American tips worth noting

Analysis of tipsheets shows that many positively harm their readers' wealth. Such titles can be a profitable business, but can they be of profit to investors?

Can investors hope to make any money out of following stock market tipsheets? We do not have a great tradition in this country of tipsters offering share tips through newsletters, as they do in the United States.

There it is a big business, with literally hundreds of titles. So much so that the market is able to support a newsletter, Hulbert's Financial Digest, which does nothing else but analyse the performance of other investment newsletters!

Although a few (such as those produced by Martin Zweig) are excellent, well-researched publications as good as anything on Wall Street, many of the American newsletters are very poor quality indeed, produced by individuals with few qualifications and little experience to back up their advice. Careful analysis by Mr Hulbert over many years has shown that only a handful of titles consistently offer advice which is profitable to investors.

More precisely, while many newsletters inevitably pick some winning individual stocks, anyone who followed all the advice that the tipsters have offered would be unlikely to have made any money from the exercise. On average, the number of dud recommendations greatly outweighs the tips which have come good, very much as happens with racing tipsters.

Some - perhaps most - are positively harmful to their readers' wealth, but this does not stop them promoting themselves assiduously with promises of great gains ahead - often based on the most extraordinarily selective accounts of their past performance.

How do they get away with it? The US Supreme Court, no less, ruled in a landmark case in 1985 that even amateurs who produce newsletters are in effect exempt from the investment Advisors Act, and therefore from regulation. The First Amendment, the court decided, provides them with the right to peddle their tips, whatever their track record. The principle of caveat emptor - or buyer beware - remains, in the great American tradition, splendidly sacrosanct.

Such a laissez faire regime seems unlikely to catch on here, where the tradition of regulation is entrenched, and the law/regulatory system goes to huge - and frequently futile - lengths to protect individuals from their own capacity for financial folly.

One of the longest surviving - and perhaps the best known - pure tipsheet in the UK is the Fleet Street Letter. This has had a chequered history over the years, but has the distinction of being the vehicle through which two millionaire businessmen - Nigel Wray (the rescuer of Saracens rugby club) and Michael Green (the boss of Carlton Communications) - first obtained a quotation on the London stock market. In the right hands a successful newsletter can become a very profitable business indeed.

What we do have in this country is a fairly long tradition of tipping shares in newspapers. How good are they? Mike Mitchell has had the bright idea of analysing the performances of tipsters, tracking all the individual tips made by specialist newsletters and in national newspapers - and seeing how they performed subsequently. His findings, which he publishes as a regular newsletter of his own called Tiptracker (0181-747 9497), make for interesting reading.

Apart from the usual problems involved in measuring performance - many tipsters are notoriously good at hedging their bets, making it hard to pin down what they are saying - two things are clear from his analysis.

One is that the newspaper tipsters, by and large, fare less well at picking stocks than the best specialist newsletters. (An honourable mention here to Quentin Lumsden, for many years a columnist on the Independent on Sunday, who also produces two newsletters, Chart Breakout and Quantum Leap, which both have shown a strong recent track record in spotting small company growth stocks.)

The second - and perhaps more surprising - finding in Mr Mitchell's analysis is that there do appear to be one or two specialist titles which do, on recent evidence, have rather good track records at spotting winners. Apart from Mr Lumsden's titles, he particularly rates the performance of Analyst, a monthly publication produced by a former stockbroker, Jeremy Utton, and a team of other former broking analysts.

I can vouch for the fact that Analyst is a serious and well-regarded title which attempts to apply rigorous investment appraisal techniques to the task of picking smaller company growth stocks. Mr Utton has a relatively conservative investment approach, and the style and pricing of the publication (pounds 97.50 for new subscribers, pounds 120 a year thereafter) marks it out as a cut above the "heard it in a pub" style of tipsheet further down the market.

How good is it? Well, last year, according to Tiptracker, the 51 shares tipped by Analyst produced an overall gain of 18.9 per cent, which compares with a 12.9 per cent gain on the FTSE All share index. (But note that the analysis takes no account of dividends, which add a further 3 to 4 per cent a year to the total return on the market.)

Most tipsters prefer to trawl among smaller quoted companies, which have little or nothing to show by way of dividend. Of Analyst's tips last year, just over one in three produced gains of more than 30 per cent. At least three stocks doubled during the year. But 21 tips failed to show any gain at all. Is a two-to-five ratio of losers to winners good or bad?

Clearly, nobody should expect a ticket to riches for just pounds 120 a year. But the better publications, such as Analyst, can be valuable additions to the investor's armoury. Anyone who thinks, however, that they are going to get rich solely by following tips in a newsletter - as thousands of Americans apparently do - obviously needs to think again.