Whose advice can you trust?
At the simplest level, nobody’s. Take even the broadest outline advice. Nathan Rothschild said ‘The way to make money on the Exchange is to sell too soon.’ Another member of the same banking family, Solomon Rothschild agreed: ‘One must get into the market as into a cold bath – quick in and quick out.’ Timothy Bancroft on the other hand said ‘Buy good securities. Put them away. Forget them’, which is much the same advice as the Sage of Omaha, Warren Buffett.
How about on individual shares though? Think of it this way – what sort of philanthropy could it be that persuades some nice people to make you rich instead of themselves? If journalists really knew which share to buy and when, would they still be hacking away at the computer instead of lolling on some Caribbean beach? How can the authors of books like Make a Killing on the Stock Exchange, How to Pick the Winners, Selecting the Soaring Shares and so on afford to spend all those hours writing when they should be too busy becoming billionaires by trading? Indeed if they were good, why would they share the secret when your buying might inflate the shares they would have wanted to buy?
All advice should be treated with scepticism – even this one. There used to be an old Stock Exchange maxim: ‘Where there is a tip there is a tap.’ What that meant was that if somebody is persuading you to buy a share there is probably some self-interested motive such as having large amounts of that company’s shares on tap.
This is not a defeatist view or insistence that all advice should be rejected, just a recognition that nobody is always right, that some people are unreliable, and that the decision lies with the investor. No excuses, no defences, and no attempts at shuffling off the blame: you choose.
Scepticism should extend to financial advisers. Stockbrokers have an incentive to encourage trading because they make money from commissions on deals. Most of their analysts are clever graduates but few have ever got their fingernails dirty in industry, so although they understand all the corporate ratios, meet the chairmen and finance directors, and sometimes even visit factories, they have little feel for commerce. What they do understand is the stock market, so they have a better feel than the lay investor for how the City, including institutional investors, will react to a company and its performance. Since those are the people who influence share prices, this information is valuable. Its value is about the market, but not about any individual company or about strategy.
Stockbrokers plod through annual reports and issue circulars on companies, but the average small investor does not have access to these circulars, and would probably have little use for them if he or she did. By the time the circulars are printed the professionals have already acted on any insight in them, and there is little evidence that stockbrokers are markedly better prophets than the rest of us. It is not a matter of asking, if you are so clever why are you not rich (because many of them are pretty comfortably off), but once again, would they still be working for wages if they could make amazing fortunes by merely investing?
At least the better newspapers and magazines, unlike stockbrokers’ analysts, assess the performance of their share tips at the end of the year. If they do not, you can be pretty sure performance has been dismal. Even that is not a guide though, because personnel change.
There are several reference books, like REFS, UK Major Companies Handbook and UK Smaller Companies Handbook that provide statistics and facts about business and companies. These are on top of the guides to the Stock Exchange and other investments, plus other explanations of the financial markets.
In summary, there is lots of advice about but little of it is disinterested and even that is not always right. So listen to as many as you can, weigh them against common sense and use them as a factor but not as the final arbiters of an investment decision. Remember that their criteria may be different. As Shaw said, do not do unto others as you would have them do unto you; their tastes may not be the same.
Newspapers, daily and Sunday, devote many pages to business investment and finance. They provide news, comment and advice. On top of that there are many business and investment magazines, ranging from the venerable Investors Chronicle to a wide and growing range that includes Your Money, Money Management, What Investment, Moneywise, Personal Finance, Bloomberg Money, Shares, Money Week and Money Observer. There are also specialist journals such as Your Pension and Which Mortgage and general business journals like Fortune, Forbes and BusinessWeek.
Serious newspapers carry company news including reports of results from smaller or less interesting companies, which concentrate on turnover, profit and exceptional items plus directors’ pay. They also have columns that concentrate on analysing corporate financial results – eg Questor, Lex and Tempus. These columns do not always make explicit recommendations to buy or sell, but the general message of their comments is usually obvious.
