Why you shouldn't trust Wall Street's top stocks for 2011

Why You Shouldn't Trust Wall Street's Top Stocks for 2011

Warren Buffett, the chairman and CEO of Berkshire Hathaway Inc. and one of the smartest investors in the world, knows all about broker conflicts. Buffett says he learned that "the broker is not your friend. He's more like a doctor who charges patients on how often they change medicines. And he gets paid far more for the stuff the house is promoting than the stuff that will make you better." I couldn't agree more. After 10 years close to Wall Street, I saw the pressures and the abuses.

You may wonder how good are Wall Street’s stocks recommendations. Please find attached an article that may answer your question. In summary:

How would you do longer term if you followed Wall Street's top recommendations each year? The future, of course, is unknowable. But I looked back over the past five years. I asked how you would have done if you bought the analysts' top 10 favorite stocks at the start of each year, held on for 12 months, and then sold and spent the money buying the new year's picks.

 
If you had started with $10,000 at the start of 2006, invested $1,000 in each stock and reinvested any dividends, today you'd have $10,950. That's before trading costs and taxes.

 
But if you had just ignored Wall Street analysts, put that money in the SPDR S&P 500 exchange-traded fund—which tracks the entire Standard & Poor's 500—and left it alone, you'd have $11,190: slightly more. And you'd have saved a lot on trading costs and capital-gains taxes as well. Overall, you'd have ended up considerably better off.

 
As for the unpopular stocks? Thanks to survivorship bias, we can't be completely certain. But if you'd just bought the most-hated 10 stocks (in today's S&P) each year you'd have an astonishing $16,430 today.

 
That's in just five years.

Lehman Brothers? At the start of 2008, 17 analysts covered the stock. Of them nine had it as a "hold," five as a "buy" and two—amazingly—had it as a "strong buy." Given that one of the smartest things anyone could have done with their money, ever, was to sell Lehman stock at the start of 2008, how many analysts actually issued that recommendation?

One. Out of 17. Source: WSJ.com

Investmentnews.com just reported that companies in the Standard & Poor's 500 Index that analysts loved the most rose 73 percent on average since the benchmark for U.S. equity started to recover in March 2009, while those with the fewest “buy” recommendations gained 165 percent, according to data compiled by Bloomberg.

When your broker calls to offer you his analysts' "top picks" for 2011, maybe you'd be better off asking him which stocks his analyst hates. Or you could just let the phone ring. 

This newsletter was first published in February of 2011

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