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Ignore the analysts at your own peril

Before you read too much into the headline notice I didn't say listen to the analysts; I said don't ignore them. Let me explain the difference. My own blog is called Financial Tides for a reason; I don't recommend swimming against the tide.

I think analysts and astrologists have a lot in common. They both claim they can foretell the future by interpreting the signs better than anyone else and are willing to share their insight with you for a price. Most of the analysts are young MBAs with CFAs so they have 2 little pieces of paper to certify how much better they are than you at reading the tea leaves. Their job is to produce reports that will give their brokers something to talk to you about.

Most brokerage firms do not allow their sale reps to do their own research. That would open them up to liability so they use these young MBA/CFAs to peruse all the published info on a company to document why they are making a buy/sell recommendation. How can you lose an arbitration hearing if your recommendations are well documented and produced using a standardized methodology?

We are now in the middle of earnings season and have you noticed that most stocks either beat expectations or did not meet consensus? That's the wordsmith way analysts use to justify that they totally missed the mark with their projections. The estimate wasn't wrong, it's the companies' performance that is the reason for the bad estimate.

I always use my own technical analysis research to come up with my buy recommendations but the last thing I do before I push the buy button is to check the analysts recommendations. It's not that I'm looking for them to agree with me, I'm making sure they don't disagree with me; big difference.

If I notice a stock has hit new highs 50% of the time in the last 20 day, I like that and would probably buy it. If however, several of the major brokerage firms have a sell recommendation I've got to realize that there are probably 50,000 brokers out there telling all their clients to sell that stock. I would be hard pressed to think that the stock would continue to climb if there are that many brokers each calling their top 250 clients saying:" The sky is falling, our analyst recommends selling this stock immediately".

Do your own research but don't be foolish enough to think you can swim against the tide. Don't ignore the analysts.

Jim Van Meerten is an investor who writes about financial matters here and on his blog Financial Tides. Please leave a comment below or email FinancialTides@gmail.com.