If you’ve ever heeded the advice of a Wall Street equity analyst, then you probably also know what it’s like to lose money.
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But that doesn’t mean you should dismiss Wall Street research altogether.
Just as Alexander Fleming developed penicillin from fungus, researchers cited by the SmartMoney’s Jack Hough have figured out ways to make money using Wall Street’s underperforming research.
Two key findings: First, analyst recommendations are like dairy products in that it is best to use them quickly or not at all. Shares tend to drift in the direction of recommendation changes, but for weeks or months, not years.
Second, “sells” tend to be far more prescient than “buys.” According to study author Kent Womack, a former Goldman Sachs executive who now teaches finance at the University of Toronto, analysts face little resistance to their “buy” recommendations but risk angering companies and investors with their “sells,” so they tend to issue sell calls much more judiciously.