Why You Should Ignore "BUY" Recommendation By Investment Banks

First of all, all investment banks do not really care about their customer making profit or not, instead they just care about generate more revenue and posting more profit. So they will make a lot of "buy" recommendation for their customer. They never responsible for their call and when their recommendation did not work, they will come out with more facts to encourage you to believe their word and make you believe now you can buy it at low price. However they will never tell you how low is low. They seldom make "sell" recommendation since sell mean end of a transaction for a counter.

The reason they recommend a stock is very ridiculous. The method they use to determine a cheap stock is outdated. Most of the time they will used unsuitable accounting ratio to convince their customer such as Price/Earning Ratio and Price to book ratio. All of these ratio is useless and i will tell you why:

The single most commonly used ratio is P/E ratio. Investment banks will make a "buy" call on a stock when its PE ratio is below 10 or so. PE ratio is useless because it used previous earning level versus current price level which is completely misleading. Current and future earning level might not be as good as before. Just look at all the financials in NYSE earlier this year. They all trade at below 10x PE and look at them now.

Besides, PE ratio determine the outlook of future performance of a company. If a company trading at less than 5x PE, investor think its future is really cloudy. Forget about hidden treasure and greatest story never told, there are no good stock with low PE ratio nowadays. If a company is good, its price is low and its PE is low, i'm sure Mr Buffett, Mr Soros and all the big gun have spotted it.

Price to Book ratio is also useless as the book value, as it is conventionally computed, does not include intangible assets such as intellectual property and brands. Thus the book-value or net tangible assets may not be an appropriate measure for many firms.

Target price is another tool by investment banks to generate revenue. Target price is absolutely useless as nobody in this world can target the price of a stock 12 months from now. Target price real intention is to make investor greedy and buy that stock. I've seen target price for some company set as high as 200% from current price. If a stock can go that high in the next 12 months, why its price traded at current low level? and if that company secure any big project or goes for restructuring, insider of that company should have already know and start buying so its price won't trade at its current price level.

Big Investment Banks such as Goldman Sachs and Morgan Stanley recommendation may have a short term impact but in the medium-long term, company fundamental is what counts. Eg. Goldman Sachs was traded at around 210 January this year and every investment bank recommended a buy for this company. I've seen target price of 250-485 by year end. It's PE is low, It's PB is low, biggest investment bank in the world.......Everything looks great. Well, now it's trade at 62.49 (plunge more than 65%).

So do not believe any recommendation by any investment banks especially a "buy" call with ridiculous high target price. Evaluate and study a company yourself and look at it past performance and future activity. Compare it to other company in the same sector. There are no free lunch in this world so you have to work hard to succeed.

Good luck!