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Sound Advice: February 10, 2021

It seems as if there are as many investment websites as there are grains of sand on the beach. Each of them trumpets the merits of its own approach, yet the overwhelming majority are either lacking in substance or credibility.

There is more than enough hard information available for investors to make intelligent decisions. The problem is that there is so much information that it can become difficult to sort through and decide what is truly important. There is, in addition, widespread duplication of data, though it is not uncommon for the same data series to vary from site to site. There may be even greater variation when considering forward-looking data, which in most cases is anything but reliable.

What is most useful is data about recent company trends in revenues, earnings, borrowings, valuations, and relative strength. Less useful, or perhaps to be taken with a grain of salt, are analyst recommendations (Buy, Hold, Sell). Neither these nor target prices should be taken seriously.

Recommendations generally come from sell-side analysts who prepare them as part of campaigns to interest major financial institutions in buying sizable positions and thereby earning large commissions for themselves. These recommendations are biased heavily toward the buy side simply because few institutions are interested in hearing about what to sell.

The exercise is one in which the sell-side analyst presents his idea, which may or may not fit with the institution’s objectives.  If the institution has an interest in buying, it will then apply its own sell discipline. Ergo, most recommendations are Buys.

What’s especially troublesome is that Wall Street analysts tend to make recommendations and estimates that are close to the consensus.  Why?  The main reason is that there’s little risk if your estimates were in line with the consensus and the consensus was wrong.  But if your estimates were outliers and you missed the target, you may be at risk for your job as well.

There are also websites dedicated to belief in the wisdom of the masses. These are websites that compile aggregate recommendations of both individual and ostensibly institutional investors in an effort to lead the way to the truth. Some have taken the proposition one step further and dedicated relatively small funds that invest according to the consensus.

To all of these, I say “best of luck.”  The reality is straightforward: Over time, improving company fundamentals will lead to higher prices for their shares.  That’s the basic equation.  Ignore it at your own peril.

N. Russell Wayne, CFP®

Sound Asset Management Inc.

Weston, CT  06883 


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