Stock Rating

Buy. Sell. Hold. That’s about it. Those are the ratings.

Stockbrokers usually employ what is called a sell side analyst, who writes investment reports on the favorability, or lack thereof, of buying a given stock or bond. They are framed generally as “within this price range, this stock is rated buy”...meaning they like the stock here for a given period forward. Maybe a quarter or two, maybe the next 5 years. But the rating doesn't specifically say “Buy at 27 dollars and 12 cents." It just says “buy.”

Why? Well, it starts with the fact that anyone who’s good at actually picking stocks...would pick stocks. There’s almost no other legal career on the planet where an individual can work fewer hours and make more money than if they can read a crystal ball of stock-picking futures and invest their money well. Remember that you could have bought 25 grand worth of Amazon 2 weeks after its IPO in the late 90s, and today that would be worth tens of millions of dollars.

So it's a fair question to ask: why would someone publish a stock rating at all when, statistically, their ratings are no better than a monkey throwing bananas at a dart board? Well, the reality is that brokerages used to make decent money on commissions before computers took so much of the profit margin from the business. For decades, the role of the analyst was to keep the attention of company management so that, when the company did a financial offering, or sold themselves to an acquirer, the company hired the investment bank for their lucrative-to-the-bank investment banking services, and when management sold their own shares in the company they were managing, they’d put the cash proceeds as investments in the lucrative-to-the-bank proprietary hedge funds, i.e. the bank’s own hedge funds.

So, not surprisingly, in most cases in history, when 87 analysts were covering a given stock, 86 of them had strong “buy” ratings on the stock with a little asterisk, which led to another one at the bottom of the page, which said that, when you do lucrative banking deals, please pick me me me! This fact was shouted out loudly in the mid-1990s, and banks quickly adjusted, requiring analysts to segment top, middle, and bottom third enthusiasm levels that they held in their ratings of stocks at given price points. Their success or failure in actually picking good stocks didn’t change, but the asterisks, with the "me me me" things...basically went away.

So all of the above is about stock ratings. When you’re making chicken soup, it’s, uh...a different kind of stock.