Choosing a stock picking service can be an intimidating decision. Choose the right service and you may beat the market; choose the wrong service and you may end up losing money. Most stock picking services use aggressive marketing tactics that make it even more difficult to find clarity. These marketing tactics make it seem like signing up for a subscription is a no-brainer. After all, what’s a few hundred bucks in subscription costs when you can increase your portfolio gains by 5 or 10 percent?
In a lot of cases, you only discover how effective (or ineffective) a service is after you’ve signed up. In this case, learning from experience can cost you a lot of money. That’s where we come in. Our goal is to help traders and investors make informed financial decisions before they commit to a service. Our team provides in-depth reviews on top trading and investment services so you can do your research before you buy. Keep reading to learn more about what you should look for when searching for the best stock picking services.
What is a Stock Picking Service?
A stock picking service is designed to help investors identify exceptional stocks that will outperform the market. These services fill the gap between self-directed investors and investors who seek full money management. If you’re looking for average returns, your best bet is to find a mutual fund or ETF with low fees. In the majority of cases, these types of broad market funds will outperform proprietary strategies.
There’s a lot of debate about whether or not it’s possible to beat the market. Plenty of studies show that the majority of funds do NOT outperform the S&P500, but many individual investors would beg to disagree. There’s a strong argument to be made for the ability of investors to beat the markets.
Consider an anecdotal example. From 2013 (after the release of iPhone 5) to 2018, Apple’s stock (AAPL) ran almost over 300%. During that same five-year period, the S&P 500 ran close to 100%, meaning Apple outperformed the broader market by 3X. A $10,000 investment in Apple in 2013 would’ve yielded $40,000 by 2018, whereas the same investment in an S&P fund would’ve yielded $10,000. Of course, everything is much clearer in hindsight, but it wouldn’t take a rocket scientist to recognize that Apple was set up for success. During that same period, Netflix ran close to 1000% and Amazon ran close to 700%. Even in 2013, these weren’t obscure companies. They ranked in the top global brands.
Hindsight analysis aside, the point is actually pretty simple. Individual stocks can outperform the broader market which means stock picking services have the potential to deliver exceptional returns. Whether or not these services follow through on their claims is a topic we will explore in depth.
What to Expect from a Stock Picking Service
You need to have proper expectations before signing up for a stock picking service. These services do not sell results; they sell advice and recommendations. This is an important distinction to be aware of. If you sign up for a service thinking you just found your shortcut to life-changing wealth, you’re delusional. There are never any guarantees in investing. Be reasonable with your expectations.
Here are some things to consider:
General Market Conditions
The majority of stocks move with the broader markets. This means that if the S&P 500 is going up, individual stocks are more likely to go up as well. In strong bull markets, every stock picker can be a winner. It’s much easier to pick stocks when market conditions are favorable. The true test of a company’s performance is how well their picks hold up in less favorable conditions (i.e. bear markets). This leads to two considerations.
- Look for a longer track record when choosing a stock picking service. A company that did well in the last five years of bullish activity may crumble under the weight of a future bear market.
- Be conscious of the market environment when building your portfolio. You will achieve different results if you buy during corrections, dips, bear markets, bull markets, and new market highs. It’s difficult to predict, but at the very least you should be aware of the market environment.
Stock picking services have a few ways of touting their performance. Some will focus on cumulative performance while others will zone in on a few good picks. Both approaches are unrealistic.
Cumulative performance is an average of all of a company’s picks. This means that a company can achieve great results and have a lot of losing recommendations. For example, a company could beat the S&P 500 with a 50% win rate on their stock picks. This creates a wide margin of error, as certain subscribers may have followed the 50% of picks that resulted in loss.
Selective performance can be just as deceptive. This is where a company promotes specific stock picks they’ve made over the years. For example, a company may promote the fact that they recommended Google ten years ago. While this pick would undoubtedly yield a nice return, it’s not necessarily indicative of the stock picking service’s true performance. A single pick could be an outlier and past performance is never indicative of future returns.
Over the past ten years, you could have placed an infinite combination of trades on any stock. Some of these trades would be wildly profitable and others would would result in catastrophic losses. Take AAPL for example. In the past 12 months, you could have made 40% or lost 40% depending on your entry.
A quality stock pick requires a timeframe. When choosing a stock picking service, make sure their timeframes line up with yours. Investors who are approaching retirement will have different investment timeframes than those who are much younger.
It’s important to remember that signing up for a stock picking service doesn’t excuse you of your responsibility to manage risk. Every investor has a different risk threshold so it’s important to have a risk management plan tailored to your personal needs. While a young investor may be able to stomach a 20% portfolio drop, an investor approaching retirement may not.
Make sure you have an effective risk management strategy that you will apply to your investments. This may mean you cut losses early, take smaller positions, or avoid volatile stocks. There’s no perfect strategy. You will never be able to control the markets but you should be able to devise a risk management strategy that enables you to feel in control of your portfolio.
Different Types of Stock Picking Services
There are a few different types of stock picking services. It’s important that you choose the one that meets your needs if you want to get your money’s worth. Here are a few common types.
Research Platforms (Hands-On)
Many stock picking services take the form of research platforms. These services don’t directly tell you when to buy and sell a stock, but they provide you with unique tools to help you uncover opportunities. For example, a software company may offer a scan that finds unique opportunities based on proprietary criteria. You may be able to run a market scan for stocks that:
- Are in an uptrend
- Are beating the market
- Have high quarterly profit growth
- Have above average analyst recommendations
In a way, these research platforms are still self-directed, but they provide traders and investors with tools that make stock selection easier. Here are some examples:
Finbox.io provides screeners, fair value price estimators, and financial models that help investors find stocks and evaluate opportunities.
IBD’s MarketSmith provides a wide-range of scanning filters as well as chart commentary to help investors find hidden gems and identify prime entry points.
GuruFocus provides access to proprietary scanners, guru picks, and market education.
Research platforms are ideal for investors who have a stronger understanding of the markets and are looking for tools to help automate their stock selection process.
Investment Services (Hands-Off)
Investment services are stock picking services that recommend long-term investments. These services generally provide buy and sell entries, making it easy for subscribers to copy the trades. Generally, these types of services will also provide research for diligent investors. The research explains the rationale behind the stock picks.
Here are some examples:
Motley Fool’s Stock Advisor services provides buy/sell alerts as well as deep research reports on the companies they recommend.
IBD’s Leaderboard serves as a hands-off version of MarketSmith, providing subscribers with buy/sell recommendations, annotated charts, and recommended entry/exit prices.
These types of services are best for long-term investors who want to take a hands-off approach to investing.
Best Stock Picking Services
We do in-depth analyses of every company we review. As of today, these are our top picks.
Best for Stock Picks: Motley Fool
Motley Fool is a credible stock picking company with more than a decade of proven performance. Read our full review here.
Best for Self-Directed Research Tools: MarketSmith
IBD’s MarketSmith is a platform built around the investment strategies of renowned investor William O’Neil. Read our full review here.