This article was published on 13 November 2004. Some information may be out of date.

QI cannot agree with your expressed belief that, in share investing, the available knowledge is not useful to the ordinary investor. I suggest that it depends where you seek it.

I am an ordinary share investor, and have neither the desire, resource nor skill to undertake meaningful market analysis, but I can manage to digest the weekly summaries and other advice available from my sharebroker, and make reasoned decisions on that basis. Not infallible, but better than do-it-yourself.

Diversification is fine, but requires a certain critical mass in the portfolio, and coping with fifteen companies is about my limit — stock picking is inevitable.

I suggest your correspondent seeking knowledge in last week’s column consider this approach.

ALet me take you back a few years, when I was studying for my MBA at the University of Chicago.

One day, the professor said that share tips from sharebrokers to their clients were, basically, useless. By the time the clients heard that a company’s prospects suddenly looked brighter, the big institutions had long since rushed in and bought, and the share price had already risen to reflect the new information.

“Hmmm,” I thought, “What does that say about the hugely popular share column in the Chicago Sun-Times?”, where I was working at the time. The column ran the top tips from America’s biggest sharebrokers.

With the co-operation of the man who wrote the column — who was keen to prove the professor wrong — I looked back at the share tips of the last several years, checked how those shares had performed since then and wrote a varsity paper about it.

My friendship with the columnist was never the same after that. While the prices of the recommended shares had, on average, risen, the market as a whole had risen more. An investor would probably have done better throwing the proverbial darts at the newspapers share tables and buying what he or she hit.

Heaps of similar research has been done, with similar results. Sure, if you look at one broker’s tips over a relatively short period, they may look good. But if you study them for long enough, the performance of the recommended shares will probably be about the same as the market.

Admittedly, most of the research has been done in the US. Some New Zealanders say our market is not as efficient, meaning news about a company isn’t incorporated into the price as quickly.

This may be at least somewhat true, particularly for companies that are too small for the big institutions to trade.

If you reckon, over the years, that your broker really has given you tips that are valuable, go for it. But I’m yet to be convinced that any of them have.

As far as diversification is concerned, if you hold 15 shares you’re doing pretty well — as long as they are in a wide range of industries, company sizes and so on. While 30 or 50 shares would be better, the added benefit of moving from 15 to 50 isn’t nearly as big as moving from one to 15.

One word of warning: Following sharebrokers’ tips often leads to frequent trading. The brokers, of course, are happy to get the brokerage when you sell one share, and again when you buy another.

But — turning back to research, I’m afraid — it has been shown over and over that investors are better off to buy shares and stick with them.

Trading doesn’t necessarily improve the quality of portfolios. And by the time you subtract brokerage and other expenses — and perhaps also tax on your capital gains — it’s highly likely that you will be worse off than if you had simply bought and held.

QRe the first reader’s letter last week, let’s get back to basics.

Buy when others are selling; sell when others are buying. If caught in a falling market, if you can stay in, ride out the trough — the market will come back — or transfer across to a company that you think has better recovery prospects.

(Hugely successful investor) Warren Buffett has access to all types of information (hopefully not insider!), analysts etc to make his decisions.

A case in point: I was advised years ago to put any spare money on Brierley. The advice came from a good company owner.

I did so. A few months later he said, “Time to get out!”, which I did, at a tidy profit. He got that information from a source I can’t divulge.

ABuying shares when others are selling, and vice versa, tends to be better than following the crowd. Some “contrarian” investors have done well.

I have a couple of problems with it, though. One is that it often involves frequent trading, which is not a good idea, as explained above.

Another is that, while some shares that everyone is selling turn out to be great bargains that enrich the contrarian, others are on a slippery slope to zero value. The contrarian has to live with some big losses, and not everyone can.

Also, behavioural finance research shows that investors tend not to mind a loss so much if many others have suffered the same loss. That’s not logical, but misery loves company. Contrarians don’t have that consolation.

I heartily agree with you about riding out market downturns. But I’m not keen on too much transferring to other shares, although it beats bailing out of shares altogether.

Your Brierley tips sound as if they might have been insider knowledge — and it’s illegal to trade on that.

If not, your source might have been an astute observer. His advice was clearly worth taking. It seems to me, though, that people tend to remember the good tips they have received over the years and forget the many that turned out to be wrong.

Good luck is called “skill” quite often, I suspect.

Mary Holm is a freelance journalist, a director of Financial Services Complaints Ltd (FSCL), a seminar presenter and a bestselling author on personal finance. From 2011 to 2019 she was a founding director of the Financial Markets Authority. Her opinions are personal, and do not reflect the position of any organisation in which she holds office. Mary’s advice is of a general nature, and she is not responsible for any loss that any reader may suffer from following it. Send questions to [email protected] or click here. Letters should not exceed 200 words. We won’t publish your name. Please provide a (preferably daytime) phone number. Unfortunately, Mary cannot answer all questions, correspond directly with readers, or give financial advice.