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Wall Street Myths – Part 3: Analyst 'Buy' Calls

All week long CNBC contributor Gary Kaminsky has been revealing some of the costliest myths that often vex investors.

In part 3 of this multi-part series the veteran trader tackles those headline making analyst recommendations. They’re not all created equal.

Myths # 3: Analyst Buy Calls Mean Buy The Stock

Oh, you’ve read the headlines too many times. An analyst who’s been bearish on a sector for years has just issued a ‘Strong-Buy’ or ‘Outperform’ rating. But that doesn’t mean you should buy the stock.

”I’m amazed that just because a stock is rated a strong buy investors don’t know that doesn’t necessarily mean the analyst expects a positive return,” says Kaminsky.

Analyst who issue ‘Buy’ ratings do so to signal that the stock is best bet in its sector, but unless you must put money to work in the sector you may well do better elsewhere.

For example, Deutsche rated Citi a ‘Buy’ in August 2009. And it has outperformed its peers down about 3% while Wells is 9% lower, and JP Morgan 14% lower.

"When this analyst is evaluated at the end of the year, (the Street) thinks he's done an exceptionally good job," explains Kaminksy. However, had you put that same money to work in a myriad of other stocks you'd be a lot happier today.

What's the bottom line?

When you're reading a research report, identify whether the 'Buy' rating is a relative buy rating or an absolute buy rating.

* It’s worth noting that in this post we’re strictly talking about ‘Buy’ recommendations from a sell side analysts – so called because they typically work for brokerages that make a commission from the public’s selling (and buying) of stocks.

By contrast buy side analysts typically work for mutual funds or pension funds. You rarely hear their calls because their recommendations are proprietary.

For more on the difference between sell-side and buy side analyst click here
(Turn the page for more Wall Street Myths)

Learn more. Check out our entire conversation about broker compensation and find out why Gary thinks investors find the subject taboo. Watch the video now!

Click here to go to McGraw Hill's website and check out Kaminsky's book "Smarter Than The Street: Invest and Make Money In Any Market

Myth #2: Your Broker Has Your Best Interest At Heart.

Your broker has a dirty little secret that you probably don’t want to hear. He makes money when you buy his products. There, we said it. He’s not suggesting financial products out of the goodness of his (or her) heart. So it’s critical to know how he (or she) profits from your purchase.

”It’s amazing that people don’t ask how brokers are compensated,” Kaminsky says. “When consumers buy a house they ask a lot of questions about their broker’s commission.”

But not when they plunk down as much money or sometimes more on stocks and bonds.

”I encourage every investor to ask if their broker is being compensated because the financial product is something the firm is trying to push,” he says. “It may be a suitable product but people need to know.”

What’s the bottom line?

Do your own research, Kaminksy says, a broker should only complement your strategy. Remember, if you rely on the research of others you only know what they know.

(Turn the page for more Wall Street Myths)

Learn more. Check out our entire conversation about broker compensation and find out why Gary thinks investors find the subject taboo. Watch the video now!

Click here to go to McGraw Hill's website and check out Kaminsky's book "Smarter Than The Street: Invest and Make Money In Any Market



Myth #1: Index Funds Are The Best Way To Invest

If you’re bullish you should put money into an index fund right?

Whether the fund tracks the S&P 500, the Dow, the Russell or some other benchmark, - if you’re bullish it’s a smart play.

Not so, says Kaminsky.

"When you’re indexed you’re fully invested and what the last decade has taught us is being fully invested 100% of the time is not the right strategy," says Kaminksy.

Instead he thinks it's much smarter to identify a handful of stocks that meet your pre-determined criteria (growth, dividend-payers, value names etc.) and make your moves accordingly.

And for those of you who argue you just want to park money in a fund and index funds are less expensive - Kaminsky doesn't buy it. "The idea of just putting money into an index fund because it has the lowest fee structure is a false strategy," he says.

