Overview – Learning How to Effectively Use Stock Recommendations
If you’ve ever done any sort of preliminary research about a stock, chances are you will come across countless investment gurus and enthusiasts alike who either try to sell you the stock as hard as they can or try to convince you to avoid the stock like the plague.
There are recommendations for virtually every stock, both large and small. Some recommendations are very well put together, while others, not so much. With so many recommendations to choose from, how can they be useful for investors?
From my experience, stock recommendations serve as a decent starting point for preliminary investment research, but that should be the scope of their influence – preliminary. They should never serve as a final verdict when making an investment decision.
There is no Shortage of “Expert Advice”
There are countless gurus on YouTube, Instagram, Facebook, and throughout the internet who give recommendations on certain stocks.
One of the first problems you run into is the rampant inconsistency in the quality of these analyses. Some recommendations are well done, whereas others have a lot left to be desired.
Some stock recommendations give very excellent points and use several pieces of quantitative and qualitative evidence as to why an investor may or may not want to consider a certain stock. The recommendation given at the end is based on the facts that were presented, and not the personal feelings of the author.
On the other hand, some stock recommendations are clearly biased towards one action (either buy the stock or don’t), will only present evidence that reinforces that bias, and omit anything that goes against the bias. Consequentially, the recommendations given by these authors are clearly a matter of opinion rather than one based on facts.
I’ve previously talked about the importance of thinking for yourself when it comes to investing, and that’s because every investor follows their own framework when performing investment analysis. Give 10 investors the same set of data, ask them to perform investment analysis, and chances are you will end up with 10 different conclusions.
You can’t expect to assess the conclusions of other investors if you haven’t arrived at your own. How can you tell if the recommendations you read present valid arguments if you haven’t done the required due diligence yourself?
I’ve noticed that the wealthiest, most prominent investors in the world never claim to be “experts”. I’ve never seen Warren Buffett, Ray Dalio, Charlie Munger, Seth Klarman, or any other billionaire investor call themselves “investing experts”.
The insights and recommendations these individuals share are usually based on their own experiences, and most of the time they draw on evidence to back up their claims. This doesn’t mean that what they say is infallible, but it certainly helps that they speak from experience and present the necessary facts when needed.
There’s a difference between an investor presenting their conclusions in a logical, factual, and nonsensical way, and an investor who calls themselves an “expert” on a given stock, only to give biased advice based on half-baked due diligence.
This may sound like stock recommendations should be avoided, but that isn’t the case at all. In fact, if an investor knows how to use stock recommendations effectively, they can potentially save themselves a lot of time when performing their own analytical work.
Using Stock Recommendations as Preliminary Tools
Whenever a stock catches my attention and I want to investigate it further, one of the first things I do is perform a quick search and peruse through people’s recommendations about this stock.
My purpose here is strictly to get a “feel” for what people have to say about the stock. Unless there is something every investor happened to miss, most recommendations usually go over the same major points.
If a company is about to execute a new project later in the year or there is a major scandal surrounding a company, most stock recommendations will mention that in their analysis.
I’ve found that stock recommendations are a decent way to get a quick understanding of what’s going on without having to find this information yourself. Because recommendations are designed to serve as an overview, many of them go over major points right away, such as ongoing litigation, noticeable financial developments, and any major projects/initiatives.
By doing this, I save myself a lot of time that I otherwise would’ve spent trying to figure out the same information on my own. The information presented in these recommendations is spread across multiple sources and compiling them into one document isn’t something that can be done quickly.
No investor has an infinite amount of time to spend performing investment analysis, so by skimming through stock recommendations I’m essentially delegating the low-level work of figuring out what major points I need to be aware of.
By “delegating” this surface-level work, I can spend more time on other important tasks such as reviewing the financials and trying to estimate a stock’s intrinsic value.
While this may sound great, be warned: stock recommendations are great preliminary tools only if the work is high quality. If an investor decides to use stock recommendations to aid their work, the responsibility falls on them to ensure the work they come across is top quality.
Avoid Picking a Side Too Early
As I mentioned earlier, 10 investors analyzing the same stock will result in 10 different conclusions. If an investor reads these conclusions before arriving at their own, they may prematurely choose a side before properly assessing the facts.
I’ve found that the key to reading stock recommendations is to remain neutral about the recommendation given. That is, I don’t agree or disagree with the conclusions given at the end.
Remember that the reason behind reading stock recommendations in the first place is to get a feel for the stock, and to learn the major facts surrounding a stock. Your goal is to gather facts, not choose a side.
Whether the recommendation is to buy or avoid a stock, what’s more important is to understand what led to that recommendation in the first place.
If you fall into the trap of choosing a side (e.g., thinking to yourself that buying this stock may be the best course of action), your preliminary research is now flawed because you will subconsciously reject recommendations that go against your decision, while only focusing on ones that you agree with – a textbook example of confirmation bias.
Investment research means gathering all the relevant facts first, then make a conclusion based on what you know. If you prematurely arrive at a conclusion, you will only focus on facts that support your conclusion, even if there are facts that don’t support your conclusion but should still be addressed.
To be an investor means knowing as much as you can about a potential investment operation, both the good and the bad.
No Replacement for Your Own Work
Naturally, just because you go over hundreds of recommendations doesn’t mean you are exempt from performing your own analytical work.
Independent thinking is a hallmark trait of every investor. It’s not unheard of for investors to challenge popular opinion and end up being right.
Stock recommendations serve as a good starting point for investment research, but that’s all they ever should be – a starting point. You should never make an investment decision based solely on the opinions of other people – at the end of the day, the decisions you make should be based on the conclusions you arrived at.
Wrapping Up
With so many stock recommendations for investors to read, how can investors use this resource when performing their analytical work?
Stock recommendations can serve as a great tool for preliminary investment research. They are usually presented in an overview format, meaning they cover a lot of major points right away without giving the reader too many unnecessary details.
Although stock recommendations are a good start, that’s all they should ever serve as – a start. In the end, an investor still needs to perform their own analytical work, draw their own conclusions, and make their own judgments.
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