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Herd Analysts Are Putting Lipstick On Every Pig

The “lipstick on a pig” quote is pretty infamous after the 2008 U.S. presidential race and former Merrill Lynch analyst Henry Blodget’s enthusiastic recommendations on stocks that he privately derided. It looks like there is still lots of lipstick on Wall Street.

Earlier this year, a report from Standard and Poor’s indicated that of the 1,485 stocks making up the S&P 1500 index, not a single one had a consensus sell recommendation from Wall Street analysts. That doesn’t mean there wasn’t the odd sell recommendation, it just means that there were no stocks that most analysts agreed had less than rosy prospects. Meanwhile, the S&P 1500 is down 2.77 per cent including dividends to Oct. 19, with the financials sector down 19.97 per cent.

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In a recent neuroeconomics and behavioural finance presentation by Barry Ritholtz, chief executive officer of Fusion IQ in New York, who also writes The Big Picture blog, he also noted that only 5 per cent of all Wall Street recommendations were sell recommendations in May, 2008, according to data from Bloomberg. The markets didn’t reach their troughs until March, 2009. During the tech run up in the late 1990’s, this figure was only about 2 per cent.

This can partly be explained by what Mr. Ritholtz referred to as “herding.” A similar concept is the “institutional imperative” which Warren Buffett identifies as a red flag in companies he is looking to invest in. Simply put, it’s the tendency for people to act the same no matter how irrational it may appear.

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