{"id":30445,"date":"2012-06-25T07:10:35","date_gmt":"2012-06-25T11:10:35","guid":{"rendered":"http:\/\/countingpips.com\/forex-news\/2012\/06\/former-sell-side-analyst-reveals-trade-secrets\/"},"modified":"2012-06-25T07:10:35","modified_gmt":"2012-06-25T11:10:35","slug":"former-sell-side-analyst-reveals-trade-secrets","status":"publish","type":"post","link":"https:\/\/www.investmacro.com\/forex-news\/2012\/06\/25\/former-sell-side-analyst-reveals-trade-secrets\/","title":{"rendered":"Former Sell-Side Analyst Reveals Trade Secrets"},"content":{"rendered":"<p>Article by <a href=\"http:\/\/www.investmentu.com\/\" target=\"_blank\">Investment U<\/a> <\/p>\n<div><img loading=\"lazy\" decoding=\"async\" class=\"size-full wp-image-29963\" title=\"Former Sell-Side Analyst Reveals Trade Secrets\" src=\"http:\/\/www.investmentu.com\/wp-content\/uploads\/2012\/06\/sell-side-analyst.jpg\" alt=\"Former Sell-Side Analyst Reveals Trade Secrets\" width=\"220\" height=\"220\" \/><\/p>\n<p>Take a \u201crandom walk\u201d in the shoes of the typical sell-side analyst, and see how those shoes could affect what they say and how they say it.<\/p>\n<\/div>\n<p>In my <a rel=\"nofollow\" target=\"_blank\" href=\"http:\/\/www.investmentu.com\/2012\/June\/buy-sell-hold.html\">last article<\/a> I told you why you shouldn\u2019t look too far into analysts \u201cBuy,\u201d \u201cSell,\u201d or \u201cHold\u201d ratings. Simply put, there\u2019s just not much incentive for analysts to initiate anything but a \u201cBuy\u201d rating.<\/p>\n<p>That\u2019s why you see many more \u201cBuy\u201d ratings than \u201cSell\u201d ratings.<\/p>\n<p>To understand this phenomenon better, let\u2019s take a look at the four potential results facing the sell-side analyst.<\/p>\n<p>I rate them from best to worst:<\/p>\n<ul>\n<li><strong>Bullish and Right<\/strong> \u2013 This is the best. You like a stock, you say positive things, you rate it a \u201cBuy\u201d and the stock goes up. You\u2019re a rock star, your clients who agree are making money and everybody thinks you know what you\u2019re doing. You ride the wave of a bull market and you feel like you\u2019re on top of the world, along with everyone else.<\/li>\n<li><strong>Bearish and Right<\/strong> \u2013 Ok, even if nobody listens, if you\u2019re right you can take credit. Being bearish and right means the stock is going down. People don\u2019t openly celebrate when a stock goes down \u2013 it\u2019s like the guy betting \u201cDon\u2019t Pass\u201d at a craps table. If the dice are cold and you bet against the shooter, you just take your chips when they come your way. You don\u2019t jump up and down and celebrate in the face of people who are losing money. So, because of this, bearish and right is only slightly better than\u2026.<\/li>\n<li><strong>Bullish and Wrong<\/strong> \u2013 You say buy a stock, but it keeps going down. At least you\u2019ll find that misery loves company. You\u2019ll hold investors\u2019 hands as the stock descends below the level you said it wouldn\u2019t go below. You\u2019re wrong, but at least you\u2019re still a red-blood American who believes people can get rich owning the right stocks. So, bullish and wrong is still a heck of a lot better than\u2026.<\/li>\n<li><strong>Bearish and Wrong<\/strong> \u2013 You say \u201cSell,\u201d the stock goes up. You\u2019re lonely. Everyone is having a party but you. You feel like the whole world is a tuxedo, and you are a pair of brown shoes.<\/li>\n<\/ul>\n<p>Which brings me to the four biggest reasons there are more \u201cBuy\u201d ratings than anything else.