REUTERSClerks relay orders from traders on the trading floor behind them during a frenzy of activity in the Chicago Mercantile Exchange May 15, 2001.
Sure, investors are generally bullish about 2014, but only 25 stocks?
History repeats. Business Insider’s own Henry Blodget wrote in Slate way back in 2004 about the same problem. He highlighted a few points worth paraphrasing again:
- Problem #1: Analysts don’t cover every stock in an industry. They tend to be choosier and select the higher-quality companies.
- Problem #2: The whole market is taken into account. A bull market tide tends to lift all boats, so if the shop is bullish about the market overall, even the “meh” stocks can nab a buy rating.
- Problem #3: The crowd mentality sets in. If everyone is long Apple and you’re long Apple, you won’t be the only one wrong if Apple crumbles. But if you cut against the grain and you’re wrong, you are the isolated doofus. By the same token, if you’re right, you’re get to be the only genius.
- Problem #4: Rating a stock “sell” can tick off that company’s management. And in an industry where information and access is key, that can scare off analysts from giving sell ratings.
- Problem #5: Wall Street clients are generally looking for investing ideas; the number of investors looking for stocks to sell or short is much smaller. Also, if you have a “sell” rating on a stock, you’re pissing off many more of your clients than if you have a buy rating.