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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 fervently recommended, effectively pounding the table to entice investors to amass major positions. This ardor is self-fulfilling. Research analysts are overconfident. The more proficient analysts that 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. As a result, the stocks can ascend to artificially high, unsustainable levels. The opposite is true for infrequent Sell opinions. We exaggerate 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 and make our negative view all the more correct. In both situations, analysts overstate their positions. Stocks swing in both directions far beyond what is warranted, because analysts overstress their stances. Investors should sell when analysts get overly enthusiastic and likewise avoid unloading (maybe even buy) when an analyst has derided a company too long.

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