November 6, 2013

Introduction to the business startup TipRanks

TipRanks was founded in 2012 with the goal of giving power back to the individual investor. To fulfill the goal, they have developed a product that can evaluate stock analysts. With the help of computers, TipRanks automatically scan websites like Bloomberg, Forbes, and CNBC, then they store the recommendations the scanner found in a database, and then they publish the information in a browser app. In the app, you can see a ranking of an individual analyst, the analyst's average performance over S&P 500, search for analysts who recommends a company you are interested in, and if previous analysis by the analyst were successful. If you want, you can get e-mail alerts when your favorite analysts posts a new analysis. This is however not an entirely free service - there's a very limited free option or you have to pay between $14.95/month and $24.95/month to get more features. This is how the browser app looks like:

Why TipRanks is a good idea
  • According to TipRank's website, 86.5 percent of analysts ratings are "BUY," but they are wrong 50.2 percent of the time.
  • Each day, we are bombarded with recommendations by analysts and it's impossible to sort through the information without the help from a computer.
  • It's a common psychological mistake to follow "hot" analysts that currently have made good recommendations. For example, after the financial crisis of 2008, it was common to see interviews with an analyst called Peter Schiff, who had "predicted" the financial crisis. But when the stock market moved up again, Peter Schiff, who was still negative to the stock market, disappeared from the television screens and was replaced with someone who had "predicted" that stocks would move up again. With TipRanks, we can clearly see if the current "hot" analyst is worth listening to, or if he/she has shouted "sell" the last 20 years.

Why TipRanks is a bad idea 
  • Should we really listen to analysts? Or is it a better idea to listen to our own knowledge. The famous find manager, Peter Lynch, always said that amateur investors can outperform Wall Street analysts by using their own knowledge. If you work at Tesla Motors, then you know more about the company than the analysts who lives 4133 km away in New York. 
  • Customers to the company where the analyst is working tend to get the recommendations by the analyst before the recommendations become public. As some analysts move the stock market, it might be too late to listen to the analyst when the recommendation is public. The strategy to buy/sell before the recommendation becomes public was used by the fund manager Michael Steinhardt
  • Good amateur investors are publishing their recommendations on blogs and TipRanks is not analyzing these recommendations. Maybe they will in the future?