Why Due Diligence is Crucial
Jonathan is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Hope is one of the most powerful emotional forces in the universe, with a profound role in every major religion and philosophy. It is the hope for a better life that leads to the blind faith acceptance of a religion's tenets or the adherence to the intonements of a philosoper. But it has no basis for any role in an analyst recommendation for buying or selling a security.
Yet, an investor must wonder what else other than hope has led to there being at least ten recommendations for Research-in-Motion (NASDAQ: BBRY) for 2012 without a single one a "Sell" this year. For the year to date, Research-in-Motion has fallen from a high of over $17.50 in January to its present price of around $7.35. There does not appear to much hope for the future of Research-in-Motion, however, as it has declined almost another 17% in the last week of trading and now has a short float of over 15% (one of 5% is considered to be troubling for a company). For the investment portfolio of Diogenes, Brigatine issued a "Sell" recommendation for Research-in-Motion on August 24, 2011.
In two books and numerous other offerings of his wisdom and experience to the public, investing legend Peter Lynch has constantly and consistently propounded that inviduals have an inherent and intrinsic advantage over the professionals working for mutual funds and other major institutions. In his books, Beating the Street and One Up on Wall Street, Lynch, who guided the Fidelity Magellan fund to annualized returns of 29.2% from 1977 to 1990, espouses a simple philosophy without any component of hope: "Average investors can become experts in their own field and can pick winning stocks as effectively as Wall Street professionals by doing just a little research."
This need is not just limited to stocks in North America, either. Kate O'Keefe, in an article for The Wall Street Journal, detailed how few negative recommendations there were about Chinese stocks. In O'Keefe's Wall Street Journal piece, “Seldom Heard on China: Sell,” analyst coverage on Chinese stocks does not result in many “Sell” recommendations," she writes that, “In bullishness reminiscent of the technology bubble of the 1990s, analysts who work for investment banks based around the world rate nearly every Chinese stock they cover as a ‘buy.’ While these analysts generally are a bullish lot, they are far more positive on Chinese banks, tech companies, retailers and the like than they are on companies based elsewhere.” O’Keefe notes how there were 19.2 buy recommendations for every sell for a Chinese stock. For an American stock, it is 10.5, and the rest of the Asian-Pacific region, it is 7.3.
Many times, simple questions can lead to profitable investing decisions after the proper research, no matter the analyst rating. These might include, "Do you know anyone who does not eat at McDonald's? or "There are crowd control problems at Apple (NASDAQ: AAPL) stores in China and long lines at all the others for iPhones: where are the customers at the Research-in-Motion stores waiting for a BlackBerry?"
It is not just Research-in-Motion or Chinese stocks. Of about twenty analyst recommendations issued for Bank of America (NYSE: BAC) since January 2010, not a single one was a 'Sell" as the share price fell over that period from over $20 to under $8, at present. Not a single analyst was even close in their predictions for the market meltdown during The Great Recession.
There are many competing factors when an analyst issues a recommendation for a stock. Charlie Munger, Warren Buffett's partner, has observed that in making financial decisions, "If you don't allow for self-serving bias in the conduct of others, you are, again, a fool." There is no place for either hope or foolishness in buying and selling stocks. But there is for thorough diligence for, as Emerson counseled, "For the resolute and the determined, there is always time and opportunity."
jonathanyates13 has no positions in the stocks mentioned above. The Motley Fool owns shares of Apple, Bank of America, and McDonald's. Motley Fool newsletter services recommend Apple and McDonald's. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.