What is Stock Analysis & Who Should Do It?

Stock Analysis. What is stock analysis and how is it done?

Since the publication of the classic book by Benjamin Graham in 1934 called “Security Analysis”, an entire industry has built up around the analysis of stock market investments.

There are various methods used to evaluate the past, present and future performance of stocks from professional analysis to private stock pickers.  Methods employed use primarily two approaches, Fundamental Analysis or Technical Analysis.

Institutional Stock Analysis.  Wall Street Analysts

Most of the investment banks and brokerage houses employ Stock Market Analysts. Their job is to research the firms in the industry they are allocated to, in an attempt to assess if the companies are worth investing in.  You can purchase the “Analyst Reports” from S&P, Moodys, The Street, Credit Suisse or the plethora of other information providers out there.  The analysts usually attend the shareholder meetings for the companies they cover and probe the management team for further information.  Wall St analysts come under constant scrutiny for the meaningless jargon and inaccurate rating they put on stocks.  There is no aligned meaning across the research house as to the meaning of ratings such as:

  • Strong Buy, Hold, Sell, Strong Sell
  • Outperform, Perform, Underperform
  • Overweight, Underweight
  • Long, Neutral, Avoid
  • Accumulate, Hold, Distribute

The analysts tend to avoid negative opinions as they tend to receive flack from the management teams and pressure that they may lose access to the companies they cover.  Analysts are not paid for the performance of their stock ratings, therefore they have limited motivation to be accurate.

“Wall Street Analysts are bad at stock picking”

Stephen T McClennan – Book Full of Bull

Does “Buy” really mean buy the stock.  What if the highest rating used is Strong Buy.  Does that mean that buy is more negative than Strong Buy?

Wall Street is oriented towards increasing stock prices, they have to be positive in order to convince people to continue buying.

In a 2006 CFA Magazine Research article by Mike Mayo it was noted that of the recommendations on the Top 10 Largest Cap stocks in the U.S.  there were 193 Buy Ratings and only 6 Sell Ratings.  Systemic Bias….?

Stephen T McClennan – Book Full of Bull

Do not take analyst ratings as literal, you cannot rely on them.

Stock Newsletters – Stock Pickers

There are also many newsletter services available where you can register to receive stock recommendations.  You will usually receive a daily or weekly newsletter that recommends what to buy and sell.  They come in two flavors, “Free Newsletters” and “Pay for Services”.

At all costs avoid any Free Stock Tips Newsletters.  The companies that run free newsletters provide biased data as they earn their money form the companies they promote.  They will often be paid by the companies they promote with stock options.  So if they promote the stock well enough they can sell their options as the price rises, therefore, making money at your expense.

Premium Newsletter can be a reasonable source of good information, but you have to research the track record of the person providing the tips.  Ensure they beat the market year after year.  At least 90% of stock tippers do not beat the market regularly.

Be your own Stock Analyst.

We recommend the best way to improve your profits and success in the market is to invest in yourself and make your own decisions.  When it comes to your own money, you can only trust yourself.  Make a good investment in stock market education and spend the time to use Fundamental and Technical Analysis to make informed decisions in the stock market.

For further reading, I highly recommend the book Full of Bull, by Stephen T. Mclennan



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