Beware the universal “buy” recommendation
An insight emerged from some research work we did recently on broker recommendations. What we did was gather historical data on investment returns for a selection of ASX300 companies, together with the “average” broker recommendation for each company over time.
When we sliced the data up, we found that the companies with the highest average broker recommendations delivered – on average – the worst returns. In other words, when almost every broker in town had a “buy” recommendation on a stock that was generally an indication that the stock was more likely to underperform. The effect was not overly strong, but it was striking, given it was the opposite of what you might expect.
How do we account for this? Firstly we need to point out that this was not a peer-reviewed academic study, and it’s possible that there was a flaw in our methodology that led to erroneous conclusions.
However, on reflection, perhaps the results we saw are not that surprising. When everyone in the market has decided that a stock is a good investment and there is nobody left to get on board, then there is probably more scope for disappointment than for positive surprises. This may be another case in which there is merit in doing the opposite of what everyone else is doing. As Buffet put it – be fearful when others are greedy, and greedy when others are fearful.
Tim joined Montgomery in July 2012 and is a senior member of the investment team. Prior to this, Tim was an Executive Director in the corporate advisory division of Gresham Partners, where he worked for 17 years. Tim focuses on quant investing and market-neutral strategies.
This post was contributed by a representative of Montgomery Investment Management Pty Limited (AFSL No. 354564). The principal purpose of this post is to provide factual information and not provide financial product advice. Additionally, the information provided is not intended to provide any recommendation or opinion about any financial product. Any commentary and statements of opinion however may contain general advice only that is prepared without taking into account your personal objectives, financial circumstances or needs. Because of this, before acting on any of the information provided, you should always consider its appropriateness in light of your personal objectives, financial circumstances and needs and should consider seeking independent advice from a financial advisor if necessary before making any decisions. This post specifically excludes personal advice.
craig.cory.54
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Many analysts are like art gallery critics: can talk a lot: can’t necessarily paint.
Chris B
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This reminds me of a saying “The last time all the experts agreed, they were all badly wrong”.
I’ve seen analysts change their valuation of companies based on a trivial piece of news about the company. This is not proper long term valuation of a company.
Buffett has said many times to make your own mind up, ignore analysts recommendations.
Analysts are more short term focused for funds that need to keep up with the index, they are often not long term focused.
A competitor (actually, a newsletter tipster) works on analysts recommendations, not a good idea.
Andrew Legget
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The “buy” recomendation can be a dangerous thing. Also considering that you see it in my experience, an awful lot more than sell recomendations. I am too cynical about the markets to think that there are always far more opportunities to buy then to sell.
Investors, although free to read and take notice of whatever research, broker reports, news and blog articles etc as they want, need to always come back to the central theme that should be at the core of their investment philosophy. Is this a company i would like to own or is this a quality company? and Does this company based on my complete research, show value worth taking the tisk of investing?
Price paid and performance tends to have an inverse relationship. Higher price, lower return.
Remember as well, that there are unique personal factors that these scuttlebut cannot take into account and also that many biases may be at play (some innocent, some in certain murkier areas not so much). It is up to you to protect your own investment performance and only you are responsible for missteps. It’s what i call the “pirate rule”.