Investors have a love-hate relationship with stock ratings. On one hand, they are loved because they succinctly convey how an analyst feels about a stock. On the other hand, they are hated because theyꦰ can often be a manipulative sales tool.

This article ൲will look at the good, theꦚ bad, and the ugly sides of stock ratings.

The Good: Sound Bites Wanted

Today’s media, and investors, demand information in sound bites because our collective attention span is so short. Buy, sell, and hold ratings are effective because they quickly convey the 𓆉bottom line to investors.

But the main reason why ratings are good is that they are the result of the reasoned and objective analysis of experienced professionals. It takes a lot of time and effort to analyze a company and to develop and maintain an 澳洲幸运5官方开奖结果体彩网:earnings forecast. And, while different analysts may arrive at different conclusions, their ratings are efficient in summarizing their efforts. However, a rating is one person’s perspective, and it will not apply to every investor.

The Bad: One Size Does Not Fit All

While each rating succinctly conveys a recommendation, this rating is really a point on an investment spectrum. There are many other factors to consider, including the investor’s 澳洲幸运5官方开奖结果体彩网:risk tolerance, 澳洲幸运5官方开奖结果体彩网:time horizon, and 澳洲幸运5官方开奖结果体彩网:objectives.

A stock might carry a certain risk, whiꦅch may not fit the risk tolerance of the investor. Thus, a stock might be viewed differently by di⭕fferent investors.

The Stock Rating Spectrum

Ratings and perspectives change, too, and not necessarily at the same time or i𒉰n the same direction. Now, let’s examine how things change by examining the history of AT&T Inc. () shares.

First, let’s examine how perspectives at one point in time matter. In the beginning (say, in the 1930s), AT&T was considered a 澳洲幸运5官方开奖结果体彩网:widow-and-orphan stock, meaning it was a suitable investment for very 澳洲幸运5官方开奖结果体彩网:risk-averse investors—the company was perceived as having little business risk because it had a product everybody needed (it was a monopoly), and it paid a dividend (income that was needed by the “widows to feed the orphans”). Consequently, AT&T stock was perceived as a safe investment, even if the risk of the overall market changed (due to 澳洲幸运5官方开奖结果体彩网:depressions, 澳洲幸运5官方开奖结果体彩网:recessions, or war).

At the same time, a more risk-tolerant investor would have viewed AT&T as a hold or sell because, compared to other more aggressive investments, it did not offer enough potential return. The more risk-tolerant investor wants rapid 澳洲幸运5官方开奖结果体彩网:capital growth, not dividend income—risk-tolerant investors feel that the potential additional return justifies the added risk (of losi🤪ng capital).

An older investor may agree that the riskier investment may yield a better return, but they do not want to make the aggressive investmen🃏t (more risk-averse) because, as an older investor, they cannot afford the potential loss of capital.

Now, let’s look at how time changes everything. A company’s risk profile (澳洲幸运5官方开奖结果体彩网:specific risk) changes over time as the result of internal changes (e.g., management turnover, changing product lines, etc.), external changes (e.g., 澳洲幸运5官方开奖结果体彩网:market risk caused by increased competition), or both.

AT&T’s specific risk changed while 澳洲幸运5官方开奖结果体彩网:its breakup limited its product line to long-distance services—and while competition increased and regulations changed. And its specific risk changed even more dramatically during the 澳洲幸运5官方开奖结果体彩网:dot-com boom in the 1990s: It became a tech stock and acquired a cable company. AT&T was no longer your father’s phone company, nor was it a widows-and-orphans stock. In fact, at this point, the tables turned. The conservative investor who would have bought AT&T in the 1940s probably considered it a sell in the late 1990s. And the more risk-tolerant investor who would not have bought AT&T in the 1940s mo🐷st likely rated the stock a buy in the 1990s.

It is also important to understand how individual risk preferences change over time and how this change is reflected in their 澳洲幸运5官方开奖结果体彩网:portfolios. As investors age, their risk tolerance changes. Young investors (in their 20s) can invest in riskier stocks because they have more time to make up for any losses in their portfolio and still have many years of future employment (and because the young tend to be more adventurous). This is called the 澳洲幸运5官方开奖结果体彩网:life cycle theory of investing. It also explains why the older investor, despite agreeing 🅷that the riskier investment may offer a better return, cannot afford ☂to risk their savings.

In 1989, for example, people in their mid-30s invested in startups like AOL because these companies were the “ne𝄹w” new thing. And if the bets failed, these investors still had many (about 30) years of employment ahead of them to generate income from salary and other investments. Now, almost 20 years later, those same investors cannot afford to place the same “bets” they placed when they were younger. They ar☂e nearer to the end of their working years (10 years from retirement) and thus have less time to make up for any bad investments.

The Ugly: A Substitute for Thinking

While the dilemma surrounding 澳洲幸运5官方开奖结果体彩网:Wall Street ratings has been around since the first trade under the buttonwood tree, things have turned ugly with the revelation that some ratings do not reflect the true feelings of analysts. Investors are always shocked to find such illicit happenings could be occurring on Wall Street. But ratings, like stock prices, can be manipulated by unscrupulous people, and have been for a long time. The only difference is thಞat this time, it happened to us.

But just because a few analysts have been dishonest does not mean that all analysts are. Their assumptions may turn out to be wrong, but this does not meanꦑ that they did not do their best to provide investors with thorough and independent💝 analysis.

Investors must remember two things. First, most analysts do their best to find good investments, so ratings are, for the most part, useful. Second, legitimate ratings are valuable pieces of information that investors shouꦚld consider, but they should not be the only tool in the investment decision-making process.

The Bottom Line

A rating is one person’s view based upon their perꦓspective, risk tolerance, and current view o✱f the market. This perspective may not be the same as yours.

The bottom line is that ratings are valuable pieces of information for investors,🍒 but they must be used with care and in combination with other information and analysis in order to make good investment decisions.