Also he adds that some money managers are well worth those higher fees you pay, the trick is to do your research.


Check out our entire conversation about Index Funds and why Gary isn't a fan. Watch the video now!

Click here to go to McGraw Hill's website and check out Kaminsky's book "Smarter Than The Street: Invest and Make Money In Any Market



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Trader disclosure: On Oct. 27, 2010, the following stocks and commodities mentioned or intended to be mentioned on CNBC’s Fast Money were owned by the Fast Money traders; Scaramucci and SkyBridge Capital own (AAPL); Scaramucci and SkyBridge Capital own (BAC);Scaramucci and SkyBridge Capital own (XOM); Scaramucci and SkyBridge Capital own U.S. Dollars; Finerman owns (AAPL); Finerman & Finerman’s Firm owns (BAC); Finerman’s Firm owns (BKS); Finerman’s Firm owns (FLS); Finerman’s Firm owns (MSFT); Finerman’s Firm owns (POT) options; Finerman's firm is short (IJR); Finerman's firm is short (MDY); Finerman's firm is short (SPY); Finerman's firm is short (IWM); Finerman’s firm owns S&P 500 puts; Finerman’s firm owns Russell 2000 puts; Pete Najarian owns (AKAM) call spread; Pete Najarian owns (BAC); Pete Najarian owns (POT) call spread; Terranova owns (APA), (AAPL), (AXP), (C), (CRM), (FCX), (GOOG), (GS), (IBM), (ISRG), (JPM), (MCD), (MDT), (MMM), (NBR), (NKE), (ORCL), (PEP), (PCP), (TBT), (TLT), (UPL), (VRTS), (XBI)

For Joe Terranova
Terranova is chief market strategist of Virtus Investment Partners, LTD.
Virtus Investment Partners own more than 1% of (ABAX)
Virtus Investment Partners own more than 1% of (ALK)
Virtus Investment Partners own more than 1% of (AMKR)
Virtus Investment Partners own more than 1% of (CASS)
Virtus Investment Partners own more than 1% of (CSVI)
Virtus Investment Partners own more than 1% of (IGE)
Virtus Investment Partners own more than 1% of (LDR)
Virtus Investment Partners own more than 1% of (LPHI)
Virtus Investment Partners own more than 1% of (MGRC)
Virtus Investment Partners own more than 1% of (NRCI)
Virtus Investment Partners own more than 1% of (DBV)
Virtus Investment Partners own more than 1% of (XLB)
Virtus Investment Partners own more than 1% of (XLP)
Virtus Investment Partners own more than 1% of (XLY)
Virtus Investment Partners own more than 1% of (XLF)
Virtus Investment Partners own more than 1% of (XLI)
Virtus Investment Partners own more than 1% of (XLU)
Virtus Investment Partners own more than 1% of (SUBK)
Virtus Investment Partners own more than 1% of (WDFC)
Virtus Investment Partners own more than 1% of (YDNT)
Virtus Investment Partners own more than 1% of (DRYS)

For Brian Kelly
Accounts managed by Kanundrum Capital own (JEF)
Accounts managed by Kanundrum Capital own (GLD)
Accounts managed by Kanundrum Capital own (GDXJ)
Accounts managed by Kanundrum Capital own (SLV)
Accounts managed by Kanundrum Capital own (PPLT)
Accounts managed by Kanundrum Capital own (REE)
Accounts managed by Kanundrum Capital own (MCP)
Accounts managed by Kanundrum Capital own (POT)
Accounts managed by Kanundrum Capital own (ANDE)
Accounts managed by Kanundrum Capital own (JO)
Accounts managed by Kanundrum Capital own (JJG)
Accounts managed by Kanundrum Capital own (SGG)
Accounts managed by Kanundrum Capital own (NIB)
Accounts managed by Kanundrum Capital own (TIP)
Accounts managed by Kanundrum Capital own (XHB)
Accounts managed by Kanundrum Capital own (HD)
Accounts managed by Kanundrum Capital own (AWI)

