Did Wall Street advise you to sell that stock? Here’s WHY you shouldn’t listen! [Wednesdays: The Independent Investor]
Miles Everson’s Business Builder Daily speaks to the heart of what great marketers, business leaders, and other professionals need to succeed in advertising, communications, managing their investments, career strategy, and more.
A Note from Miles Everson:
We’re excited to share with you another investing insight in today’s “The Independent Investor!”
Every Wednesday, we publish various articles about investing because we believe this activity will help us achieve financial freedom.
Today, we’ll be sharing an investment hack that both novice and experienced investors will find useful in maximizing the profitability of their investments.
Read on to know how ignoring one “side” of the financial market can help you improve your decision-making.
CEO, MBO Partners
Chairman of the Advisory Board, The I Institute
The Independent Investor
In today’s investment climate, Wall Street and the mainstream financial media have a lot of influence on stock valuations. The stock prices of companies rise and fall depending on what these institutions say.
The problem with Wall Street valuations is there’s simply nothing new. One day the market is at an all-time high and on the next one, it’s about to collapse! Sensationalized reporting about such news isn’t helpful for investors at all. The prevalence of Wall Street’s stock opinions makes access to proper investment guidance difficult.
Luckily, there’s a workaround for this problem…
All you have to do is ignore this side of the financial markets:
Wall Street is known as the “sell-side” of financial markets. Sell-side firms are known to provide financial services to corporations for a hefty fee.
Simply said, these firms make money in the transaction of buying and selling, not by buying a stock that then goes up.
The real client of Wall Street is the corporation. A sell-side firm is chosen based on its ability to complete a client’s financial transactions.
Sell-side analysts are largely responsible for recommending which stocks to buy or sell. The opinions of these analysts change on a day-to-day basis and are often based on predictions. Bill Miller, the founder and chief investment officer of Miller Value Partners, perfectly sums up this point when he said:
“The first duty of the investor or analyst is to figure out what is embedded in the price, what is discounted.”
“The failure to address that question [stock price] is the main source of the poor relative results of most money managers and the general lack of value provided by the opinions of analysts [Wall Street Analysts].”
As we’ve discussed in a past “The Independent Investor” article, predicting markets isn’t a viable investment strategy.
Wall Street analysts are guilty of making stock recommendations based on profit, not on financial success. Seth Klarman, chief executive officer of Boston-based hedge fund, The Baupost Group, had these to say about Wall Street analyst recommendations:
“Wall Street analysts are unlikely to issue sell recommendations due to an understandable reluctance to say negative things, however truthful they may be, about the companies they follow. This is especially true when these companies are corporate-finance clients of the firm.”
“A great many of those who work on Wall Street view the goodwill financial success of clients as a secondary consideration; short-term maximization of their own income is the primary goal.”
Because of this profit-oriented approach in stock recommendations, you can’t count on Wall Street for investment advice. Unfortunately, these opinions are widely accessible, making them hard to ignore.
Meanwhile, the mainstream financial media also publish sell-side opinions. These organizations distribute content that isn’t useful for investors who want to maximize the earnings potential of their investment portfolios.
So… how can you maximize your investment portfolio without relying on sell-side advice?
- Study the financial statements and performance of the firms you plan to invest in. Balance sheets are a good indicator of a firm’s profitability.
- Avoid making trades based on your emotions. Emotional investing can harm your investment portfolio in the long run.
- Pay close attention to market movements. Buy stocks when the markets are down, not when it’s up.
- Consider investing in index funds. Index funds are safe investments that generate good returns over time.
We hope these principles can help you in developing your investment strategy!
Despite the difficulty, tuning out the noise coming from the sell-side of the markets can be rewarding for you and your investments.
Happy mid-week, everyone!
(This article is from The Business Builder Daily, a newsletter by The I Institute in collaboration with MBO Partners.)
About The Dynamic Marketing Communiqué’s
“Wednesdays: The Independent Investor”
To best understand a firm, it makes sense to know its underlying earning power.
In two of the greatest books ever written on investing, the “Intelligent Investor” by Benjamin Graham and “Security Analysis” by David Dodd and Benjamin Graham (yes, Graham authored both of these books), the term “earning power” is mentioned hundreds of times.
Despite that, it’s surprising how earning power is mentioned seldomly in literature on business strategy. If the goal of a business is wealth creation, then the performance metrics must include the earning power concept.
Every Wednesday, we’ll publish investing tips and insights in accordance with the practices of some of the world’s greatest investors.
We make certain that these articles help you identify and separate the best companies from the worst, and develop your investing prowess in the long run.
To help you get on that path towards the greatest value creation in investing.
Hope you’ve found this week’s insights interesting and helpful.
Stay tuned for next Wednesday’s “The Independent Investor!”
Head of Marketing
Valens Dynamic Marketing Capabilities
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