Naive Small Investors

The August Journal of Financial Economics reports that large traders tend to compensate for the fact that "security analysts tend to bias stock recommendations upward, particularly if [the analyst is] affiliated with the underwriter."   But "small traders, instead, follow recommendations literally.

So to help you small investors, I’ve made a handy guide.  If the analyst is not affiliated with those pushing the stock:

  • When the analyst says "strong buy", you should buy.
  • When the analyst says "buy", you should hold.
  • When the analyst says "hold", you should sell.

If the analyst is affiliated with those pushing the stock:

  • When the analyst says "strong buy", you should hold.
  • When the analyst says "buy", you should sell.
  • When the analyst says "hold", oh my God, sell!!!
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