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Should you be buying stocks on the advice of a professional stock analyst ? Can they be trusted ? Do they know what they are talking about ? Lets look into some of those questions and find some answers. The first thing about a stock analyst is that they are basicly giving advice. Since it is considered advice, that they should not be held financally responsable for you using thier advice. Thus is the reason after all or most recomendations is the forward statement clause. Now not all stock anlyst's are trying to get you to buy a bad stock, some do do due deligense in thier recomendations. Sorry for the pun could not pass that one up. For the most part that is what thier selling or in some instances giving to you, do do. Lets begin with what does all those terms mean. ie. Underwieght, Overwieght, Buy, Strong Buy. Ect., Ect....
The explanation is not as clear cut as it may seem. First off the analyst community wants you to understand that Sell or Buy recomendations do not mean to Sell or Buy the stock immediately to every invester. It means to Sell or Buy the stock if it fits your own unique perticular financial situation. Clear right ?. Well lets look at recomendations in groups to start with. Buy, Stong Buy, Market Outperform, Recomended list all fall into the positive recomendation list. Hold, Neutral, Market perform fall into the without growth list. Sell, Avoid, Market Underperform are the negative stock list's. We will begin with the positive recomendatrions. What does it mean, really to see a Buy or outperform recomdation ? To not get too technicial, it can mean that the stock, in presant market conditions wiill increase in stock price by 5 to 10 percent in the next 18 month period. The Hold or Nutral recomendation means that the stock will not increase or decrease by 5 to 10 percent in the next 18 months in the present market conditions. Of course then the Sell or Underperform recomendations mean that the stock will decrease by 5 to 10 percent in the next 18 months in the present market conditions. That sure leaves a lot of room for error. The Market rarely stays in the same conditions for 18 months and a 5 to 10 percent change in 18 months is not uncommon. As you can see by these guidlines a stock analyst is quite close to being a weatherman as far as accuracy is concerned. Now that we know the guidelines of the stock analyst, lets look at the driving force behind those recomendations Many analyst's work for Brokerage Companys, Institutional money managers, Finanacial Investment Firms and some work on thier own. You must know the reputation and the track record of the analyst before you use those recomendations. These things must be considered when using thier advise. You must also consider how the analyst makes his living. If they work for a brokerage firm, for example how the firm compensates the analyst may be directly related to how the firms portfolio performs. They may pay commissions on covered stocks and therefore have a vested interst in how certian stocks perform. That may also be true with Institutional Money Managers. Thier compensation is directly related to how well thier Mutual Fund performs. On the same hand they may not want to issue a Sell recomendation on a stock that is widely held by thier company or fund. In this case they may issue a market perform or hold recomendation to prevent losses in thier own fund or portfolio. Some analyst are compensated with stock from the recomended company in the event of an IPO. Then they also have a vested interest in the stock price. The company they work for, friends and themselfs may own significant numbers of a recomended stock and then also have an interst in the performance of a stocks price. In the end the anaylst community wants you to believe that they have the publics interests foremost in thier recomendations when in fact it may be someone else who may benifit from any peticular recomendation. Remember that it is your money, keep an eye on it. Nothing beats good sound research of a stock your interseted in. Good luck out there and watch for those falling knives, there everywhere. Ric Bottorf
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