<\/p>\n<h2><strong>Four Reasons for More Buys Than Sells<\/strong><\/h2>\n<p>The first, as you can see in my points above, is simply that it\u2019s more fun to be bullish!<\/p>\n<p>The second is that when analysts choose the stocks, they\u2019re going to cover stocks you\u2019re more likely to like. This is natural, and in no way misleading. Simply put, analysts choose stocks to cover that they\u2019re more likely to be positive about.<\/p>\n<p>In my last article, I explained that the \u201cBuy\u201d side wants access to management. This means they\u2019ll reward you if you bring a management team into their office to speak to them. This is typically called a \u201cNon-Deal Road Show.\u201d Unlike the recent Facebook road show hoopla, these meetings occur even when there\u2019s no high profile IPO occurring. It\u2019s simply business as usual. And who will these management teams go on the road with? Well, more often than not they would prefer to go on the road with someone who\u2019s positive on the stock. So the third reason why, is it\u2019s easier to get management team access when you rate a company a \u201cBuy.\u201d<\/p>\n<p>\t\t\t<a rel=\"nofollow\" target=\"_blank\" href=\"http:\/\/ads.investmentu.com\/delivery\/ck.php?n=196222&amp;cb=e0893602b6f1eade082f3b95e3a8fc8a\"><br \/>\n\t\t\t\t<img decoding=\"async\" src=\"http:\/\/ads.investmentu.com\/delivery\/avw.php?zoneid=44&amp;cb=e0893602b6f1eade082f3b95e3a8fc8a&amp;n=196222\" border=\"0\" alt=\"\" \/><br \/>\n\t\t\t<\/a><\/p>\n<p>Firms still get compensated for investment banking. An analyst can\u2019t be paid directly from particular banking deals, but the analyst also knows that the more positive they are, the more likely an investment banking client may choose them. So, the fourth reason is, investment banking still brings money into the firm.<\/p>\n<p>Basically, the typical analyst wakes up each morning with a pre-disposition to be positive. Not always. But the game is tilted in that direction.<\/p>\n<p>When a firm initiates coverage of a high-profile name like Facebook <span>prior<\/span> to the IPO, and <span>prior<\/span> to even knowing the level at which the stock will trade, they\u2019re trying to be interesting&#8230;<\/p>\n<p>They\u2019re also trying to fill the information void from the analysts\u2019 firms who are on the IPO, since they\u2019ll be embargoed from publishing research for over a month after the IPO.<\/p>\n<p>And it\u2019s not just the \u201cBuy\u201d ratings you need to be aware of. There\u2019s also pressure to be contrarian and to issue the dreaded \u201cSell\u201d rating.<\/p>\n<h2><strong>Sell Ratings: It\u2019s All in the Semantics..<\/strong><\/h2>\n<p>I know of at lease one sell-side firm that will try to get analysts to go to a \u201cSell\u201d rating when a company is being acquired. In those cases, the stock essentially goes to the take-out price and the theory is that clients should sell and get into another stock instead.<\/p>\n<p>That\u2019s fine, except when you look at the ratings definition of a \u201cSell,\u201d which typically state something like \u201cwe expect the stock to be at least 15% lower in 12 months\u201d or words to that effect. Downgrading to \u201cSell\u201d is much more interesting than going to a \u201cHold.\u201d<\/p>\n<p>Unfortunately, it isn\u2019t consistent with the way the firm defines its ratings. This same firm I\u2019m referring to actually issued a \u201cSell\u201d rating on a stock after the stock stopped trading.<\/p>\n<p>Sell-side research isn\u2019t inherently evil. It may even be, and frequently is, valuable. I\u2019m merely suggesting you take a \u201crandom walk\u201d in the shoes of the typical sell-side analyst, and see how those shoes could affect what they say and how they say it.