Positivity Sells, Does Pessimism?

Last week I shared one of Wall Street’s tricks. Specifically, how returns are calculated. My purpose was for you to understand chained returns versus arithmetic returns. Today, I’d like to share another “sleight of hand” so-to-speak. This one concerns the frequency of buy and sell recommendations as it relates to the Wall Street machine.

In 2000, Fortune magazine ran an article titled, “The Top Picks From Wall Street.” The gist of its findings was that Wall Street analysts issue many more buy recommendations than sell recommendations. “Analysts made 33,169 stock recommendations the prior year. Of those, only 125 were recommendations that you sell that stock or approximately .34 percent (1 in 300).”

Fortune isn’t alone here. Many publications and studies offer the same result for a multitude of reasons. For example, if Fidelity Investments places a buy rating on your favorite company, it may not be because it thinks it will go up in price. It could be for another reason.

Most investors don’t know that many of the financial firms that issue buy ratings also do other business with the companies being rated. Think about it. If you’re an investment bank, It’s not wise to issue a sell rating (thus causing a stock price to fall) in one breath and ask for advisory or banking business with the next! (Follow the money!)

From one of my favorite books - The Capitalist’s Lament:

“Despite how things turn out, there is a tremendous bias towards optimism. Wall Street insiders will not offer advice that will adversely affect their own incomes, and their customers don’t want to hear bad news. Who’s going to buy stocks and other securities after being told that values will decline?”

Some Latin may help here. Caveat Emptor – let the buyer beware.

That’s just the way it works!

Recent Posts

See All

Are your 401(k) costs going up?

As if things weren’t hard enough, this headline caught my eye the other day. As 401K Assets Fall, Investors Could Pay Higher Fees. Here’s some background: As part of the CARES act, 401(k) participants

Darryl Rosen MBA, RICP

Darryl Rosen is the founder of Rose Advisory Group, and operates www.RealRetirementAdvice.com as a way to help others create their ideal retirement. He is obsessed with helping people create safety, simplicity and strength in their financial future. Darryl’s clients enjoy his straight-forward, plain-spoken guidance, strategies to minimize taxes and ability to generate investment returns, while minimizing risk so his clients can sleep at night! Darryl is licensed to provide guidance on securities and insurance solutions and has achieved the highly desired Retirement Income Certified Professional (RICP) designation.

Darryl is the creator of the well-known SECURiMENT™ Retirement Planning Method. A simple to understand and implement planning method that demystifies retirement planning so that people can take action. Visit Rose Advisory Group to learn more! 

Investment advisory services offered through Brookstone Capital Management, LLC (BCM), a registered investment advisor.  BCM and (Rose Advisory Group) are independent of each other.   Insurance products and services are not offered through BCM but are offered and sold through individually licensed and appointed agents. Information provided is not intended as tax or legal advice, and should not be relied on as such.  You are encouraged to seek tax or legal advice from an independent professional.