For Jan Van Eck
Van Eck is a principle in firm that is sponsoring the Rare Earth/Strategic Metals ETF

For Brent Thill
A member of Thill’s team owns (MSFT)
(MSFT) within the past 12 months has been an investment banking client of UBS
(MSFT) within the past 12 months has been a non-investment banking securities-related client of UBS
(MSFT) within the past 12 months has been a non-securities services client of UBS
UBS has received compensation from (MSFT) within the past 12 months

For Mike Khouw
Cantor Fitzgerald makes a market in (CSTR)
Cantor Fitzgerald is long (CSTR) calendar spreads

For Jeff Saut
***No Disclosures***

Trader disclosure: On October 26th, 2010, the following stocks and commodities mentioned or intended to be mentioned on CNBC’s Fast Money were owned by the Fast Money traders; Seymour owns (AAPL), (BAC), (GOOG), (F), (HPQ), (NOK), (POT), (TM); Seygem Asset Management is short (MT); Adami owns (AGU), (BTU), (NUE), (C), (GS), (INTC), (MSFT); Adami’s wife works at Merck; Terranova owns (APA), (AAPL), (AXP), (C), (GOOG), (GS), (IBM), (ISRG), (MCD), (MDT), (MMM), (NKE), (ORCL), (OXY), (PCP), (PEP), (PFE), (UPL), (VRTS), (XBI)

For Brian Kelly
Accounts managed by Kanundrum Capital own (JEF)
Accounts managed by Kanundrum Capital own (GLD)
Accounts managed by Kanundrum Capital own (GDXJ)
Accounts managed by Kanundrum Capital own (SLV)
Accounts managed by Kanundrum Capital own (PPLT)
Accounts managed by Kanundrum Capital own (REE)
Accounts managed by Kanundrum Capital own (MCP)
Accounts managed by Kanundrum Capital own (POT)
Accounts managed by Kanundrum Capital own (ANDE)
Accounts managed by Kanundrum Capital own (JO)
Accounts managed by Kanundrum Capital own (JJG)
Accounts managed by Kanundrum Capital own (SGG)
Accounts managed by Kanundrum Capital own (NIB)
Accounts managed by Kanundrum Capital own (TIP)

For Patty Edwards
Edwards owns (AAPL) for clients
Edwards owns (AXP) for clients
Edwards owns (BRCM) for clients
Edwards owns (F) for clients
Edwards owns (GOOG) for clients
Edwards owns (GS) for clients
Edwards owns (HPQ) for clients
Edwards owns (JPM) for clients
Edwards owns (MA) for clients
Edwards owns (MS) for clients
Edwards owns (V) for clients


For Joe Terranova:
Terranova is chief market strategist of Virtus Investment Partners, LTD.
Virtus Investment Partners own more than 1% of (ABAX)
Virtus Investment Partners own more than 1% of (ALK)
Virtus Investment Partners own more than 1% of (AMKR)
Virtus Investment Partners own more than 1% of (CASS)
Virtus Investment Partners own more than 1% of (CSVI)
Virtus Investment Partners own more than 1% of (IGE)
Virtus Investment Partners own more than 1% of (LDR)
Virtus Investment Partners own more than 1% of (LPHI)
Virtus Investment Partners own more than 1% of (MGRC)
Virtus Investment Partners own more than 1% of (NRCI)
Virtus Investment Partners own more than 1% of (DBV)
Virtus Investment Partners own more than 1% of (XLB)
Virtus Investment Partners own more than 1% of (XLP)
Virtus Investment Partners own more than 1% of (XLY)
Virtus Investment Partners own more than 1% of (XLF)
Virtus Investment Partners own more than 1% of (XLI)
Virtus Investment Partners own more than 1% of (XLU)
Virtus Investment Partners own more than 1% of (SUBK)
Virtus Investment Partners own more than 1% of (WDFC)
Virtus Investment Partners own more than 1% of (YDNT)
Virtus Investment Partners own more than 1% of (DRYS)

