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RVB's Market Musings

What began here as an avenue to interact and learn has far exceeded those goals.

If you are a prospective employer, please consider this site a place where you can see my passion for investing...

Thursday, September 08, 2005

Stock Analysts

You probably have heard of a stock "Upgrade" or "Downgrade". They come in all kinds of flavors. One brokerage may upgrade a stock buy moving it's rating from Hold to Accumulate. The other would use Neutral to Buy. Yet another may use Market Perform and Outperform. A plethora of terms have been created to simply refer to buy, sell, or hold. Why? To be honest, I've no idea. Perhaps it's ego food?

Anyhow, these ratings have some interesting stats. I would guess that there are 3 buy ratings to every sell rating out there. That's not an exact stat, though the real # could be found. The point is that there is a generally POSITIVE bias among analysts. Is that human nature? Is it something else? Could it be that the analyst has a relationship with the CEO of the company being covered? Could it be something else? Sure.

It's not a perfect system. In fact, it's far from it. I actually watched Shufflemaster (SHFL) get downgraded several times en route to a 100% gain in a 1 year period.

Not all analysts are equal, either. So, I always like to tell people to perform their own due diligence. Sure, an analyst might be able to do a better job than you. But then again, maybe not. Perhaps an analyst is upgrading a stock based on "valuation" in the midst of a bear market. What's the likelihood that the stock price will increase in the midst of such a market? Is it worth buying at that point?


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