numbers. For example, a value-oriented investor should analyse factors such as where the price-earnings ratio, or price-book ratio, ranks relative to the company’s sector and the broader market.

However, a growth-oriented investor should be more focused on the company’s (realistic) earnings and dividend growth potential, which is partially captured in the PEG ratio (price-earnings ratio divided by growth), as well as factors such as return on equity.

Those examples are purposefully simplified. Each investor’s exact criteria can only be defined through careful study and personal experience. Without that, an investor will be doomed to automatically act on recommendations which will inevitably lead to poor outcomes because they don’t truly understand the basis on which they were made.

There is another benefit to knowing your own investment style – a far broader array of securities can now be filtered across the entire market. It immediately rules out unsuitable recommendations or the latest hot stock grabbing media headlines. ‘Decision fatigue’ is also reduced when an investor no longer has to weigh up dozens of stock recommendations and opinions.

The funnel is now the right way up.

Fine-tuning the advice

From here, an investor can start to fine-tune the flow of information to maximise the value they receive from investment newsletters.

It can be confusing to subscribe to several newsletters offering conflicting trading advice. A better strategy may be to use one stock-picking newsletter, aligned with an investor’s own investment beliefs, and supplement that with investment newsletters offering a different intent. Cuffelinks, for example, promotes discussion around market dynamics and various investment strategies, while some others are centered on the expertise and personality of one individual. For example, the Switzer Report’s Peter Switzer (generally bullish) or the Eureka Report’s Alan Kohler or John Abernethy (generally bearish). Which type of investor are you?

Similarly, some sources have particular areas of expertise, whether it be specific stock sectors or just a broad economic perspective. Bell Potter’s TS Lim is a highly respected bank analyst and his advice is well-followed, but investors don’t turn to him when they’re assessing resource stocks.

This type of deep quantitative analysis on a sector-by-sector basis is usually more revealing than qualitative analysis, just as original sources of information tend to have more value than aggregators, which often impart their own spin and leave out the original data.

Finally, judge an investment newsletter on its success. No-one can outperform all the time, but over the long-term, skill always shines through. Investors can also take some comfort when experts are also investors who back their recommendations with their own money because they’re on the same ride too.

There are no shortcuts to investment success but using market information in the right way is a great start.

 

Arnie Selvarajah is the Chief Executive of Bell Direct. See www.belldirect.com.au.

 

RELATED ARTICLES

From stockmarket boom to stockpicker’s opportunity

10 key investment themes for 2022

10 key themes for 2021

banner

Most viewed in recent weeks

How much do you need to retire comfortably?

Two commonly asked questions are: 'How much do I need to retire' and 'How much can I afford to spend in retirement'? This is a guide to help you come up with your own numbers to suit your goals and needs.

Meg on SMSFs: Clearing up confusion on the $3 million super tax

There seems to be more confusion than clarity about the mechanics of how the new $3 million super tax is supposed to work. Here is an attempt to answer some of the questions from my previous work on the issue. 

The secrets of Australia’s Berkshire Hathaway

Washington H. Soul Pattinson is an ASX top 50 stock with one of the best investment track records this country has seen. Yet, most Australians haven’t heard of it, and the company seems to prefer it that way.

How long will you live?

We are often quoted life expectancy at birth but what matters most is how long we should live as we grow older. It is surprising how short this can be for people born last century, so make the most of it.

Australian housing is twice as expensive as the US

A new report suggests Australian housing is twice as expensive as that of the US and UK on a price-to-income basis. It also reveals that it’s cheaper to live in New York than most of our capital cities.

Welcome to Firstlinks Edition 566 with weekend update

Here are 10 rules for staying happy and sharp as we age, including socialise a lot, never retire, learn a demanding skill, practice gratitude, play video games (specific ones), and be sure to reminisce.

  • 27 June 2024

Latest Updates

Investment strategies

The iron law of building wealth

The best way to lose money in markets is to chase the latest stock fad. Conversely, the best way to build wealth is by pursuing a timeless investment strategy that won’t be swayed by short-term market gyrations.

Economy

A pullback in Australian consumer spending could last years

Australian consumers have held up remarkably well amid rising interest rates and inflation. Yet, there are increasing signs that this is turning, and the weakness in consumer spending may last years, not months.

Investment strategies

The 9 most important things I've learned about investing over 40 years

The nine lessons include there is always a cycle, the crowd gets it wrong at extremes, what you pay for an investment matters a lot, markets don’t learn, and you need to know yourself to be a good investor.

Shares

Tax-loss selling creates opportunities in these 3 ASX stocks

It's that time of year when investors sell underperforming stocks at a loss to offset capital gains from profitable investments. This tax-loss selling is creating opportunities in three quality ASX stocks.

Economy

The global baby bust

Across the globe, leaders are concerned about the fallout from declining birth rates and shrinking populations. Australia, though attractive to migrants, mirrors global birth rate declines, and faces its own challenges.

Economy

Hidden card fees and why cash should make a comeback

Australians are paying almost two billion dollars in credit and debit card fees each year and the RBA wil now probe the whole payment system. What changes are needed to ensure the system is fair and transparent?

Investment strategies

Investment bonds should be considered for retirement planning

Many Australians neglect key retirement planning tools. Investment bonds are increasingly valuable as they facilitate intergenerational wealth transfer and offer strategic tax advantages, thereby enhancing financial security.

Sponsors

Alliances

© 2024 Morningstar, Inc. All rights reserved.

Disclaimer
The data, research and opinions provided here are for information purposes; are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. Morningstar, its affiliates, and third-party content providers are not responsible for any investment decisions, damages or losses resulting from, or related to, the data and analyses or their use. To the extent any content is general advice, it has been prepared for clients of Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), without reference to your financial objectives, situation or needs. For more information refer to our Financial Services Guide. You should consider the advice in light of these matters and if applicable, the relevant Product Disclosure Statement before making any decision to invest. Past performance does not necessarily indicate a financial product’s future performance. To obtain advice tailored to your situation, contact a professional financial adviser. Articles are current as at date of publication.
This website contains information and opinions provided by third parties. Inclusion of this information does not necessarily represent Morningstar’s positions, strategies or opinions and should not be considered an endorsement by Morningstar.