Analysts are employed by brokerage houses. Their job is to analyze stocks and advise brokerage house clients and/or the public whether given stocks are worth buying, selling, or holding. Although many analysts are competent, honest, and care about investors, the sad truth is that a handful of dishonest analysts have placed the entire profession and procedure of analyst recommendations in a bad light. The
continued buy recommendations in worthless stocks by analysts from the late 1990s until early 2002, as these stocks literally crashed, is a glaring example of what can happen if investors allow themselves to be manipulated by those who purpose to be professionals in their areas of expertise.
Although most brokerage houses have taken steps to separate their research departments from brokerage commission and sales departments, the truth is that any analyst on the payroll of a brokerage firm has a vested interest and can therefore be influenced by the desires and directions of the firm. Unless an analyst is totally independent and has a lengthy track record of successful stock picks and honesty, you ignore his or her opinions.
Be especially suspicious of guest “experts” who give their opinions on business television. Most of these individuals are employees of, directors of, shareholders in, or otherwise associated with firms that stand to benefit in one way or another from their recommendations and/or television appearances.
The popular CNBC cable television business station and many others have instituted a policy of asking guests whether they own any of the stocks they are recommending or discussing and whether their firm owns any of the stocks. Such questions may give a false sense of security to the public, because they do not sufficiently address the basic issues:
- Are they being paid to tout the stocks?
- Does anyone in their families stand to benefit from their recommendations?
- Do they intend to buy or sell the stocks they have discussed?
- Do they have a reciprocal arrangement with other firms or individuals to recommend stocks in which they have a vested interest?
These are more specific and useful questions, ones that you will not see asked or answered on any of the business television shows. Regardless of disclosures, it is unlikely you will be able to fully trust most of the opinions you get on television from either analysts or advisors. The sad fact is that the vast majority of them have poor track records. Their opinions are usually worthless.
Recently, commentators on many business television programs have become market experts. Several have written investment books and regularly tout them on the air to a ready-made audience. Sadly, at least one of these books has been roundly critiqued as generally worthless and even inaccurate. The investing public seems to believe that just because someone on television is giving advice it is worthwhile.
Don’t get the wrong impression. Some of the guests and even some of the commentators on CNBC, Bloomberg, and CNN are quite accomplished and competent. However, as a new investor, you will not know this and may take seriously investment advice from those who are not skilled or sufficiently experienced.