Why should I trust investment banks' ratings?

Question

To me it does not make any sense to trust investment banks' (e.g. Goldman Sachs) so-called "price targets", I don't see how they would profit from actually helping retail investors.

But it is trivial how they could profit at the expense of the poor and gullible retail investors, by manipulating them

Why would they help investors when it is against their interest?

see:

A note from Goldman Sachs auto industry analyst Patrick Archambault Tuesday put a price on Tesla stock of $120 in a best case scenario. In the worst case, Archambault put a value of less than half that on the stock, at $58. Goldman Sachs has a price target of $84 and a neutral rating on Tesla.

Read more: http://blogs.marketwatch.com/thetell/2013/07/16/tesla-shares-hit-on-goldman-note/?mod=MW_story_latest_news

I'm currently long on tesla so todays events hurt me badly so far(down 15%), but I still don't trust GS's price target of $85. I tend to believe those guys just want themselves a cheap buy price a few days before Q2 earnings release (22-jul-2013)

If there's indeed no reason to trust GS, i.e. those are just guides then the question is:

Why do investors seem to care? hence today down 15%

Again it makes no sense to me to publicly speculate earnings less then 7 days before the actual earnings release. Not to mention that the price target is quite vague $58-$120

Answer 1

In theory, GS has a Chinese Wall between the department which issued the advice and any departments which may profit from such advice. This would take away some of your distrust, except for the fact that GS did violate these rules in the past (see the answer from user10665).

You're wondering about the timing, prior to the release of figures by Tesla itself. This is quite normal. Predicting the past is not that useful ;)

The price range indeed is wide, but that too is a meaningful opinion. It says that GS thinks Tesla's share price strongly depends on factors which are hard to predict. In comparison, Coca Cola's targets will be in a much smaller range because its costs and sales are very stable.

Answer 2

If there's indeed no reason to trust GS, i.e. those are just guides then the question is:

Why do investors seem to care?

Because there's a reason to trust. You're just reading the bottom line - the target price range. More involved investors read the whole report, including the description of the current situation, the premises for the analysis, the expectations on the firm's performance and what these expectations are based on, the analysis of how the various scenarios might affect the valuation, and the evaluation of chances of these scenarios to occur.

You don't have to trust everything and expect it to be 100% correct, analysts are not prophets. But you do have an option of reading their reports and critically analyzing their conclusions.

What you suspect GS of doing ("I tend to believe those guys just want themselves a cheap buy price a few days before Q2 earnings release") is a criminal offence.

Answer 3

Investment banks will put out various reports and collect revenues from that along with their banking activity. I don't read them or care to read them myself. If banks can make money from something, they will likely do it, especially if it is legal.

To take the Tesla stock question for a moment:

Aren't you ruling out that yesterday was the day that Tesla was included in the Nasdaq 100 and thus there may be some people today exiting because they tried to cash in on the index funds having to buy the stock and bid it up in a sense? Or as @littleadv points out there could be those tracking the stocks not in the index that would have been forced to sell for another idea here.

The Goldman note is a possible explanation but there could well be more factors in play here such as automated trading systems that seek to take advantage of what could be perceived as arbitrage opportunities.

There can be quick judgments made on things which may or may not be true in the end. After all, who knows exactly what is causing the sell-off. Is it a bunch of stop orders being triggered? Is it people actually putting in sell order manually? Is it something else? There are lots of questions here where I'm not sure how well one can assign responsibility here.