May 7, 2006

Analyze the Analyst

        There are analysts and there are analysts. The more “famous” are those who appear on
the various talk shows (think CNN, Foxnews, etc) as guests, or those who have
(amazingly enough) their own show. (Jim Cramer, Bruce Williams, Jerry Wade and
a plethora of others.)

        Those would all be considered ‘independent’ (at least in the most rose colored glasses way.) 
The independent analysts are not being paid to convince you to buy or sell any particular stock 
by their employer.

        On the flip side of this there are buy-side and sell-side analysts who (just by the implication 
of the name) exist to either recommend your buying a stock or they are there to sell you a stock.

        Most of these are internal to firms and are not directly looking to make money for the individual 
investor, but to make money for the firm.  To go into a little more detail, the buy-side analysts 
are recommending what to buy, meaning they are doing research and finding investments that 
look like they are going to be moving in the desired direction. To get advice from them, you are 
usually looking at an added cost with your investment firm (your broker.)

        Sell-side analysts are also looking to recommend investments, but they are usually offered by a 
firm as an overall part of the basic service, not an additional-cost service. The down side is that
 the recommendations are generally ones that are being ‘pushed’ by the firm.

        This gets into the ‘rose colored glasses’ I was talking about earlier. There is much concern over 
conflict of interest with analysts. Who is paying the bills for the shows? Who pays the salaries 
at the firms? Who is truly objective? You would assume that the analysts also have a portfolio of
their own, and where is their money at? How would a recommendation affect their holdings? In the
 case of your local independent firm, it may not have a great effect if they push some stock, but 
for a national firm or a syndicated host, a recommendation can and does affect price. (sometimes 
considerably)

        For accuracy of predictions a website called Starmine is available for a fee. I am sure there are others, 
but I just used Starmine as an example.

        For those who do use a broker, there are some thoughts on what analysts do. For those of us who don’t, 
well, you are free to listen to the talk show guru’s and do your own due diligence on what they throw out
during a show.

        I, of course, recommend using the “six factors” I discuss in my e-book, Solid Stock Selection. Whatever 
you do, I think just as you wouldn’t drive blind, so you shouldn’t invest blindly on the say-so of others.

Until next week,

Good investing to all,

Rob

Rob @ Wealth Training Source.com



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