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I have access to some deep financial analysis from a large bank, on equity. Since I know nothing in this field, but I'd still like to invest my money, I was about to follow their different advices on stock picking.

But I am wondering if we can trust, on average, the analysts recommendations, or if they are as wrong as anyone else? Is there any study that would compare their predictions with realized returns?

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    I'd bet they are as wrong as anyone. If pros had any skill, in aggregate, managed funds would beat the averages. Over the years they don't. I understand you are asking about research reports, but the result is similar, again, in my opinion. I hope a member can offer a reference to a study or two that support my gut feeling.
    – JTP - Apologise to Monica ♦
    Commented Feb 25, 2017 at 23:48
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    Predicting return on investment is hard, but equity research may be viable for other purposes. In particular, consensus RoI expectations are captured reasonably well in current share prices, but risk and volatility aren't so obviously priced. Equity research reports may form an alternative to analyzing options pricing. Another secondary use is to ensure a proper spread of risks within your portfolio, e,g. to avoid excessive exposure to Brexit risks.
    – MSalters
    Commented Mar 29, 2017 at 18:00
  • Related: Why should I trust investment banks' ratings?
    – Flux
    Commented Nov 9, 2020 at 0:31

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If by "can we trust the analyst recommendations" you mean "are they right 100% of the time" the answer is absolutely no. Analysts are human and make mistakes, some more than others. There are many stories of "superstar managers" that make killings for several straight years, then have a few bad years and lose it all back.

However, don't take "you can't trust them" to mean that they are nefarious in some way. While there may be some that recommend stocks for selfish purposes, I suspect that the vast majority are just going off what information they have, and can't predict market behavior or future performance with perfect accuracy.

Look at many analysts' recommendations. Do your own analysis. If you're still not comfortable buying individual stocks, then don't buy them. Buy index funds if you are satisfied with market returns, or other mutual funds if you want to invest in specific sectors. Or at the very least make sure you are sufficiently diversified so that you don't lose your entire investment by one bad decision. One rule of thumb is to not have more than 10% of your entire portfolio in any one company.

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They aren't necessarily trustworthy. Many institutions claim to have a "Chinese Wall" between their investment banking arms and analysis arms. In practice, these walls have sometimes turned out to be entirely imaginary. That is, analysis is published with an eye to what is good for their investment banking business.

One of the most notorious cases of this was Henry Blodget, an analyst with Merrill Lynch during the dot-com bubble. Blodget became a star analyst after he correctly predicted Amazon would hit $400/share within a year. However some of his later public analysis dramatically conflicted with his private comments. Famously when he started covering GoTo.com, rating it as "neutral to buy", he was asked "What's so interesting about Goto except banking fees????" Blodget replied, "nothin". Eventually he was permanently banned from the securities industry.

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    They're required by law to have a "Chinese Wall."
    – quid
    Commented Feb 27, 2017 at 1:42
  • @quid, sure, but the Blodget case reveals, they can have one without it being effective.
    – Charles E. Grant
    Commented Feb 27, 2017 at 1:44
  • Sure, but they don't "claim to have" one, they're required to have one. Whether or not it's 100% effective in every instance is a different story. You're citing one case, but there are literally thousands of investment institutions.
    – quid
    Commented Feb 27, 2017 at 1:45
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    @quid The question is not tagged "united-states". Different countries have different laws.
    – Mike Scott
    Commented Mar 28, 2017 at 13:59
  • @MikeScott the case cited is from a US court, the bank involved in the case is a US institution and there is no international consideration given to this answer. I didn't post an answer to the question, I posted a comment to this answer.
    – quid
    Commented Mar 28, 2017 at 16:10

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