FOOL'S EYE VIEW
Broker Tips

By Alan Oscroft
July 3, 2001

Liverpool -- In the long term, the UK stock market has been going up, bit by bit, for well over a century. We know that much. We also know that the rate of growth since 1918 has been approximately 12.3% per year.

That doesn't mean that all shares go up, of course, because there's a constant turmoil of individual success and failure going on. Some companies succeed, others fail. But on the whole we should expect to see more companies succeeding than failing. In the short term, we expect to see unpredictable ups and downs too, and we'll sometimes encounter periods when more share prices are falling than rising.

When we pick shares, we want to find those that are going to perform better than the market average. On that score, on average we are likely to find approximately the same number of shares outperforming the market as underperforming it.

What About Tips?

If the distribution of share tips was in any way logical, what I'd expect to see on a long-term average is slightly more Buy tips than Sell tips, with the balance only a little over 50/50. But I'd be wrong. Faced with anecdotal evidence of there always being far more Buy tips out there than Sell tips, I thought I'd do a little survey of my own. Admittedly, it is a far from perfect survey in statistical terms (but I generally manage to get through life reasonably well by not being too much of a perfectionist).

A Survey

What I did was pluck 10 companies out of the air. I went for a selection of shares that are popular with Fools, and tried to balance tech shares with non-tech shares. I then searched for brokers' recommendations and dug out all the clear Buy and Sell tips I could find. (To do this, I stuck with the plain English recommendations and ignored all the rest of the babble. I included "Add" and "Accumulate" as Buy tips, and "Reduce" as a Sell tip). Here are the results:

Company                      Buy Tips   Sell Tips

Vodafone                         11        1
British Telecommunications        6        0
ARM                               4        3
Halifax                           4        2
Lloyds TSB                        5        2
BP                                3        0
Tesco                             7        1
Unilever                          6        0
Marks & Spencer                   1        7
British Airways                   5        1

Total                            52       17

These tips were issued over a period from around the beginning of January 2001 to today. Over that time, the FTSE All Share index has fallen by around 7%. Yet a full 75% of share tips over the period were "Buy" tips. It gets curiouser...

Cheap ARM?

I was particularly intrigued to see opinion so evenly split on ARM (LSE: ARM), so I did a bit of historical digging. Ignoring tips that were not obviously buys or sells, here is what I found:

Date       Buy Tips  Sell Tips  % buy      Price

Jun 2001       4         3        57%      280p
Nov 2000       8         4        67%      679p
May 2000       5         1        83%      655p
Nov 1999       1         0       100%      359p*

(* OK, there were only two brokers offering tips in Nov 99, one Buy and one Hold).

This evidence lends more credibility to my theory that brokers have just one simple rule for forecasting tech shares -- "If it's been going up recently it's a Buy, but if it's been going down it's a Sell".

Why So Many Buys?

So why are brokers' tips so heavily biased towards Buy recommendations? I think there's one very good reason. Remember, tips are designed to sell things -- analysts' reports, tipsheets, advertising space, or whatever - and the more people they can sell to the better.

So who is the target audience for a Buy tip? Everyone. And who is the target audience for a Sell tip? Only those who already own the shares. It's easy to see which kind of tip has the potential to attract the most punters.

What Should We Do?

We should take absolutely no notice at all of brokers' recommendations, because they are riddled with hidden agendas and conflicts of interest. Sticking to goat entrails or Tarot cards would probably be more accurate, because at least with those we're more likely to get closer to a long term 50/50 split.