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Buy and Sell Opinions Are Usually Overstated

Analysts cheerlead their Buys, and disparage the Sells. The Street tends to overdo its enthusiasm on stocks being strongly recommended, effectively pounding the table to attract investors to amass major positions. The ardor is self-fulfilling. The more proficient analysts are in this endeavor, the higher the stock climbs, and the better our call looks. We promote these favored ideas way out of proportion to the reality, and the stocks can ascend to artificially high, unsustainable levels. The opposite is true for the infrequent Sell opinions. We are overly emphatic on all the negatives, diss the company at every opportunity, and basically pile on an already troubled, depressed stock. This is to help push the shares lower to make our negative view all the more correct. In both situations, analysts overstay their positions. Stocks overreact in both directions far beyond what is warranted by reality, due mainly to analysts going overboard in stressing their stances. Investors should sell when analysts get overly enthusiastic and avoid unloading (maybe even buy) when an analyst has derided a company too long.

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