There are a lot of stock brokers, and stock analysts, who are smart, hard-working people who want to make money for their customers. But that doesn’t mean that they give you good advice… or that you’ll make money by listening to them.
There’s an entire industry dedicated to telling you what stocks you should buy. The main job of thousands of stock analysts in Singapore and Hong Kong – not to mention London and New York and other financial centers around the world – is to tell investors what stocks are a “buy”. Then there are many more brokers whose sole job is to relay to customers the smart things their analysts told them.
Most analysts rate most stocks a “buy”. Truewealth Publishing ran a screen of 333 stocks listed in China, Hong Kong, Singapore, Philippines, Thailand and Malaysia that have a market capitalization of more than $3 billion, and which have more than 10 analysts covering the stock. Of these stocks, 7% of them were rated a “buy” by every single analyst that covers them. And 70% of these stocks were rated a “buy” by at least half of the analysts that cover them. That’s a lot of buying.
The table below shows some of the biggest stocks in the Asia Pacific region that have the most “buy” ratings from stock analysts. For example, 37 of the 43 (86%) analysts who cover Tencent rate the stock a buy. 21 of the 25 analysts who cover DBS Group rate the stock a buy. Siam Cement is called a buy by 85% of analysts who cover it.
Does that mean that you should buy nearly everything? Of course not. But why do stock analysts say that you should?
First… those stock recommendations are code. To you and me, if someone tells me to “hold” something (whether it’s a stock or a carton of milk or a sleeping baby), that means I don’t let it go (and that I don’t sell it). But is that what the broker wants you to do with that stock?
Even the regulators understand the game. “Clear sell ratings have grown rare,” says the Financial Industry Regulatory Authority (FINRA), a U.S. securities industry regulator. “Some firms no longer even use “Sell” or any word obviously like it; frequently, a “Hold” rating in effect means “Sell”.”
Be warned, therefore, that when a broker or research report recommends a “hold,” it really may be meaning “sell”.
Stock analysts at banks aren’t analyzing stocks for you and me. They’re hoping to hook the much bigger fish of the companies themselves – companies might need advice on mergers or acquisitions, or on raising new money. You get close to a company by saying nice things about them. But you don’t get close to a company by calling their stock a sell. And often, young analysts are hesitant to ask questions of senior personnel in a way that might be seen as disrespectful.
For example… during the late 1990s tech bubble, analysts on Wall Street put “buy” ratings on the stocks of dozens of internet and tech companies that were doomed. In private emails, some of the analysts ridiculed their prospects. At the same time, they were writing glowing reports about them, encouraging small investors to buy.
It’s not a surprise that those very companies were paying Wall Street billions of dollars in fees for stock offerings and other financing.
Some stock analysts, and banks, aren’t in the market for big corporate deals. But they want to make money by generating commissions from buying and selling shares for customers. A “buy” recommendation pushes someone to buy… but a “sell” recommendation makes a customer sell only if he happens to own that particular stock.
So small brokers that aren’t trying to play nice with big listed stocks also might not have your best interests in mind. A stock analyst at a small brokerage house who issues too many “sell” recommendations – which won’t generate much in commissions – might find himself out of a job.
But maybe the biggest reason that stock analysts and brokers call so many stocks a “buy” is that they’re afraid of going against the herd.
Stock analysts are like everyone else: They like to be accepted. They want to fit in. They don’t want to be blamed for being wrong. And you can’t really be blamed for being wrong if everyone else is wrong, too. So it’s a lot easier to call the flavor-of-the-day stock a “buy”… whether it’s Chinese stocks last August, or mortgage-related stocks in the U.S. in 2007 – just before the credit crash.
But you don’t make money by investing with the herd. The herd buys at the top… and sells at the bottom. When the herd is buying, who are they going to sell to? There won’t be any buyers left.
One sure sign that you’re part of the herd: If a government starts talking up the stock market. When Chinese stocks headed for the moon in the massive bull run that started in 2014, People.cn, a website run by the country’s state media proudly claimed on April 21, 2015 that it was “just the start of the bull market” because the market had “support from China’s grand development strategy and economic reforms.” Just four months later, by August 2015, the Chinese stock market had fallen 32%.
Anyone who sold – instead of bought – would have saved himself a lot of headache and money.
The next time the talking heads on TV… or the fancy stock report in your inbox… or your broker on the other end of the line… says “buy,” just ask yourself why.