When a ‘Buy’ Isn’t Really a ‘Buy’


A witty opinion piece in the Financial Times tweaks equity stock recommendations, outlining various reasons a ‘buy’ recommendation may not truly be a ‘buy’.

Dan Davies, a former Credit Suisse analyst covering investment banks, ‘confessed’ to a few reasons why an analyst might fudge a buy recommendation. First on the list is the ‘Brown- Nosed Buy,’ motivated by keeping the boss happy, or the fact that company’s CEO will be keynote speaker at a conference you are organizing.

Then there’s the ‘Client-Driven Buy’ when the stock is the biggest holding of the biggest hedge fund on your client list and the manager responsible for that position is an arrogant so-and-so who does not like being disagreed with.

There is the ‘Industry Buy’ where your boss has dictated that all recommendations have to be made on a sector-relative basis; at least one stock in an industry will have to be a Buy. Perhaps more than one: fund managers do not want to talk to analysts about their Hold recommendations.

There is neglect: “You should have downgraded Amalgamated two months ago — and you know it, but you have had results season, the management away day, weeks of work on an initial public offering that never happened. If you were actually managing money, you would cut your losses — but reversals are embarrassing.”

Our Take

Davies concludes that buy/sell/hold recommendations are largely ignored by institutional investors but dangerous to retail investors and best junked altogether. Unfortunately, that is not so easy particularly where individual investors and financial advisors are genuinely looking for guidance.

Banks with large wealth management business, such as Morgan Stanley, UBS and Credit Suisse, will have strong motivations to continue the buy/sell/hold even if it is low value to their institutional clients. And, if institutional clients end up footing less of research’s bill thanks to unbundling, the needs of wealth management may become more paramount.


About Author

Sandy Bragg is a principal at Integrity Research Associates. He has over thirty years experience as an investment research professional. Prior to joining Integrity in 2006, he was an Executive Managing Director at Standard & Poors, managing S&P’s equity research business and fund information properties. Sandy has an MBA from New York University and BA from Williams College. Email: Sanford.Bragg@integrity-research.com

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