Forget the hedge funds. You want to crush the suits?
Well, they still make sell side analysts wear suits and come into the office.
It’s wild, I know.
Sell side analysts have worse herd behavior habits than your average investor. They have their cushy jobs (a few of them still do anyway). They get to tell their friends and family that they work on wall street, because some people still think that’s “cool”.
But the truth is, it’s our job to take advantage of them. It’s a lonely and dying business and they’re not having any fun. In fact, they’re finding it really difficult to run their antiquated valuation models on today’s business. It’s hilarious to watch them try.
Now, making fun of the situation doesn’t get us paid. BUT, taking advantage of their conflicts of interest certainly can, if done correctly.
You see, they have families, kids in private school, expensive mortgages and used to nice vacations. It’s a lifestyle. Their wives don’t work and it’s up to daddy to make sure the big check comes home every month, regardless of the cost.
To be clear, this is not ‘every’ sell side analyst. But for the purposes of this strategy, this is how we want to view them as a group. It helps understand their flaws and motivations.
They’re not going to have their jobs for much longer. That business is dead. BUT, in the meantime, we can take advantage. They say you shouldn’t kick someone when they’re down, but that’s actually the best time to kick someone, when they’re already down.
The herd behavior on the sell side is off the charts. Because, for example, if 20 other analysts cover a stock and they all have buy recommendations on it, for you to give it a sell rating, YOU BETTER BE RIGHT!
If the stock rips and you’re the only loser with a sell on it, you’ll be looking for a new job soon. It’s not worth it for you to go out on the limb, no matter how confident you might be.
“Should I put a sell on this one, because I really think it’s a zero? Or, do I just agree with the rest of the analysts so that if I’m wrong, so was everyone else? That way little Chad can start 7th grade in the same expensive private school with all his friends.”
Family > Doing My Job Correctly. [Read more…]