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!!!
* 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?
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.