Why We Have So Little Respect For Wall Street Buy/Sell Recommendations

Understanding the next few paragraphs is one key to understanding our investment strategy.

Wall Street analysts have an immense amount or knowledge about the companies and industries they follow.  We learn a lot when we read their reports.

Wall Street analysts are very well educated, generally good neighbors, and very nice to their families and pets.

Wall Street analysts believe in almost none of the value investment principles we believe in.  Therefore, it is not surprising that their recommendations are of little value to us.

Wall Street analysts get paid to write buy recommendations.  Buy recommendations generate trades, and it is trades that generate revenue.

Wall Street almost never writes sell recommendations.  Despite all the attempts at reform, this is still true today.  Analysts fear losing investment banking revenue if they say anything negative.  In our opinion you should consider any “Hold” recommendation to be a “Sell” recommendation.

Therefore, when we look at a company we expect to find a high percentage of hold recommendations, and a few sell recommendation.  When we find this situation it is a major positive to our investment thesis. In general, sentiment can only get better.

We often find very few buy recommendations.  We consider this a positive.

Let’s discuss what happens when find several buy recommendations on a stock we like.  We consider it to be a small negative, but never a disqualifying issue.  Often these buy recommendations come from smaller regional firms that do not have much influence. Other times they are weak “2” ratings on a 5 point scale that mean very little.  Finally these buys can just be traditional efforts to drum up investment banking business.

If we recommend a stock that is on the Goldman Sachs Conviction Buy List and the Merrill Lynch Recommended list, please call the FBI because we have kidnapped and replaced by Wall Street shills.

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About Gregg Jahnke