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Why stock broker ‘Sell’ recommendations almost never happen…

It seems being right is just not enough. There is an etiquette in research, unwritten rules that must be respected, landmines that have to be avoided, and the truth is no defence. Analysts take note, as the old motorcycle adage goes:

“It’s no good being in the right if you’re dead”

 

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One of the biggest land mines, of course, is the ‘Sell’ recommendation. There is a reason 80% of broker research says ‘Buy’. In fact, there are a few reasons. Saying ‘Sell’ is one of the lowest return recommendations a broker can publish.

Here’s why:

  • Sell recommendations are more likely to be wrong than right, because of the long-term upward trend of the market. The price of any company that doesn’t go bust (a tiny minority) is almost certain to rise again one day. If you advise someone to sell something, especially a big stock, you are bound to look stupid eventually. Just leave it long enough. And as any broker can tell you, clients have tremendous powers of recall when it comes to money they didn’t make. They will remember and blame you decades later.
  • The other blatant fact about sell recommendations, from a business point of view, is that the audience is limited to shareholders. It only appeals to a limited number of people. But the audience for a buy recommendation is the whole world. Which one do you think is going to generate more business?
  • If you put out a sell recommendation, you must ring people who have bought the stock and tell them they were wrong. It’s a hard sell, especially when they are one of the long-term faithful. Not sure they’ll think you’re doing their share price any favours, and woe betide you if you’re wrong. A good way for a broker to upset a few clients and do no business.
  • One of the main ones, however, is this. Companies don’t like it when brokers suggest their painstakingly acquired shareholders sell. It’s not good for relationships between company and analyst. An analyst’s lifeblood is the relationships they build with their researched companies. The access they have to management. Why would they want to screw that up?
  • Even if the analyst doesn’t care, saying sell is one sure way for the analyst to screw up the chances of his corporate department ever doing a deal for the company in question. Getting corporate deals is hard work, it can take years. Corporate departments are there to support companies and their share prices, not kill them. A sell recommendation from your own analyst is an Exocet missile for any corporate ambition.
  • Finally, from the adviser’s point of view, no-one remembers when you save them from losing money. Only when you make them money. And even then, they tend to believe it was their own good judgement. There’s less mileage in a sell recommendation when it comes to reputation, even if you do get it right.

It is a fact of life. Brokers almost always recommend a purchase, at least on the front page.

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Marcus Today Pty Ltd ABN 57 110 971 689 is a Corporate Authorised Representative (no. 310093) of AdviceNet Pty Ltd ABN 35 122 720 512 (AFSL 308200).

Except where otherwise specifically indicated, any financial product advice is provided on this website is provided by Marcus Today Pty Ltd, Marcus Padley or Henry Jennings as Authorised Representatives of AdviceNet Pty Ltd AFSL No. 308200. The advice provided is general in nature and is not personal financial product advice. The advice has been prepared without taking into account your objectives, financial situation or needs and because of this you should, before acting on it, consider the appropriateness of the advice having regard to your objectives, financial situation and needs. You should carefully read and consider any Product Disclosure Statement (PDS) or other disclosure document that is relevant to any financial product that has been discussed before making any decision about whether to acquire the financial product. For more information, please see our Financial Services Guide.

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At the time of publishing, the author or their clients may have a financial interest in some of companies or securities mentioned.

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