EVEN though the bull market ended on November 1, 2008, and despite all the brain power in our industry, it is amazing that 80 per cent of company target prices are still above the current share prices, and the majority of recommendations are still "buy" recommendations.
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: corporate business is the lifeblood of broking and, because of that, a lot of research is effectively 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 is simply not commercial to do so.
But that aside, there are other reasons research always says buy. Let us start with the universal reasons.
You don't walk into a car yard and hear a salesman say, "It's better on a bus." The finance industry is biased to optimism, as is any industry. Walk in 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, 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. And if it doesn't, you just extend your definition of what's "long term".
Buy recommendations are much more commercial than sell ones. You can ring 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 much more easily delivered, received and acted on. People like to hear about hope not failure. Its creates more business.
If saying sell a stock upsets a listed company's management then 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 some structural issues:
Research is mostly written for the big institutional investors, the clients that 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 the institutional clients are interested in. The market direction doesn't really matter. It is 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 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 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. Ultimately, the problem in this market is not the research, the brokers, or the companies, it's 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.
Marcus Padley is a stockbroker with Patersons Securities and the author of stockmarket newsletter Marcus Today. For a free trial go to marcustoday.com.au. His views do not necessarily reflect the views of Patersons.