They, like many of the Sunday papers, also reprint advice from stockbrokers. In addition, journalists meet people, sometimes including the management of companies they write about, look at results, talk to brokers and their analysts and trade associations, and discuss business with independent commentators. In the course of this they may come across companies that justify a better rating and are currently being ignored by the market. They may therefore alert investors to shares that are undervalued, and by drawing attention to them may prompt an upward re-rating.
Tips like this can move a share, especially if it is in a tight market – there are not many free shares on issue. The rise is not purely because of buying, but also because market professionals read newspapers too and so anticipate demand by moving up the prices. One consequence is that by the time you have read the buy recommendation, the price at which it was said to have been a bargain can be just a memory.
It may still be worth acting on such recommendations to buy, but it is notable that newspapers are less good at spotting shares that are due to fall. It may be fear of the fierce defamation laws, or that journalists are just more geared to finding winners, but investors should not rely on newspapers for warnings of when to sell a share, although it can be just as important a piece of advice. And nobody is much good at spotting in advance when the market as a whole is about to turn.
The financial pages also carry stories about takeovers and other dramatic events, and have interviews with the top managers. In addition, they carry details of plans, new products, investments, changes of tactics, recruitment of new senior staff, changes at board level, sales of subsidiaries and a host of other indications of how a company is approaching its business. In the course of these articles journalists usually give strong hints about how the management and products of a company are regarded. That gives an added layer of information to the investor.
People have a tendency to say they believe nothing they read in newspapers, but then act as if journalists were omniscient supermen.
Journalists know only what somebody has told them, and though the good ones do conscientiously dig behind the facts and try to interpret and test what they hear, they are fallible like the rest of us. They do, however, mix in the City world, talk to all the people who are directly and indirectly involved and keep an eye on what is going on. Anybody getting into investments would be foolish to lose out on the flood of information that is available. There is daily detail on a wide variety of companies and sectors, discussing the managers, products, performance, deals and prospects. Some of it may be nothing but gossip or a space-filler, but in the reputable press there is often more and better-informed early news about what is happening than comes out of stockbrokers. The more authoritative writers do get read and as a result may move public opinion about a company and hence the share price.
With so many newspaper pages devoted every day to finance and companies, and the large number of magazines concentrating on investment advice, it is hard to see what the tip sheets can add.
Specialist magazines provide greater depth of information on a wide range of investments. The Investors Chronicle (published by Pearson, which also owns the Financial Times) reports a wide range of stock market and economic information and has a speedy summing up of major company results.
Its chartist section requires extensive knowledge of the language and methods of technical analysis; without it one could well be little better off for being told ‘the current rally could conceivably take the index through its daily cloud and as high as the black falling trendline which would likely result in overbought momentum’, or references to ‘a time-cycle turning-date’. But the pictures make it clearer.
Advice from newspapers, magazines, radio, television, newsletters and mail shots may be readily available, and some of it free, but investors still have to collect and sort it all, sift the material and test
it to see if any of it is worth acting on. This is not only a long and tedious task but the testing is tricky for someone inexperienced in the stock market. In theory, having a professional adviser can improve on that. The stockbroker or adviser can take on board the investor’s preferences and needs and so produce tailor-made investment recommendations. Such hand-holding can be valuable, and the good advisers can produce a far better portfolio than an individual who has a living to earn and so cannot spend all day evaluating the options.
Like everything else worth having, it costs money, so its price has to be checked against its value. In addition, no sensible investor hands over the future without asking questions and testing the answers against common sense. Just as an intelligent patient asks the doctor what is wrong and what effects the medicine will have, and a careful client asks the lawyers how the law stands and what the advice is based on, so a shrewd investor should ask financial advisers why they advise a particular course and what assumptions lie behind the recommendation. It is at that point that common sense and personal experience re-enter. If you disagree with the adviser’s forecasts of the next six months or five years (and your guess may be as good as anybody’s) it is important to say so, so that the portfolio can be adjusted to the satisfaction of both of you.
Such advisers/brokers charge either commission or a flat fee, or a commission on trade.