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Signs of an Objective Investment Research Report

Aug 17, 2007
With the advent of internet investment newsletters and websites, it has become increasingly difficult to locate objective investment research. Even those who don't make a habit of reading investment research have no doubt been the recipients of e-mail spam research reports. While many research reports are clearly untrustworthy, others may take a little more skill to dismiss as biased stock advice.

The first sign that something might be wrong with a research report is the lack of an author. If no one is willing to sign his or her name to the stock advice, assume the worst. Reliable and objective analysts are always named in their reports, along with any credentials they may have. Lack of credentials doesn't necessarily mean that a report is unreliable, but the presence of credentials can be a good sign when everything else seems reliable.

Beyond the author, reliable research reports generally take on a consistent tone. Instead of relying on used car lot sensationalism, they are calm and logical. Investment newsletters and websites that encourage large immediate investments in random unknown companies should not be trusted. Instead, look for standard recommendations like "buy", "sell", and "hold", along with detailed reasoning for the suggestion. Stock advice should demonstrate historical knowledge of the company and show a firm grasp of the overall market and competition.

Along the same lines, most good reports contain reasonable numerical predictions of future performance. While untrustworthy investment newsletters often contain predictions that a stock will double or triple in a short time period, objective reports state assumptions and offer corresponding earnings forecasts. Reports that don't explore these details are generally not to be trusted.

One of the most heavily researched subjects in investment analysis objectivity is the nature of the relationship between the company and its analysts. While some researchers believe that affiliated analysts have good reasons to overstate values, others suggest that unaffiliated companies have just as much reason to exaggerate. Because certain types of services (like investment banking services) can be very profitable, many researchers believe that unaffiliated companies may provide unrealistically favorable coverage in hopes of earning a corporation's business in the future.

While it's impossible to understand the reasoning behind every piece of stock advice, it is possible to determine the relationship between an analyst and the company in question. All reputable research will contain some kind of disclosure about the relationship between the two. If a company stands to gain in any way from the coverage that is provided, it may be necessary to view the report with an especially critical eye.

Because anyone with a computer can create and distribute stock advice, it is especially important for investors to examine research reports carefully before acting. While some investment newsletters can be wonderful and thoughtful sources of investment advice, others can be little more than sensationalistic hearsay, designed to increase share prices or generate higher trading volume for a company. Because the consequences of acting on stock advice are borne only by the investor himself, it's important to consider the source before you accept it as truth.
About the Author
Joel Arberman is the Managing Member of Stock Aware, LLC. We publish a free investment research and analysis newsletter. Learn more at
www.StockAware.com
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