For Colin Langan
(F) has been an investment banking client of UBS within the past 12 months
(F) has been a non-investment banking client of UBS within the past 12 months
(F) has been a non-securities client of UBS within the past 12 months
UBS has received compensation from (F) within the past 12 months

For Janet Bashear
Bernstein own more than 1% of the outstanding common stock of (H), (HOT)
(MAR) has been a client of Bernstein during the past 12 months
Bernstein has received compensation from (HOT) for investment banking services
In the next three (3) months, Bernstein or an affiliate expects to receive or intends to seek compensation for investment banking services from H / Hyatt Hotels Corp, HOT / Starwood Hotels & Resorts Worldwide Inc, MAR / Marriott International Inc.

For Scott Nations
***No Disclosures***

For Andrew Busch
***No Disclosures***

Trader disclosure: On Oct. 25, 2010, the following stocks and commodities mentioned or intended to be mentioned on CNBC’s Fast Money were owned by the Fast Money traders; Seymour owns (AAPL), (BAC), (F), (NOK); Finerman owns (AAPL); Finerman & Finerman’s Firm owns (BAC); Finerman owns (GOOG); Finerman & Finerman’s Firm owns (JPM); Finerman’s Firm owns (HPQ); Finerman’s Firm owns (MSFT); Finerman’s Firm owns (SKS); Finerman's firm is short (IJR); Finerman's firm is short (MDY); Finerman's firm is short (SPY); Finerman's firm is short (IWM); Finerman’s firm owns S&P 500 puts; Finerman’s firm owns Russell 2000 puts; Terranova owns (APA), (AAPL), (AXP), (C), (GOOG), (GS), (IBM), (ISRG), (MCD), (MDT), (MMM), (NKE), (ORCL), (OXY), (PEP), (PFE), (PCP), (UPL), (VRTS), (XBI); Weiss owns (QCOM), (AKAM), (VZ), (TXN), (COP), (NIHD)

For Gary Kaminsky
***No Disclosures***


For Joe Terranova
Terranova is chief market strategist of Virtus Investment Partners, LTD.
Virtus Investment Partners own more than 1% of (ABAX)
Virtus Investment Partners own more than 1% of (ALK)
Virtus Investment Partners own more than 1% of (AMKR)
Virtus Investment Partners own more than 1% of (CASS)
Virtus Investment Partners own more than 1% of (CSVI)
Virtus Investment Partners own more than 1% of (IGE)
Virtus Investment Partners own more than 1% of (LDR)
Virtus Investment Partners own more than 1% of (LPHI)
Virtus Investment Partners own more than 1% of (MGRC)
Virtus Investment Partners own more than 1% of (NRCI)
Virtus Investment Partners own more than 1% of (DBV)
Virtus Investment Partners own more than 1% of (XLB)
Virtus Investment Partners own more than 1% of (XLP)
Virtus Investment Partners own more than 1% of (XLY)
Virtus Investment Partners own more than 1% of (XLF)
Virtus Investment Partners own more than 1% of (XLI)
Virtus Investment Partners own more than 1% of (XLU)
Virtus Investment Partners own more than 1% of (SUBK)
Virtus Investment Partners own more than 1% of (WDFC)
Virtus Investment Partners own more than 1% of (YDNT)
Virtus Investment Partners own more than 1% of (DRYS)

For Peter Schiff
***No Disclosures***

For Chris Raymond
Robert W. Baird & Co. makes a market in (AMGN)
Robert W. Baird & Co. intend to seek investment banking compensation from (AMGN) within the next 3 months

For David Sackler
Moab Capital Partners Owns (RGS), (RGR)


For Bill O'Donnell
***No Disclosures***

For Mike Khouw
Cantor Fitzgerald makes a market in (EXPE)

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