<\/p>\n<p>Good Investing,<\/p>\n<p>Gary Spivak<\/p>\n<div>\n<a rel=\"nofollow\" target=\"_blank\" href=\"http:\/\/feeds.feedburner.com\/~ff\/InvestmentU?a=FrEEcqi_zz0:T2woisk4XaM:yIl2AUoC8zA\"><img decoding=\"async\" src=\"http:\/\/feeds.feedburner.com\/~ff\/InvestmentU?d=yIl2AUoC8zA\" border=\"0\" \/><\/a> <a rel=\"nofollow\" target=\"_blank\" href=\"http:\/\/feeds.feedburner.com\/~ff\/InvestmentU?a=FrEEcqi_zz0:T2woisk4XaM:V_sGLiPBpWU\"><img decoding=\"async\" src=\"http:\/\/feeds.feedburner.com\/~ff\/InvestmentU?i=FrEEcqi_zz0:T2woisk4XaM:V_sGLiPBpWU\" border=\"0\" \/><\/a> <a rel=\"nofollow\" target=\"_blank\" href=\"http:\/\/feeds.feedburner.com\/~ff\/InvestmentU?a=FrEEcqi_zz0:T2woisk4XaM:qj6IDK7rITs\"><img decoding=\"async\" src=\"http:\/\/feeds.feedburner.com\/~ff\/InvestmentU?d=qj6IDK7rITs\" border=\"0\" \/><\/a> <a rel=\"nofollow\" target=\"_blank\" href=\"http:\/\/feeds.feedburner.com\/~ff\/InvestmentU?a=FrEEcqi_zz0:T2woisk4XaM:gIN9vFwOqvQ\"><img decoding=\"async\" src=\"http:\/\/feeds.feedburner.com\/~ff\/InvestmentU?i=FrEEcqi_zz0:T2woisk4XaM:gIN9vFwOqvQ\" border=\"0\" \/><\/a> <a rel=\"nofollow\" target=\"_blank\" href=\"http:\/\/feeds.feedburner.com\/~ff\/InvestmentU?a=FrEEcqi_zz0:T2woisk4XaM:F7zBnMyn0Lo\"><img decoding=\"async\" src=\"http:\/\/feeds.feedburner.com\/~ff\/InvestmentU?i=FrEEcqi_zz0:T2woisk4XaM:F7zBnMyn0Lo\" border=\"0\" \/><\/a>\n<\/div>\n<p><img loading=\"lazy\" decoding=\"async\" src=\"http:\/\/feeds.feedburner.com\/~r\/InvestmentU\/~4\/FrEEcqi_zz0\" height=\"1\" width=\"1\" \/><img loading=\"lazy\" decoding=\"async\" src=\"http:\/\/feeds.feedburner.com\/~r\/SyndicationFeed\/~4\/YZl-cGVLEZ4\" height=\"1\" width=\"1\" \/><\/p>\n<p>Article by <a href=\"http:\/\/www.investmentu.com\/\" target=\"_blank\">Investment U<\/a> <\/p>\n","protected":false},"excerpt":{"rendered":"<p>Article by Investment U Take a \u201crandom walk\u201d in the shoes of the typical sell-side analyst, and see how those shoes could affect what they say and how they say it. In my last article I told you why you shouldn\u2019t look too far into analysts \u201cBuy,\u201d \u201cSell,\u201d or \u201cHold\u201d ratings. Simply put, there\u2019s just &hellip; <\/p>\n<p class=\"link-more\"><a href=\"https:\/\/www.investmacro.com\/forex-news\/2012\/06\/25\/former-sell-side-analyst-reveals-trade-secrets\/\" class=\"more-link\">Continue reading<span class=\"screen-reader-text\"> &#8220;Former Sell-Side Analyst Reveals Trade Secrets&#8221;<\/span><\/a><\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[],"tags":[],"class_list":["post-30445","post","type-post","status-publish","format-standard","hentry"],"_links":{"self":[{"href":"https:\/\/www.investmacro.com\/forex-news\/wp-json\/wp\/v2\/posts\/30445","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.investmacro.com\/forex-news\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.investmacro.com\/forex-news\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.investmacro.com\/forex-news\/wp-json\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/www.investmacro.com\/forex-news\/wp-json\/wp\/v2\/comments?post=30445"}],"version-history":[{"count":0,"href":"https:\/\/www.investmacro.com\/forex-news\/wp-json\/wp\/v2\/posts\/30445\/revisions"}],"wp:attachment":[{"href":"https:\/\/www.investmacro.com\/forex-news\/wp-json\/wp\/v2\/media?parent=30445"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.investmacro.com\/forex-news\/wp-json\/wp\/v2\/categories?post=30445"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.investmacro.com\/forex-news\/wp-json\/wp\/v2\/tags?post=30445"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}