In stock recommendation reports, the stock analyst has to declare his shareholding in the recommended stocks. When he declares that he holds certain stocks, do you then treat his stock recommendations with some suspicion, wondering whether he is recommending certain stocks so that the rest of the public would buy and lead to a rise in the stocks that he holds? And if 2 stock analysts (Analysts A & B) both recommend the same stock but Analyst A doesn't hold any shares in the stock and Analyst B does, who would you believe in more? Most people would believe in Analyst A more, because he has no vested interest in his recommendations. However, should that be the case?
Analyst B puts his money where his mouth is. If the stock drops, at least he suffers a loss together with his clients. And when he is prepared to put his money in, he would be more careful in analysing the stock being recommended. If the stock drops, he would learnt where has he made a mistake in his stock analysis and would review the stock more regularly for any changes in prospects. For as long as he holds the stock, he has the same interest as his clients. In contrast, Analyst A neither gain or lose regardless of how the stock performs in future. He may have no vested interest, but that also means less alignment to the interests of his clients. While one might argue that a wrong stock recommendation would lead to clients not believing in him in future, this is rarely the case as investors generally do not track the performance of stock analysts. Stock recommendations are essentially an opportunity for investors to trade the stock short-term. Hence, for long-term investors, isn't it important that they consider whether the analyst holds the stock in the mid- to long-term?
As an analogy, imagine that you wish to travel to an exotic destination for a holiday. 2 travel agents (Travel Agents A & B) offer their travel packages to you, but Travel Agent A has never travelled there and will not be accompanying you on this trip. On the other hand, Travel Agent B has travelled there and will be on the same trip as you. Which travel agent would you sign up with? More likely Travel Agent B, because of his experience and his presence on the same trip. If this is the case, shouldn't investors believe in Analyst B more when it comes to stock recommendations? This is one of the paradoxes in stock investing.
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