Stock ratings: good, bad and ugly

Investors have a love-hate relationship with stock ratings. On the one hand, they are loved because they succinctly convey the analyst’s view of stocks. On the other hand, people hate them because they are usually a manipulative sales tool. This article will focus on the good, bad, and ugly aspects of stock ratings.

  • Stock ratings, such as buy or sell, are good because they provide quick insight into the stock’s prospects.
  • However, the rating is the opinion of a person or group of people, and does not consider the individual’s risk tolerance.
  • Ratings are valuable information for investors, but they must be used with caution and combined with other information.

Pros: Needs original sound

Today’s media and investors need information in sound clips because our collective attention is so short. The “buy”, “sell” and “hold” ratings are effective because they can quickly convey the bottom line to investors.

But the main reason for the good ratings is that they are the result of rational and objective analysis by experienced professionals. It takes a lot of time and effort to analyze the company and formulate and maintain profit forecasts. Moreover, although different analysts may come to different conclusions, their ratings can effectively summarize their efforts. However, ratings are a person’s point of view and do not apply to every investor.

Disadvantage: one size is not suitable for everyone

Although each rating conveys a recommendation concisely, the rating is actually a point within the investment range. There are many other factors to consider, including the investor’s risk tolerance, time frame, and goals. A stock may carry certain risks and may not meet the investor’s risk tolerance.Therefore, different investors may view stocks in different ways

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Stock rating range

Ratings and opinions will also change, but not necessarily at the same time or in the same direction. Let us now understand how the situation has changed by examining the history of AT&T Inc. (T) stock.

First, let’s examine how important a point of view is. In the beginning (such as in the 1930s), AT&T was considered a “widows and orphans” stock, which meant that it was very suitable for unconventional risk-averse investors-the company was considered to have little commercial risk because it had what everyone needed Product (this is a monopoly), which pays dividends (the income required by “widows to feed orphans”). Therefore, even if the risk of the entire market changes (due to depression, recession, or war), AT&T stock is considered a safe investment.

At the same time, more risk-tolerant investors will view AT&T as holding or selling because it does not provide sufficient potential returns compared to other more aggressive investments. More risk-tolerant investors want rapid capital growth, not dividend income—risk-tolerant investors believe that the potential additional return justifies the increased risk (loss of capital).

Older investors may agree that riskier investments may produce better returns, but they do not want to make aggressive investments (more risk-averse) because, as older investors, they cannot afford potential capital losses.

Now let us see how time changes everything. The company’s risk profile (“specific risks”) may change due to internal changes (for example, management turnover, product line changes, etc.), external changes (for example, “market risk” caused by increased competition), or both.

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AT&T’s specific risks have changed, and its spin-off has restricted its product line to long-distance services, while competition has intensified and regulations have changed. During the Internet boom in the 1990s, its specific risks changed more significantly: it became a “tech” stock and acquired a cable company. AT&T is no longer your father’s telephone company, and no longer the stock of widows and orphans. In fact, at this point, the situation has changed. Conservative investors who bought AT&T in the 1940s might think it was a sell in the late 1990s. More risk-tolerant investors who would not buy AT&T in the 1940s are most likely to rate the stock as a buy in the 1990s.

It is also important to understand how personal risk appetite changes over time and how this change is reflected in their investment portfolio. As investors age, their risk tolerance will change. Young investors (20s) can invest in riskier stocks because they have more time to make up for any losses in the portfolio and there are still many years of employment opportunities in the future (and because young people tend to be more risky Spirit). This is the so-called investment life cycle theory. This also explains why older investors cannot bear their savings risks even though they agree that riskier investments may provide better returns.

For example, in 1985, people in their 30s invested in startups like AOL because these companies were “new” new things. If the bet fails, these investors still have many (approximately 30) years of employment opportunities and can earn income from wages and other investments. Now, almost 20 years later, these same investors cannot afford the same “bets” they made when they were young. They are about to end their working life (10 years after retirement), so there is less time to make up for any bad investment.

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The ugly: alternative to thinking

Although the dilemma surrounding Wall Street ratings has been around since the first trading under the plane tree, things got worse with the revelation that some ratings did not reflect the true feelings of analysts. Investors are always surprised to find that such illegal incidents may happen on Wall Street. But ratings, like stock prices, can be manipulated by unscrupulous people and have existed for a long time. The only difference is that this time it happened to us.

But just because a few analysts are dishonest does not mean that all analysts are dishonest. Their assumptions may prove to be wrong, but this does not mean that they have not done their best to provide investors with thorough and independent analysis.

Investors must remember two things. First, most analysts do their best to find good investments, so ratings are largely useful. Second, legal ratings are valuable information that investors should consider, but they should not be the only tool in the investment decision-making process.

Bottom line

Ratings are a person’s opinions based on their opinions, risk tolerance, and current market opinions. This view may be different from yours. In the final analysis, ratings are valuable information for investors, but they must be used with caution and combined with other information and analysis to make good investment decisions.

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