MARKET COMMENT
Honest Reporting From A Tipsheet

By Maynard Paton (TMFMayn)
November 22, 2004

Stock market tipsheets don't have a great reputation. The notoriety stems mostly from how they report their performances, with the marketing long on fantastic, short-term gains, but short on the trading realities faced by the ordinary punter.

However, we think there's reason to separate the Motley Fool's Value Investor newsletter from some of its crafty rivals. In true Foolish style, our Value Investor operates a clear and honest performance scorecard.

There are a number of tricks that some of the more unscrupulous tipsheets use.

A particular favourite is measuring gains based on a share price seen prior to publication. Especially with illiquid smallcaps, any old tipsheet can register an instant profit following initial subscriber buying and a market-maker mark-up.

In contrast, our Value Investor scorecard takes 'buy' prices at the close of trade on the first day after publication (thus reflecting a realistic entry price for readers). Not surprisingly, this practice has dampened the Value Investor's declared performance a little, with a handful of selections having rallied 5% or more immediately after publication.

Another popular technique for a tipsheet to bolster its performance comes from ignoring spreads. You see, there's often a notable difference between the offer (buy) and bid (sell) prices when dealing in the smaller companies numerous newsletters prefer. Naturally our Value Investor scorecard accounts for spreads.

Take Loades (LSE: LOD), a small property group and Value Investor selection. Following the profile, the 475p Loades mid-price was accompanied by a massive bid/offer spread of 400p-550p. However, with the shares now sporting a mid-price of 655p and a bid/offer spread of 625p-685p, the Value Investor scorecard currently shows a 13% gain. Using a mid-price basis, most other tipsheets would now be crowing about a 40% profit.

Another method to sex up a tipsheet's achievements is to backtrack on earlier advice. For example, one stock market magazine advised selling Ultraframe (LSE: UTF), a conservatory company, at 72p in September (and repeated the advice in October at 70p). But in November, the recommendation was 'moderated' back to hold at 92p! How this bizarre turnaround will eventually be calculated for this publication's readers is anybody's guess. When our Value Investor advised selling Ultraframe at 69p, the scorecard actually sold it and took a 58% loss squarely on the chin!

After starting out in January this year, the Value Investor scorecard (as at 17 November, including declared dividends) is now showing a 3% average gain from 28 value share selections, and a 9% average gain from ten high-yield portfolio selections. In comparison, the FTSE All-Share index (with dividends reinvested) is up 9%.

Other newsletters may trumpet much more impressive performances, but the question is: can you believe them?

Maynard selects a value share every month for the Motley Fool's Value Investor newsletter. The scorecard currently shows his ten tips to be up 9% on average. To enjoy a free no-obligation trial of the Value Investor newsletter, as well as gain access to past editions, click here.