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It constantly amazes me whenever there is news about a stock
analyst opinion is published and its a positive report regarding a
specific stock, the share price goes up. If you start looking at the
top 100 Nasdaq listed stocks, 84 are rated a buy, 15 are ranked a
Hold and just 1 is actually rated a sell. This implies the fact that
84% of stocks listed on the Nasdaq 100 really should end up being in
your own stock portfolio and merely 1 really should be definitely
avoided? Does not seem like an impartial opinion does it? It sounds
like a tendency towards a buy and hold approach - and we realized
the danger involving that at the start of the bear market in the
fall of 2008. You'll notice in addition that research analysts
only produce a sell recommendation well after the fact. In June
2008, the same Nasdaq 100 had 83% Buy recommendations and 1% sell
recommendations. Zero forecasts of the danger that impacted your
account only 90 days into the future.
How does that analysis genuinely benefit you? It doesn't.
Even as regulators have been recently cracking down on glaring
conflicts of interest, such as an investment banking relationship, it is
actually harder to crack down on the more subtle conflicts.
For instance, several analysts acquire insights and details through
corporate management just before making a recommendation. If the
research analyst expects to continue to get hold of those insights, they
will need to go on to present the firm they are following in a positive
light. When they give a sell rating, these people worry about the
reprisals from the corporation which may impact his or her ability to
estimate cash flow and growth. Without having future management help, it
is going to end up being problematic to get the insiders info that can
help to develop the analysts status.
Virtually no research analyst is going to take that risk. That is
definitely bad for you.
At the same time, countless analysts future price predictions usually
are infamous for being incorrect. In cases where they are suggesting a
buy, you can gamble it will be accompanied by a big increase in
forecasted share price, however, they are frequently mistaken with that
estimate.
With a tendency to provide a buy recommendation, the retail trader
does not get the heads up on where to sell until its too late. Further,
the share price projections, while rosy, are a guess at best. The
average retail investor could guess just as well.
Exactly how does that research really benefit you? It doesn't.
If you really want to gain an advantage on the market, look for
facts, not opinions. Are the earnings per share (EPS) growing? Is the
business making money by way of acquisitions? Are revenues improving?
Are they purchasing back shares? Those are important inquiries to ask,
as they help check if the business will end up worth much more in the
future than it is today.
Let others chase the latest analyst darlings - we'll keep trading hot
small cap stocks. Remember, focus on the facts and you'll continue to
make money.
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