For instance, on CNN Money if you go under forecasts for any semi-large or larger company you will find the number of buy/hold/sell ratings. Is there any way to find out if over a long historical period stocks with a buy rating (from most analysts) outperform stocks with a sell rating?

For example, if I made a portfolio that exclusively consisted of stock with many buy ratings, would this have outperfomed the S&P 500 historically?

Basically I am looking for an empirical answer but I can't find any on Google.

  • Basically I am looking for an empirical answer but I can't find any on Google There is your answer. If there aren't any results means it ain't happened yet. – DumbCoder Jan 9 at 8:47
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    @DumbCoder If enough people upvote the question, we might get an answer that isn't publically available yet. – user3586940 Jan 9 at 9:02
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    In an efficient market, the stock price already factors in expected future growth. If an analyst issues a "buy" rating, that means they are predicting higher growth than the rest of the market is predicting, i.e. the stock is worth more than it's currently being traded at. But once that rating becomes public, the public can also factor in this advice and the advantage from following this advice is erased (if such an advantage ever existed). So you can only get above-average results if the market is inefficient, or if your investment goals differ significantly from other market participants. – amon Jan 9 at 9:49
  • @amon Very true, but doesn't give an empirical answer. I do hypothesize that an index comprised of buy rated stocks is more efficient than a general market. I just want to be able to prove it. Many investors lack the knowledge of a professional analyst, hence the hypothesized inefficiency. – user3586940 Jan 9 at 21:06
  • @amon I believe this is not exactly what OP is asking. Your premise is that the market somehow uses the analysts ‘special knowledge’ and it gets baked into the stock price. What I believe OP is really asking is if the analysts somehow outperform the market - and if there exists some empirical evidence of that. – ssn Jan 10 at 8:48

Sorry I don't have citations, but I worked for Fidelity for many years and I can assure you that the average fund at Fidelity underperformed the market. Only the superstar funds tended to outperform the market, and the constellation of superstars was constantly changing.

Also, don't trust "index funds". Index funds do not actually track the market because when bankruptcies occur the fund suffers, but the index does not. For example, let's say IBM drops below $1 per share and gets delisted. Then what happens is that IBM is IMMEDIATELY removed from the index, however, everybody who holds IBM usually suffers the $1 to $0 drop because they freeze trading in a stock when those things happen. So, basically what this means is that whenever a company fails, the equity holders get screwed, but that drop to zero never shows up in the index. So, the index is an artificial construct that does not represent investment reality.

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  • Upvoted the answer, but I don't think this answers the question. Fund managers don't necessarily choose the stocks that are highly rated by analysts. – user3586940 Jan 10 at 8:01

For example, if I made a portfolio that exclusively consisted of stock with many buy ratings, would this have outperfomed the S&P 500 historically?

Lets say this is a great idea. You decide that is your path forward, and you start to assemble the portfolio. At first it is easy, just pick a bunch of stocks that have a large number of buy ratings. Then time sets in. Every time new quarterly reports come in, opinions change. Highly rated stocks become neutral or shift to sell. Stocks that used to be sell are getting more buy ratings.

You now have a active fund. New opinions come in every day, so the list of stocks you should be buying or selling change. Of course you are only buying after market experts have said buy, so you missed out on the initial rise. You are also selling after the stock is viewed as struggling, so you missed out on avoiding the initial decrease.

Long term active funds that chase the popular trends do worse than the S&P 500.

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  • Certain active funds in certain industries have outperformed the market over long periods of time. Take PSR in real estate for instance. – user3586940 Jan 10 at 18:14
  • This is not an empirical answer – Daniel Jan 10 at 19:34

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