Despite the fact the bull market ended on November 1, 2008, and despite all the brain power in our industry, it is rather amazing that 80 per cent of company target prices are still above current share prices and the majority of recommendations are still to buy.
We all know brokers never say sell but perhaps more worrying, in the absence of a bull market, is why the research continues to say buy.
The first reason, of course, is well known, that corporate business is the lifeblood of broking firms and because of that, a lot of research is, in effect, marketing for listed companies. After all, the raison d'etre of the sharemarket is not to provide share prices for online betting platforms, surprisingly, but to raise patient equity capital for companies when the banks won't risk it, and you don't do that by writing negative research about corporate clients or prospective corporate clients - it's simply not commercial to do so.
But that aside, there are other reasons research always says buy. Let us start with the universal ones.
You don't walk onto a car lot and hear a salesman say, "It's better on a bus." The finance industry is biased to optimism about its product, like any industry. Walk onto the car lot and expect to get sold a car. It's normal.
Statistically, share prices have gone up in the long term so, on the whole, history suggests that buy recommendations are more likely to be right, and if a buy recommendation goes wrong, you can always say, "It's OK, it'll be all right in the long term," and no one can really argue against it. And if it doesn't, you just extend your definition of "long term".
Buy recommendations are much more commercial than sell recommendations. You can phone all your clients with the chance of an order, not just the small universe of clients that hold a particular stock.
Saying buy is an easy sell. It is a positive message and is much more easily delivered, received and acted upon. People like to hear about hope, not failure. It creates more business.
If saying sell a stock upsets a listed company's management, saying buy endears you to them and improves the relationship, rather than damages it.
On top of all this, sell recommendations upset the clients that hold the stock.
Then there are structural issues:
Research is written mostly for the big institutional investors, the clients who do the most business with brokers. Institutions are worried about relative, not actual, performance. A buy to them means it will outperform the market. That's all they're interested in. It's a success in the relative performance world if a buy recommendation goes down less than the market. But mums and dads read the same research and think it means buy. Beware relative recommendations (outperform, underperform) when trying to make money. That research isn't written for you.
Research is usually written by analysts who are focused on a sector, not the market. Their job is to pick the best stocks in their sector and tell you the best ones to buy. Few analysts have the balls to say, "I wouldn't buy any stocks in my sector because they will all lose you money." Instead, you get five buys, four holds and one sell in every sector.
But let us not despair. There is always value in research and if you understand its weaknesses, you will quickly find its strengths.
Almost all research is worthy of your attention and, perversely, becomes even more valuable if it is written by someone very close to the company. Not surprisingly, they know more about it than anyone else and their work is more informed, even if the front page is more about marketing than truth.
Ultimately, the problem in this market is not the research, the brokers, or the companies, but the absence of a bull market, and no one can be blamed for that.
One day it will return and when it does, the research will be more right than wrong, once again.