By Arie Goren
In today’s financial arena. Many people offer advice. An investor looking for a stock recommendation for a new stock often runs into a dilemma: should we rely on sell size professional analysts’ recommendation, or maybe get advice from “out there” sources in the blogosphere? The professional analysts have a name (for good and for bad) while bloggers are posting their analyses and ideas on websites like: InvestorPlace, Seeking Alpha, TheStreet.com, Motley Fool and others. In order to find an answer to this dilemma, I have used the ranking data of TipRanks, a website that ranks experts (analysts and bloggers) according to their performance. Interestingly enough, after checking the performance of all analysts and bloggers, it turns out that bloggers are ranked higher than many analysts. Just look at the May 29, 2014 list below of the top 10 experts; all of them are bloggers.
In fact, currently all the 25 top experts are bloggers.
Now let us see the performance of some top experts; the number one expert is currently InvestorPlace’s blogger Marc Bastow with impressive success rate of 86% (305 out of 356 successful ratings) with one year average return per recommendation of 21.8%.
The first ranked analyst Deutsche Bank’s David Bianco is ranked only 28th globally (analysts & bloggers), he also has fantastic success rate of 90% (92 out of 102 successful ratings) with one year average return per recommendation of 17.1%.
One might ask how come Bianco, who has success rate of 90% compared to the success rate of 86% for Bastow is ranked 28th while Bastow is ranked first. That because the more ratings the expert has, his ratings weight more. The system is running a Z test on the success rate meaning that the more the data is significant, the more weight the expert is getting (e.g. if someone has 10 out of 10, he is not as good as someone who has 75 out of 100 even though the first one has 100% success rate, and the second has only 75%). In addition, in equal proportions, the system is taking into account the average return per recommendation.
Now let us compare the second rated blogger with the second ranked analyst. The second rated blogger, which calls himself Dividend Growth Investor, has a success rate of 80% (402 out of 500 successful ratings) with one year average return per recommendation of 12.6%.
However, the second rated analyst BMO Capital’s Jim Birchenough is ranked only 65th among total experts. Mr. Birchenough has success rate of 63% (32 out of 51 successful ratings) with a one year average return per recommendation of 35.4%.
The two tables below give a better perspective about the difference between the top analysts and the top bloggers.
* Analysts & Bloggers
The first notable point is that top bloggers are offering much more analyses; on average 470 ratings for the top five bloggers while the top five analysts have an average of 54 ratings.
While large financial institutions often have analysts specializing in one sector in order to become a leader in that arena, it might ultimately have a negative impact on their trading portfolio since it can prevent them from having a full vision of the stock market. Moreover, because of their company obligations, they are restricted to cover specific companies, and they might miss some good opportunities.
In contrasts to analysts, blogger usually are looking for the most promising stocks to write about, and they do not limit themselves to just one sector. It is amazing to see the consistency of top bloggers recommendation results, even if they write about stocks from completely different industries. The explanation for this fact could be that top blogger have their own method to analyze stocks, and they are always using the same rules, regardless of sector.
The conclusion that we can draw from the discussion above is that an investor should not discredit those who don’t have a large financial institution connected to their name. For all we know, the next brain of the market might be the person with the silly image and the rhyming name found on your favorite financial blog.
While there are more people that have the potential to give good advice, it also provides more chances to get bad advice. It is for that reason that having a ranking system of analysts, but also of bloggers is very useful for investors. A ranking system enables investors to take successful investment decisions according to very reliable recommendations from sell size analysts and top bloggers, while differentiating the good, from the bad, from the ugly.