Stock Recommendations from Analysts or Brokerage Houses: How Valuable Are They?

I believe it was Warren Buffet who said "We read analyst reports only if we can't find the satire pages of the paper". This saying, while extreme, demonstrates how stock recommendations by brokerage houses are often treated by investment professionals.

Analysts or brokerage houses base their recommendations on research of certain companies and their stocks. More often then not there are more interests at play then meets the eye. This does not mean it is necessarily wrong to act according to these recommendations but you should always have the complete picture before acting.

Take a look at the following facts about brokerage house (or analyst) recommendations:

1) Analyst stock recommendations are always characterized by being quite optimistic. Almost 80% of recommendations are BUY recommendations.
2) An analyst's BUY recommendation is followed by an incline in the stock's price and a SELL recommendation by a decline in the stock's price.
3) Approximately 15% of recommendations are made by financial mediators of various sorts who own a certain percent of the recommended stock. This holds a substantial potential of conflict of interests.
4) Analysts often make recommendations in an untimely fashion - or just too late.

Analyst recommendations are characterized by being too optimistic. Even at times of low trade volumes and strong bearish markets. Only 3%-5% of recommendations are SELL recommendations (The rest are HOLD).

The troubling thing about stock recommendations by brokerage houses is the credibility and influence attributed to them by market players. Market players often attribute knowledge and professionalism to brokerage houses. The question to ask here is: are these working for you and your way?

Market players have a hard time differentiating between brokerage houses and recommendations which have an interest in the stock which is being recommended to others who do not. The affects of recommendations in both instances is quite similar.