One More Reason to Take Financial Analysts With a Grain of Salt

Experts help us make the best decisions — it's why we pay them the big bucks. That's the theory, anyway. But beyond trusting experts for their analysis, we have to ask questions about whose advice we follow. That hot tip you just saw may only be good news for a totally different set of investors.

We already know that stock market analysts can skew our perception of where we should put our money, sometimes to our detriment. Now, new research from the University at Buffalo has found a clear pattern of institutions profiting more from analysts' advice than individual investors, at a point when investors should be making a killing.

The initial public offering is a great opportunity to get in on the ground floor with a really promising stock. But the University at Buffalo team looked at more than 1,000 IPOs over a 10-year period, in order to study how a particular regulation was affecting what analysts would promise. The regulation removed equity analysts from the IPO process because they could report dishonestly (or at least not entirely accurately) in order to create more business with banks. The research found that once equity analysts weight in on IPOs again, individual investors tended to lose about 3 percent of their investment, thanks to overly optimistic predictions.

Thanks to boosted share trading and pricing, however, investment banks, analysts, and firms continued to do just fine. This isn't a reason to avoid investing altogether. However, if you want to stay on top of the game, it's best to know how to interpret data and analysis for yourself as well.