More reasons not to listen to stock tips
Yesterday, we published a fairly comprehensive article advising that you don’t listen to stock tips from brokers, newspapers or other research teams which will inevitably have a certain agenda other than increasing your long-term wealth.
We illustrated via this year and last year’s tips across a number of newspapers that a well diversified, low-fee ETF is a much better alternative than following the picks from these “experts”.
After publishing the article, I immediately saw something on Facebook and quickly realized that it is not only the newspapers who are trying giving you advice in order to push their services on you.
Interactive Investors Facebook Claims
From the ii About Us page:
“Launched in 1995, Interactive Investor (II) is an award-winning, online investment service that provides retail investors with unbiased financial information together with the tools and trading environment they need to make confident and informed investment decisions.”
Therefore, they essentially provide users with “unbiased” information in the hope that they will use their trading platform and generate revenue for the company. In short, they want you to invest in shares.
Yesterday, I had a Facebook advert pop up on my timeline:
Their expert stock picker, “Share Sleuth” Richard Beddard, has made 90% returns over the past 5 years. In an interest rate environment where savers are lucky to generate anything over 1%, this 90% figure is certainly designed to grab the attention of the reader.
I have two major problems with this infographic / advertisement!
1) Wow! 90%!
The first issue I have is a simple one. Why have they chosen to use a 5 year total return figure? This isn’t useful for the potential investor as it is not comparative to any other investment options. Investments returns are almost always considered on an annualized basis.
However, “14% annual returns” is not anywhere near as impressive and eye-catching as “90% returns”.
Therefore, their choice of language irks me somewhat.
2) Lack of proper comparatives
In a previous article “What Should I Invest In?”, we explored the historical returns of the stock market, property and cash.
From this research, we noted that the FTSE 250 generally provided better returns if you were willing to accept a little risk.
Now, the Share Sleuth virtual portfolio is not a “low-risk” portfolio. Therefore, the FTSE 250 would seem to be a relatively good comparison.
Let’s imagine then that started with the same investment as the Share Sleuth (£30,000) and we followed a simple strategy:
- Buy as many FTSE 250 ETF shares as we can on Day 1
- Any cash is kept in a bank account earning 1% per annum
- All dividends are distributed to us, but we buy more shares whenever we have the funds to afford another one share
The strategy is remarkably simple, and one we highly recommend.
After the 5 years, we only have to check our bank balance each time a dividend/interest is paid and determine if we can afford another share at that date. Therefore, around 4 times a year, we spend less than a minute performing this task.
In the actual five year period (data table at the foot of this article), we would make 4 share purchases of one share each, which would take about another 2 minutes, and 0 disposals.
Our total effort in the five years is as close to zero as you could possibly get (probably less than 10 minutes per year). So, you would expect our returns to be much less than the professionally run portfolio with ii. Wouldn’t you…?
Well, our returns over this period mean that our original £30,000 in September 2009 would be worth £60,160 in September 2014. In the same terms that ii use, this would be a “101% gain”.
Compare this with Share Sleuth, who has £56,898 in September 2014 for a 91% gain. To get this gain, they had to make 56 separate additions and 27 disposals. They had to research the market and all these individual companies on a near daily basis to understand when they believed it was optimal to buy and sell these shares.
Share Sleuth spends his daily life researching shares. The level of expertise applied to this portfolio effectively requires it to be a full time job. Therefore, you had two choices:
- Work really hard researching the market and buying/selling shares like the share sleuth for a 91% gain.
- Be lazy like moneystepper and invest in a low-fee FTSE 250 ETF and reinvest the dividends in the same product for a 101% gain.
I would argue that the decision is a pretty easy one.
Therefore, I’m sorry ii and I’m sorry Share Sleuth, but you can keep your “ultimate checklist for better investing”, especially given that the actual checklist contains such pearls as “The company is at an attractive valuation”.
I’m going to stick to my investment plan of investing in diversified low-fee ETFs and save myself a lot of hassle!
ishares FTSE 250 ETF graph and investing table
For the geeks among you, here is how the 101% returns are calculated: