Are You Sure You Said, "Sell"?

Conservative measurements have found that at least 70 percent of typical analyst recommendations are either Buy or Strong Buy, while only 1 percent say Sell.(1) Such numbers don't add up to a very comfortable investment environment. We would suggest that a paucity of negative recommendations points to a bias in analyst forecasting, and is another indication that Wall Street's interests are not in alignment with those of the average investor. As Fortune magazine put it, "If, in fact, stocks are headed for a disastrous slide, you won't hear it from the researchers paid to predict it."(2)

Based on the above data, one might justifiably conclude that the few times when analysts do issue Sell recommendations, those would be sure signs that a company was in deep trouble. One might assume that shareholders should sell the stock just as quickly as possible, and should avoid buying any if they didn't already hold it.

Before leaping to such conclusions, read on. Credit Suisse First Boston (CSFB) is among the most prestigious investment firms. According to Zacks Investment Research, of the 1,328 stocks covered by Credit Suisse as we entered 2001, just 11 (less than 1 percent) carried Sell recommendations. How did CSFB's Sell recommendations perform in what turned out to be one of the worst quarters for the market in the post-War era? On average they gained 13 percent, outperforming the S&P 500 by about 25 percent and the NASDAQ by close to 40 percent. One of the Sell recommendations rose 135 percent and another rose 65 percent. Five of the stocks did decline in value, but only three fell more than the S&P 500, and only one fell more than the NASDAQ. And this is not an isolated incident. UBS Warburg covers over 1,000 stocks. Only four carried Reduce recommendations. Of those, only a single one fell in value. Three of the four went up, 64 percent, 18 percent, and 9 per-cent.(3)

In Business Week's coverage of the above news, the author humorously implied an investor might "make out like a bandit" if he or she simply buys whatever analysts recommend as sells. On a more serious note, we believe the above examples demonstrate that following the positive or negative stock-picking advice of professional active managers is rarely (if ever) in your or your portfolio's best interests.

(1) The Price of Being Right. Fortune, February 5, 2001.
(2) Ibid.
(3) A Definite "Sell"? Gimme 100 Shares. Business Week, April 2, 2001.

This material is derived from sources believed to be reliable, but its accuracy and the opinions based thereon are not guaranteed. The content of this publication is for general information only and are not intended to serve as specific financial, accounting or tax advice. To be distributed only by a registered investment advisor. Copyright © BAM Advi-sor Services, 2001 & Capital Performance Advisors, LLC.

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October is the Most Dangerous Month

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Speculating is never the way to meet your financial goals. That's why our team of CPAs and Personal Financial Specialists design, implement, and maintain each client's diversified investment strategy based on sound financial principles. Our aim is to help you achieve financial security, freedom, and independence.

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Investing hasn't offered a lot of that lately -- secure investment returns, freedom from worry, financial independence.

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Our team of CPAs and Personal Financial Specialists can design, implement, and maintain a diversified investment strategy to meet your financial goals. No gambling. No speculation. Just investing based on sound financial principles.

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We promise to never speculate with your money. Our team of CPAs and Personal Financial Specialists will design, implement, and maintain a diversified investment strategy to meet your financial goals. Our aim is to help you achieve financial security, freedom, and independence.

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