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Sound Advice: February 8, 2023

Buys, Holds, and Sells

One of the fascinating things about the world of investing is the proliferation of stock recommendations.  Most come from brokerage firms, but more than a few come from the print and broadcast media.  Rarely does a day go by without seeing “10 Stocks To Buy Now” or “Five Funds To Hold Forever.”  My sympathies to those who take this stuff seriously.

In the good old days when stock commissions were hefty, as in $150 or more per ticket, big pay days were earned by institutional stock analysts who generated massive tomes of commentary and data about companies they considered outstanding investments.  That was prior to May 1, 1975, when the Securities & Exchange Commission ruled that brokerage firms had to negotiate commissions.  Before then, those reports often ran to dozens of pages in support of the thesis.  In most cases, their best use was as kindling in a fireplace.

Most of the recommendations were Buys and there were usually a few Holds from analysts who could not make up their minds about which way to go.  In rare cases, analysts prepared reports with the heading Sell.

The problem is the reality that both a Buy and a Sell are needed to complete a transaction.  That, in turn, requires a discipline underlying the decision to buy and a discipline underlying the decision to sell.

What’s wrong with this picture.  Everything.  Yet the bombardment of nonsense continues.

This embarrassing situation gets even worse when firms put forth Conviction Lists and when websites assign numerical values that are intended to underscore the likelihood of success for each of the issues that have been rated.  However these recommendations are presented, only those who are extraordinarily naïve would base their portfolio construction on this information.

During my years at Value Line, the well-known financial publication, our written recommendations always had to be consistent with the firm’s Timeliness Ranking system.  Indeed, the theoretical results of the system showed a distinct differentiation between the market performances of the stocks that were covered.  From 1 (Highest) to 5 (Lowest), the price changes over time seemed to validate the system’s output.  But to my knowledge, that theoretical approach was never successful in practical application.

It’s all . . . hogwash.

N. Russell Wayne, CFPÒ

www.soundasset.com

 

Any questions?  Please contact me at nrwayne@soundasset.com

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