Investors must understand facts of life

It should come as no surprise that investment firms’ recommendations so often are wide of a mark. Of course, forecasting is not an exact science, so errors are commonplace. However, there is another explanation. The major fact of life here is that brokers are inhibited from stating openly their opinions.

Nowadays Bay Street estimates for company earnings frequently are nudged down and their recommendations to clients are reduced, say from “outperform” to a “hold.”

It should be recognized that historical evidence reveals that stocks could be bought at less than the value of net plant and equipment at the very cyclical bottom. Yet, despite that pattern, shares seem to be classified as a hold, even though they are selling far above those criteria. Clearly, firms are reluctant to acknowledge that in notes to clients.

When questioned, the reasons for hesitance in downgrading companies’ shares are almost never are revealed.

If an investment firm issued a gloomy report about the company under review, access to its officer would denied. Inasmuch as brokers’ clients depend on the ability of their advisers to meet the top executives of the company under review, without that information there could be only vague hints without much substantiation about the corporate situation – far from satisfactory from clients. All investors should recognize that.

Currently most in the investment sector realize that, based on a long-range perspective most common stocks are overvalued significantly. A knowledge of peaks and troughs would confirm that, but few make that observation in print as it would scare off clients. One almost never has seen an investment firm’s report urging clients not to invest at the present time.

Then, too, a thorough research report on a company should focus on such matters as cash flow, the history of dividend payments, and revenues and earnings over at least a decade. Next this data should be compared with other company in the industry. Certainly, getting a handle on these numbers requires work. With that information it would be clear if a company’s shares were correctly priced. However, too few undertake that rigorous exercise.

Furthermore all information must be correlated with a really good assessment of the economy and where it is headed. Then armed with all that and a good memory, one then could rely on reports about a company.

Otherwise, recommendations published by an investment firm should be treated with disdain.

 

Bruce Whitestone

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