The most prudent practice is never waiting to hear sell advice

A recommendation by an analyst to buy can be presented to every client interested in income.

A sale advice by an analyst applies only to those clients who already own the stock (and to that tiny minority oriented to short selling). 

A sale recommendation has a much smaller business-generating potential.  Reseach analysts are employed and compensated on the basis of the accuracy of judgement and on the amount of business their reports generate.  So analysts have a buy bias too.

Individual brokers face yet another dilemma when making a sale recommendation.  The investor tends to blame poor results more on a sale than on a buy.  That tendency can get brokers into trouble with their clients (and analysts into trouble with a firm's brokers).  Another way for a broker to get into even more trouble is to suggest redeploying the funds in another stock that goes down.

In summary, there are five ways a sale advice can backfire on a broker:

1.  It can offend the client who is emotionally attached to this stock.

2.  Selling can close out a painful transaction (a loss).
3.  The sale can be followed by a price rally, which would have provided greater profit or a reduced loss if the stock had been held.
4.  Funds liberated by the sale might be reinvested unprofitably, making the sale a double troublemaker.
5.  Unless the sale price proves nearly perfect, the broker is resented for generating a commission by suggesting the action.

It is also worth noting that penny-stock houses never recommend a sell unless it is to generate funds to buy something else.  The major reason is that they themselves must buy what investors sell because they, virtually alone, make the market in the stock. 

The most prudent practice is never waiting to hear sell advice.  Assume it will not be heard, and plan to make your personal selling-versus-holding decisions based on your own rules.

Euphemisms

Other words for sell, however, commonly do appear.  Brokerage firms have devised a variety of ways to describte a corporate situation that indicates a sale is the best option. 

• One of them is to write a report covering a corporate finance client, which is labelled a follow-up to the underwriting and carries no opinion or recommendation.  Follow-ups need to be read closely. 
• Even if the official policy is to give no recommendation, the tone of the report needs to be evaluated carefully.  If it is less glowing, suspect that the research analyst is not impressed with this stock and, while constrained from saying so, really thinks it should be sold. 
• Another way, short of uttering the Sell-word, is for the firm to drop analyst coverage of a company altogether.  Such silence is not golden.
• Another diplomatic approach is to give a recommendation other than buy that is kinder and gentler than the Sell-word itself.  The best euphemism for sell, ironically, is its operative opposite: hold.  When an analyst does not want to say buy and is not allowed to say sell, the only option remaining is hold.  Consider hold almost always as a danger sign.  In fact, hold really should generally be interpreted as meaning, do not hold.

Common brokerage euphemisms for sell:

• hold
• accumulate
• long-term buy
• market performer
• market weight
• perform in line
• under perform
• underweight

Another coded way of saying sell is a carefully worded message such as:  The stock is probably a worthwhile long-term holding despite some near-term uncertainties.  That is translated by teh cynic as:  If you hold for quite a while, maybe you will not lose.  All such euphemisms should be taken as signals to cash in.

On the other hand, don't place too much hope on an analyst's postings titled: "Why I like stock XXX a lot?"  Remember the analyst's buy bias and always to do your own homework.

How investors are rebelling against professional money managers

By Edmund Conway Economics Last updated: January 18th, 2010

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It is hardly headline news to say we’ve all lost rather a lot of our faith in the financial Masters of the Universe during this crisis. We all know they proved just how little they knew or understood the risks they were taking, and as we can see from the recent bonus rows, their standing has diminished considerably as a result.

What I hadn’t realised is that many of people are already putting their money where their mouth is on this one. According to analysts at Goldman Sachs, over the past year or so, people have been pulling their money out of funds managed by professional investors and fund managers, and choosing instead to invest it themselves, whether in simple shares or in exchange traded funds.

The story, according to Goldman’s chief US equity strategist, David Kostin, and as told by the chart above, is that despite the 25pc increase in the stock market over the past year or so, not one dollar went into US equity funds (in fact, there was a net outflow) – and yet over the first nine months of the year there was about $225bn of direct purchases of common shares.

It represents, according to Kostin, a “repudiation of the professional investor class by individuals, who are investing in ETFs and direct purchases of stocks.”

He prefers to frame this phenomenon (which reflects the US, but may well be mirrored over here in the UK) as a sign that people are becoming more independent when it comes to their finances, plus that they are aware that there are tax advantages of investing through exchange traded funds (which can track indices and commodities, but without having to pay a fund manager to do the legwork). However, one could just as easily see it as a sign of revulsion in professional asset managers. And for good reason.

Throughout this crisis, much of the criticism over what happened has been levelled at the banks, but far less at bank investors. And while bankers are not blameless for having done far too much in the way of slicing and dicing assets, creating toxic debt and pushing sub-prime mortgages, a semi-legitimate excuse on their part is that there was demand for these toxic assets. Which indeed there was: professional investors have been given far too easy a ride for investing in some of the dross that contributed to the crisis. They have also been given too easy a ride for not monitoring the banks fiercely enough in previous years. After all, if a few more bank shareholders (and I’m talking big pension funds and asset managers here) had scrutinised the banks (which they own), they might have realised that capital and liquidity were at paper-thin levels, leaving the banks at risk of insolvency.

Against this backdrop, and given how much wealth was lost as a result, it is hardly surprising that people are steering clear of the fund managers for the time being. That sounds like a pretty functional market reaction to me.

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