TIPS! How people want tips! They crave not only to get them but to give them. There is greed involved, and vanity. It is very amusing, at times, to watch really intelligent people fish for them. And the tip-giver need not hesitate about the quality, for the tip-seeker is not really after good tips, but any tip. If it makes good, fine! If it doesn't, better luck with the next.

Larry Livingstone in Reminiscences of a Stock Operator

The investing public never seems to get enough stock tips. And the financial media, brokerage firms, and investment services are more than happy to provide a steady stream of hot stock tips. With the recent introduction of online investment sites, bulletin boards, and chat services, stock tips have reached a new level of penetration in the investing public. The question for investors with money burning a hole through their pockets is no longer where to find stock tips, but which (if any) stock tips might be worth listening to.

Among the most popular stock tip sources is BusinessWeek's Inside Wall Street column. The column typically features three stocks, usually in a favorable light. The potential of a takeover is one of the common arguments presented in the stocks' favor.

As often happens to the more popular stock tip sources, people eventually get around to asking about the performance of those stock picks. If the source doesn't provide an accounting of their own performance, it's usually only a matter of time before someone else points out the times when tips didn't work out as planned.

In this case, the Inside Wall Street column drew the attention of thestreet.com's Editor-in-Chief Dave Kansas. In a skeptical article ($$) in late 1997, Kansas pointed out that many of the stock tips in the column flopped and few of the predicted takeovers ever panned out.

Perhaps in response to that article, Business Week offered A Report Card on 'Inside Wall Street' in their 7/6/98 issue. BusinessWeek reported the complete results of all the column's picks in 1997 with summaries for time frames from one day to six months in addition to the best and worst performing picks.

BusinessWeek gets credibility points for giving a full accounting which included both the positive and the negative results. BusinessWeek's publishing of their results demonstrates the growing trend in the investment business toward full accountability. Of course, even when you have full accountability, results are subject to interpretation. We'll always have the optimists (those who see the glass half full) as well as the pessimists (those who see the glass half empty). But generally we can expect the sponsor of a column or contest to portray their own results with a positive spin, so it's usually a good idea to pay close attention to the details.

In this case, the results don't imply that investors would have benefited from following the column's picks. Wall Street clearly reacts in a big way to the column, as evidenced by large price moves in the featured stocks. The average gain on publication day was 4.7% - a huge announcement effect. But those gains weren't capturable by readers because the price usually gaps up Friday morning (the column is usually available late Thursday). Returns at the end of six months were in line with the broader indexes, but when you subtract the day one returns, the picks underperformed for the one month, three month, and six month periods. The bottom line is that if you bought all of the 1997 Inside Wall Street picks on the close the day after the column appeared, you would have lagged the market (even before any transactions costs).

Of course, one year is hardly long enough to make a definitive conclusion about the column's usefulness. BusinessWeek promised to follow up on that initial report card, and true to their word, the August 9, 1999 issue included the magazine's results for the column's 1998 picks. The column's picks continued to have a huge "announcement effect" - the average one-day price appreciation was 4.9%. But for the three month and six month time frames, the column's picks had negative returns versus gains for the S&P 500 and DJIA. The losses were smaller than the loss for the Russell 2000 though.

What we still don't know is how much, if any, of the first day announcement effect is capturable by investors attempting to mimic the column (by buying on the open or during the first day of trading after the column is published). Regardless, we can conclude that had investors traded the column's picks at the close on the day following the column's release, they would have underperformed the major indexes in both years.

See also Inside Business Week's "Inside Wall Street" a collection of thorough articles by Louis Corrigan of the Motley Fool (10/15/98).