A lot of us (un?)fortunately watch CNBC/NDTV-Profit etc ... to get our updates on the markets. Many of us also read magazine and perhaps even subscribe to recommendations etc. Moneycontrol & many other website put up for free, various pds and ppts with views of various analysts and brokerage houses. Are they useful, should we follow them or not?

As usual, someone in the world would have done some work on this and here is some preliminary info for us:

There are basically 2 types of analysts:

A: Buy-side analysts
http://en.wikipedia.org/wiki/Buy-side_analyst

"Buy-siders" work for money management firms such as mutual funds, pension funds, trusts, and hedge funds. They are incentivised to identify investment opportunities that will improve the net worth of the portfolio they work for.

A buy-side analyst typically works in a mutual fund, pension fund, or other non-brokerage firm, and provides research and recommendations exclusively for the benefit of the company's own money managers (as opposed to individual investors). Unlike sell-side recommendations and reports—which are meant for the analyst's brokerage firm's clients, and the broad outlines of which the press often widely disseminates—buy-side recommendations are NOT available to anyone outside the firm. If the buy-side analyst stumbles upon a formula, vision, or approach that proves effective, it is kept secret.

B: Sell-side analysts
http://en.wikipedia.org/wiki/Buy-side_analyst

"Sell-siders" work for a brokerage firms and evaluate companies for future earnings growth and other investment criteria. They sometimes place recommendations on stocks or other securities, typically phrased as "buy", "sell", or "hold." They are incentivised by offering their recommendations to institutional investors clients, as well as by seeking investment banking deals with the firms they cover, although the latter is subject to significant regulatory restrictions, particularly in the United States. A proper title for some sell-side analysts is Equity Research Analyst.

So when we pay attention to media (of any form) and / or pay for recommendations, we are looking at the Sell-side guys (and gals!). Basically, they are selling their research and recommendations to anyone who will pay for it or providing it free to market & promote their services (in order to get paying clients in the future).

Now, some folks at Harvard University, Kellogs School of Management & Univ of North Carolina did some detailed analysis on the performance of the Buy side vs Sell side guys and here is what they came up with:

Abstract: We examine the performance of buy-side analysts relative to that of the sell-side. Our tests show that:

1. Buy-side analysts at a large investment firm make less optimistic stock recommendations than sell-side analysts, consistent with their facing fewer conflicts of interest.

BUT

2. Buy-siders earnings forecasts are relatively optimistic and inaccurate and returns to their buy recommendations under-perform sell-side recommendations.

3. Large sample tests that compare the performance of sell-side analyst recommendations vs portfolio managers who rely exclusively on buy-side research confirm the sell-side's superiority. These performance differences appear to be partially explained by the buy-side's higher retention of poor-performing analysts and by differences in performance benchmarks used to evaluate buy- and sell-side analysts.

Now if you really got the Abstract above then this throws up some very interesting propositions for retail investors:

Proposition 1.
Points 1 & 2 would imply that investment firms (mutual funds, pension funds, insurance companies etc) employing in-house Buy-side analysts would underperform those firms that use sell-side recommendations (i.e: just rely on out sourced advisory services to tell them when to buy & sell). Hence is it better for retail investors to avoid investment firms that use in-house analysts and stay with those who use out-sourced advice?

Proposition 2.
If Proposition 1 above is true (i.e: it is better for retail investors to go with Sell-side advice), then should retail investors actually pay serious attention to to what is published in media (newspapers, mags, TV, websites)?

Proposition 3.
And therefore, would it be more profitable to follow this investment approach rather than say invest in mutual, pension funds etc? Note: we are not talking about a retail investor becoming an analyst him/her self. Simply, it's just about finding decent to good Sell-side analyst(s) and following their recommendations (blindly).

While Propositions 1 & 2 are at the very broad macro level, Proposition 3 calls for action. Of course, individual Sell side guys may greatly outperform (positively or negatively) a benchmark, the Buy-siders etc and we will get into that later, for now lets deal with Propositions 1 & 2.

As a step to answering the first 2 propositions, click teh link below to read the 65 page pdf that details the analysis and will perhaps tell us whether to go on to Proposition 3 or not. Warning: it has a lot of statistics but is still worth a read. http://papers.ssrn.com/sol3/papers.cfm?abstract_id=806264

And while some (? any) of you get onto reading this, let me see if I can come up with my views on what it throws up. In the meantime, a request: If you have views or answers to these issues, experiences of trading / investing using free or paid recommendations etc, please do share them; me very interested in this :-)

More soon, with Wishes & Riches,

Musa

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The author, Dr. Musa R Kaiser is a Bangalore-based doctor, equity investor, derivatives trader, investment advisor and most importantly, a financial educator who is passionate about supporting individuals and families achieve their dreams. He is the founder of http://www.bangaloreinvestorsclub.com