Remember this the next time you see an analyst with a 'buy' recommendation
Maybe the best thing I've read this week is today's column by Matt Levine on stock market research analysts and what they're really doing.
You might think their job is to give investors advice on which stocks to buy, sell and hold. You would be wrong, as Levine explains:
Here are two models of sell-side equity research.
Model 1
- Sell-side analysts are in the business of finding out what stocks will go up and then telling you.
- They tell you to Buy stocks that will go up, Hold stocks that will stay flat (why?), and Sell stocks that go down.
- You believe them, and do that.
- Sometimes they lie to you, but it is always a shock when they do.
Model 2
- Sell-side analysts are in the business of helping institutional investors get access to corporate management teams.
- They flatter management teams by giving most companies good ratings, to maintain access.
- They help their clients, because investors who meet with management tend to outperform investors who don't.
- The clients aren't too worried about the Buy/Sell/Hold stuff.
... "If you believe that the job of a sell-side analyst is to tell people which stocks to buy and which ones to sell, you need to stop believing that right now, because it is not true."
He goes on to detais how analyst ratings basically exist to flatter management so those analysts can then set up meeting between large institutional managers and top executives.
