Jason Goepfert had a nice post on his blog today (check it out here) about analysts’ buy/sell recommendations. A new research paper (available here) shows that sell side analysts are prone to behavioral biases and let their investment banking relationships cloud their judgement.
We have long argued that injecting your emotions and biases into the investment process is problematic. These sell side analysts are smart people and analyze securities for a living - and they can’t even avoid the common behavioral biases that affect all of us! It’s easier said than done to get the emotional biases out of the process. One way is to run a disciplined, systematic process that lets the computer do the day-to-day analysis. All of the human intervention goes into the process upfront in the design phase. This technique requires a lot of experience and know-how to make it work. It’s not something every investor can easily do. What everyone can do, however, is examine your process (assuming you have one) from beginning to end to see where your biases might be creeping in. Setting rules or guidelines for these areas of your process will no doubt improve your results over time.
