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Naive Small Investors

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This is a blog on why we believe and do what we do, why we pretend otherwise, how we might do better, and what our descendants might do, if they don't all die.
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Naive Small Investors

Robin Hanson
Sep 16, 2007
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Naive Small Investors

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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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Overcoming Bias Commenter
May 15

* When the analyst says "**", you should make regular investments in an index fund.

But which analysts do you depend on when you choose which index fund?

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Overcoming Bias Commenter
May 15

I have better advice:

* When the analyst says "strong buy", you should make regular investments in an index fund.* When the analyst says "buy", you should make regular investments in an index fund.* When the analyst says "hold", you should make regular investments in an index fund.

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