Hi Annette,
RE: << The problem is the "analysts", who can move stock prices with their upgrade/downgrades. >>
Yes, I agree that's a big problem. The solution, I would submit, is to first understand who these "analysts" are, and who they work for, and who they don't. This is similar to the way many people evaluate the pro and con arguments in the sample ballot for initiatives: first determine who wants the intitiative to pass, and who doesn't want it to pass. That will tell you much of what you need to know.
So, with analysts, the first thing to realize is that they do NOT exist to provide the public with a free source of accurate information. They are in business to make money, and it is certainly not the public that pays them. Sorry to resort to hackneyed expressions here, but it is true: He who pays the piper calls the tune. Who pays the piper in the case of the analyst? The investment firm they work for. And who pays them? Their big customers. Not me. Not you [presumably]. Why do they pay them? So they can increase their wealth, at the expense of anybody at hand, and because the weak and small are most vulnerable, this most often means the retail Joe E-Trade investor.
So, one of the jobs of an analyst is to get people to believe whatever is in the best interests of their big clients, and this frequently has no relationship to reality at all. In fact, if you examine the history of analyst upgrades/downgrades in any given stock, you will see a pattern emerge: analyst upgrades cluster around market tops, and analyst downgrades cluster around market bottoms for that particular stock. Because retail investors are largely the only ones really listening to analysts, this is one major reason why most retail investors buy high and sell low, IMHO [there are others].
But this can often therefore be used as a contrarian indicator. As a stock approaches a 52 week high, and you get a flurry of new upgrades, you should strongly consider selling, or shorting. And, likewise, as that same stock plummets without any analyst downgrades, and approaches a 52 week low, and now suddenly gets a flurry of downgrades, then get ready to buy. The strategy here, IMHO, is to sucker in the last of the retailers at a market top in the case of the former, and in the case of the latter to get the last of the die-hard buy and hold retailers to give up their shares cheap, so that the big boys can then buy in at the lowest possible price.
If you realize the above, then you can begin to understand why the vast majority of analysts have an absolutely abysmal predictive track record, yet continue to be widely "sought out" for their valuable "opinions," and continue to earn large incomes being completely wrong the vast majority of the time. I don't know any job where you can make so many hugely expensive, apparent "mistakes" so often, get continually promoted for doing so, and generate interviews, TV time, endless ink, and acclaim. It's no surprise, however, when you begin to see what the job of an analyst really is, and who they really work for.
So, frequently when considering a trade, I look at the analyst upgrade/downgrade history............
<< How many people are out there buying because they 'feel' Company X's product will change the world, or because Johnny Investor in the cubicle next door at work tells them that a stock is so great everyone is buying it. >>
It's not Johnny Investor that determines stock price movements. And, its not even Johnny Investor and all his friends, relatives, neighbors, kids, dogs and cats. So it is largely irrelevant what Johnny Investor is doing or thinking.
But not completely irrelevant. Consider that Johnny Investor is the intended victim, because he is easy and gullible prey. Mostly, he doesn't even understand the game he is in, and there are concerted efforts directed at him from many quarters to attempt to ensure that this situation is perpetuated. Do what he does, and you'll likely get what he gets: buy high, sell low.
Some may say I'm a pessimist (bet the analysts would say so!). But I don't think so. I consider myself more of a realist: the glass is neither half full, nor half empty. It is half occupied.
But, as always, JMVHO...................
Regards,
Walkingshadow |
