Sell Ratings Outperformed Buys?


New York – An intriguing finding was recently reported by William Baker, a professor of marketing at San Diego State University:

We examined the accuracy of analyst recommendations from the point of view of the individual investor. Analyst performance was studied for the Dow Jones Industrial Average and the Standard & Poor’s 500 over a seven-year period beginning in January 1998 and ending in December 2005. In both studies, the performance recommendations were tracked from their initiation to their termination.

Results were sobering. The average net performance of Dow Jones Industrial Average stocks with Buy, Hold and Sell ratings was 1.0%, 2.4% and 2.0%, respectively. The results for the S&P 500 technology sector were worse. Statistically, stocks with Buy ratings underperformed stocks with Hold and Sell ratings. The average net performance of stocks with Buy, Hold and Sell ratings was 4.4%, 7.9% and 8.3%, respectively.

We should caution that this research has only been reported in news sources, and seems to be as yet unpublished in any peer-reviewed journal. In coming weeks, we hope to go through Prof. Baker’s data and findings in detail, and will then be in a better position to judge whether his conclusions are fair:

Although harsh, one may conclude from these findings that, as a whole, the analyst community either has no real stock-picking expertise or they have expertise, but they have been corrupted by conflicts of interest. The Sarbanes-Oxley Act was supposed to deal with conflict of interest issues, but results from this study suggest it has failed. Our analysis examined whether the accuracy of analysts’ predictions improved after Sarbanes-Oxley was passed. At least through the time period of the study, Sarbanes-Oxley had no impact on accuracy. If anything, analyst’s performance deteriorated.

The Federal Trade Commission established three criteria to assess deception: likelihood, materiality and reasonableness. Consumers can be deceived not only by what is in an appeal or representation, but also by what is omitted, particularly if the omitted information is important to understanding its implication. The fact that recommendations are worthless is certainly a piece of omitted information that could be helpful to investors.


About Author

Leave A Reply