Be Careful of Securities Analysts

If you are like many investors, you buy stocks because your broker recommends them. But did you know that most brokers get their tips from someone called a securities analyst? How reliable is his or her research?

Securities analysts are highly paid investment sleuths who work for brokerage houses, banks and other financial institutions. They spend their time finding stocks that they think will make a profit. But many analysts are too often bullish on the wrong stocks.

Analysts often fall in love with their stocks, just as novice investors do. And they occasionally fear that gloomy forecasts will alienate the managements of the companies they follow. Sometimes an analyst is under pressure to give a company a good report because the analyst's parent firm is acting as the well-paid underwriter for that company's new stock issues. Therefore, it is smart to ask any broker who recommends a stock to you if his firm has an investment banking relationship with the company he is pushing. If it has, you should be extra careful.

Analysts also tend to pass news along first to big, institutional customers and then to the retail brokers who do business with smaller investors. This puts you at the rear of the information line and, in many cases, that is too far back to take any profitable action on the tip. In general, it is wise to patronize brokerage houses that freely publish their analysts' recommendations and keep track of the resulting profits or losses in those stocks.

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