Why You should take Brokers' Analyst Reports with a Pinch of Salt

Conflicting Interests

If you have watched the "Wolf of Wall Street" Movie, the most significant takeaway is that people (not only stock brokers) are usually there for their own interests. When you know that a stock broker earns his pay-check by the commissions when you trade, you would have jolly well know that they will try all means to entice you to trade stocks in and out actively for their commissions to be as fat as possible.

Furthermore, they have the tendency to be slightly biased when the company is doing business with the bank they are working in too. That said, you cannot say that all of them are bad apples too. Some of them provide us with valuable and relevant stock information that are only available/accessible to them. My stock broker is one of them, everyday he sends me the forecasts and various reports.

However, ultimately I have to make the final judgement and decide whether to invest, according to my investment style. What he is doing is just to provide the information for me as a platform to filter through the stocks i want to look at. Thus, when you make money through their recommendations, you are happy and they will be happy too. However, if things turn for the worse, you cannot blame them as they are only providing recommendations - its up to you if you want to follow; and they are protected with disclaimers.

No crystal ball

When you see two different banks' analysis on a stock with different views, one say SELL, one say BUY, which one should you listen to? The following example below depicts the question relatively well...

Well, while analyst can do a detailed analysis of the firm using the same data set, different assumptions can lead to different results/outcomes. Neither one of them is wrong down here - they are just providing their viewpoint about where the stock price is going, a target price they say.

All in all, the lesson here is to educate yourself if you wish to be successful in stocks investment. And there is the slogan that goes - there is no free lunch in this world. You cannot expect to just buy into all the stocks recommended and think that you will become a millionaire at the end.

No comments:

Post a Comment