Is it better for an analyst to already own a stock he/she is recommending or is it better that they don’t own it and thus appear impartial?
In recent years you have seen a lot more disclosures when reading or viewing opinions from stock “experts”. Whether it is on CNBC, Bloomberg, Seeking Alpha, or any other place you get your stock information, it is now common to see some sort of disclosure on whether the author or analyst owns the stock.
It didn’t always used to be that way and you can read more about the SEC and their take on analyst recommendations here. This is what you will often see on CNBC when an analyst is talking about particular stocks and giving their take on whether you should buy or sell them:
Its great that we have more analyst disclosures now but its tough to decide what they really mean. There are two lines of thinking on this:
- Some people prefer to see analysts actually own the stock(s) they are recommending because that shows that they put their money where their mouth is. I have often wondered after hearing a glowing stock tip from an “expert” why they don’t own the stock themselves? If its such a good pick, why don’t they own it?
- Other people believe analysts can be more objective if they DON’T own the stocks they recommend. Not owning them means they are more impartial and are not hoping to get people to buy shares of a company so that their own investment (stock price) goes up.
I Prefer To See Analysts Own Stocks They Recommend
This is just my preference and I can see that both sides have valid points but I lean toward liking it when analysts have an actual stake in what they are recommending. Free information is everywhere now that the Internet is so pervasive and you can find opinions about individual stocks all over the place. To me, knowing that an “expert” has something of their own on the line outweighs the possibility that they are just trying to drive up the price.
Whether you fall into group #1 or group #2 though, I think this is something that each investor needs to decide for themselves. There just isn’t a right or wrong answer. Whichever scenario you feel better with is something that you will need to figure out and you may actually switch back and forth over time.
After all, analysts have personalities and some are more likable and believable than others. If you have a feeling that an expert is trustworthy, whether that feeling comes from familiarity with them or just from your gut, you may not care whether they own the stock(s) they recommend. You may just believe that they are being trustworthy with their picks. Whatever you decide, take into consideration that the stock market industry is full of sales people.