Last updated March 13th 2016
In the world of investing, countless financial analysts are offering advice on which stocks and assets to buy, sell, and hold. Yet statistics show that the majority of analysts – even those who work for premier investment banks – often give recommendations that consistently underperform compared to the market. So, how can you know which analysts to trust?
TipRanks, a financial technology startup based in Israel, allows its users to discover the measured performance of any financial analyst by simply looking up their name in the company’s database. Using machine learning algorithms and Natural Language Processing, TipRanks analyzes the analysts, and ranks them according to the performance of their recommendations, kind of like the lists that rank top athletes. Even former New York governor and state attorney general Eliot Spitzer, who earned the nickname “Sheriff of Wall Street” after chasing down corrupt financiers during the early 2000’s, has invested in the company, expressing his faith that TipRanks is “what the market needs” – a “market-driven answer for investors.”
Founded in 2012, TipRanks has already received a swarm of attention from both investors and the media, drawing in over 100,000 users since officially launching a beta version some weeks ago. Though their financial tool is still in its early stages, it has been integrated into the trading platforms of several banks around the world, including the two largest in Israel – Bank Hapoalim and Bank Leumi.
Sometimes failure is the greatest teacher
When Uri Gruenbaum, the CEO and co-founder of TipRanks, finished his army service, he was working as a software engineer and investing in the stock markets on the side. “I was a retail investor, a layman’s investor,” Uri said in an interview with NoCamels. Like many part-time investors, he sometimes relied on the recommendations of leading financial analysts. But then, one analyst’s bad recommendation led Uri to invest in a stock that lost him a lot of money.
“I found myself following some bad advice a few years ago and the stock I invested in fell,” Uri said. His wife questioned why he even bought that stock in the first place, to which he said, “I followed the advice of someone who published his opinion on a leading financial website on the front page.” His wife then asked him what he knew about this analyst and how he knew if the analyst was any good. And that’s when Uri had his revelation. “It hit me that I don’t know and that there is no way for any investor to evaluate how good a recommendation they are receiving.”
In retrospect, this bad investment turned out to be the best one he’s ever made.
Shortly thereafter, Uri quit his job and started TipRanks along with CTO Gilad Gat and Roni Michaely, a finance professor at Cornell University. Together they developed a financial accountability tool that allows investors to see which analysts are good and which are not. According to Uri, the only other tool on the market similar to TipRanks is the Bloomberg terminal. However, Bloomberg only lists the top five analysts in each sector and it doesn’t tell you how good they are. Even if it did, Uri notes, a retail investor wouldn’t have access to that information since subscriptions to Bloomberg cost around $2,000 a month.
Hey analysts, it’s time to step up your performance!
TipRanks rates about 6,500 financial analysts and bloggers on a five-star scale. The ranking is determined by a methodology that combines both the expert’s success rate (percentage of recommendations that result in positive returns) and the average return per recommendation into a single ranking. A “z-test” is also used, which takes into account the quantity of recommendations made by an expert.
Transparency is a number one priority for TipRanks with the goal of ensuring users that their rankings are based solely on the numbers. “We aim for complete transparency,” Uri claims. “I think the biggest challenge we had was creating a user interface that was intuitive enough and that would allow users to see all the different stats we have.” In fulfilling their promise of transparency, TipRanks provides a trail back to the information the company collected on each expert’s “portfolio” of stock recommendations.
When asked if TipRanks has the potential to motivate analysts to step up their game because their performance is now being exposed, Uri said, “Absolutely – that’s the idea. If we hold them accountable to what they say, they’re going to think twice about stocks they’re recommending to buy or sell.” It is no wonder why Spitzer likes this company so much.
The go-to wesbite for any investor
All that data TipTanks is collecting has the potential to do even more than just hold analysts accountable. For instance, the company noticed that it is actually the bloggers who rank more often in the top 25 than the paid analysts. So, what does TipRanks do with this information? “We license it to hedge funds in the US and tell them ‘Hey, here are your rock stars, just follow them.’”
In the future, TipRanks plans to do even more interesting things with their data. The company currently has a research and development team whose goal is to develop “reasoning trees” for investors to use when choosing stocks. “You have thousands of reasons for why you should invest in a stock or why you should short-sell a stock,” notes Uri. “We are trying to find the combination of the reasons that make most sense and generate the highest revenues.”
TipRanks is still young in startup terms, conducting its first round of funding this past August which raised $3 million from private investors, including former governor Spitzer. In order to keep the company’s content quality, TipRanks uses a “free-mium” business model, meaning their platform is free for anyone to use, but for more access to information on experts, one must pay a monthly subscription. As another source of income, the company also integrates widgets inside trading platforms at some of the world’s biggest banks.
With a mission to empower the retail investor, TipRanks hopes to become a leading market data provider, and as Uri boldly envisions, “TipRanks is going to be the go-to place for any investor in the world.”