Your Questions Answered
Every day, analysts revise their ratings on stocks, usually right after significant news has been released. What's with these guys and their timing? And don't get us started on terms like “buy” versus “accumulate” versus “hold”! Another reader wants to begin a career as a day trader. That's very short-term trading, and the odds of success are long, long, long.
By Barbara Eisner Bayer (TMF Venus) and Ann Coleman (TMF AnnC)
October 24, 2000
[Ask a Fool is a new format we are trying out here in the Foolish Four area. It's a different, fun way to address the general investing questions that our Foolish Four readers have always come to this area for. We'd love to see your questions (click the byline for email), but if you want an actual answer anytime soon, we suggest you pop over to the Ask a Foolish Question discussion board and post there as well. Although we are looking for questions of general interest to answer here, we can't answer them via email. That's private investing advice, a big no-no. This way, if we screw up, someone will notice, tell us off, and we can print an abject, groveling apology, hopefully before you take our advice and mortgage your house to finance your new day-trading career.]
Q. OK, I'm guilty of watching CNBC and Bloomberg News in the mornings. One can't help hearing about what Merrill Lynch and Lehman analysts are reporting! What do people mean when they refer to a stock being a good buy in the near term vs. the long term (or vice versa)? Analysts never provide a frame of reference when they use these catch phrases, and I have no idea what they consider to be long-term. I personally consider a long-term hold to be at least a year or longer. Any insights on this?
A. Don't you love 'em? Ever notice how they usually come out with those ratings changes right after the company announces blowout (or crash-and-burn) earnings? It does a bunch of good to hear that the stock blew through the estimates, zoomed up 30%, and now every analyst in town is screaming, "It's a BUY!" Why wasn't it a buy yesterday, or six weeks ago?
CNBC refers to bandwagon-jumping analysts as penguins. Do you know how penguins feed their young? In a word -- regurgitation. Yum. Some -- known for braying, trumpeting, croaking, cackling, and cooing -- are known as jackass penguins. I think you get the point.
The time frame analysts use is intentionally vague -- that makes it much harder to hold them accountable for their recommendations. But, it's usually short-term, a few months at most, due to quarterly pressures to outperform competitor penguins. The longest view in their crystal balls is about one year. (Fools consider long-term to be a minimum of three to five years.)
Analysts employed by brokerages are under intense pressure to keep publishing new opinions on the companies they follow. Why? Because opinions create trades, and trades create commissions. And, all this creates conflicts of interest.
While you're at it, see if you can decipher their nomenclature. If a stock is "attractive," what are we supposed to do? Stand around and admire it? Hang it in a gallery? Get its phone number?
Or, how about the stock that has been downgraded from a "buy" to an "accumulate"? How does one "accumulate" something without "buying" it? Maybe we should steal it. Why is a stock worth "holding," but not worth "buying"? And when was the last time you heard a "sell" rating?
Some of these talking penguins are pretty influential. If your idea of long-term is a week, and short-term is the next 20 minutes (see next question), they can be very accurate. Stocks often jump up or down right after a recommendation hits the air. For the true long-term investor, it's all just so much noise.
Q. I'm employed at an investment banking firm, but have not passed the Series 7. I'm thinking of leaving and day trading. Does anyone have any experience or any advice?
A. So, I assume you have $50,000 sitting around that you don't need, won't miss, and can afford to lose? No one else need apply. Here are some stats: 65% of day-trading accounts in one study were traded in a manner that "realized a 100% risk of ruin (loss of all funds)." Only 11.5% were successful, and they didn't make enough money to justify the risk that the account was exposed to.
But hey, that's the conclusion of the auditor who studied them, and we all know how stuffy auditors can be, right? Stuffy or not, it's fair to assume that if the winners were on their way to riches, the auditor would have considered the risk justified.
But, you're smarter than that, right? What do you want to bet that the other 90% -- the ones that either lost all their money or were barely staying afloat, thought that too? And, if you think that being in the business already will be an advantage... well, maybe. But, if it were, why aren't more real brokers doing it?
Day trading sounds soooooo seductive. Wait for a stock to get a positive comment on CNBC, buy it quick, wait for the inevitable run-up over the next 20 minutes, and get out. Follow the charts, anticipate the market, stay on top of the news, and be ready to click at a second's notice. Be faster than the herd, slip in and out ahead of the sheep (who are following the penguins). You'll make out like a bandit.
Unfortunately, the only bandits who are making out are the ones selling day-trading software and services. Read that study. Bandit is a very appropriate term.
