2011Nov9 Buy-Hold: Never Sell?

Have you never wondered why your financial advisor has plenty of “buy” or “hold” recommendations? This should be no surprise.

“Over the past 12 years, longtime banking analyst Mike Mayo has issued numerous calls to sell bank stocks, a rarity in a system where nearly all stocks are rated buy or hold. His negative ratings have frequently gotten him in trouble with banks, clients and his own bosses, who didn't want to alienate those companies.”

“Analysts are supposed to be a check on the financial system—people who can wade through a company's financials and tell investors what's really going on. There are about 5,000 so-called sell-side analysts, about 5% of whom track the financial sector, serving as watchdogs over U.S. companies with combined market value of more than $15 trillion.

Unfortunately, some are little more than cheerleaders—afraid of rocking the boat at their firms, afraid of alienating the companies they cover and drawing the wrath of their superiors. The proportion of sell ratings on Wall Street remains under 5%, even today, despite the fact that any first-year MBA student can tell you that 95% of the stocks cannot be winners.”(Emphasis added)

Even the buy recommendation can bode ill for the private investor as analysts try to protect their company’s relationship with a firm under review. Consider the analyst coverage of the recently bankrupt MF Global, a brokerage firm established in 1700

This year, on February 8th, priced at $8.50, the stock's technical strength fell into the bottom half of the market. In September the price fell to $4.75 violating its positive support.

Okay. You probably did not own MF Global. It was essentially the same story with Enron, Tyco, Krispe Kreme, Martha Stewart Living, General Motors, and Fannie Mae. Maybe you did not own these either, but you were probably impacted by general market downturn.

The “cause” of those declines was not really known until after the stock had collapsed. The reality of the collapses runs counter to the way most investors envision the stock market - typically as an efficient machine with information being equally shared and quickly incorporated into the price of stocks. However, the technical attributes and price trends very often foreshadowed the coming demise of the fundamental picture.

Your friendly grocer peels away the outer leaves of wilting produce retaining only those portions that remain fresh and strong. You know the adage, “a rotten apple can spoil the bushel.”

You can apply the same discipline to your portfolio. Let’s talk.