Should you buy and sell shares based on broker ratings?

As a retail investor, it can at times be overwhelming to research individual shares. How do you know which company to buy shares in? When do you buy it and when do you sell it?

That’s why in my opinion, index funds such as Vanguard US Total Market Shares Index ETF  (ASX: VTS) (listed as VUSTOTAL/ETF on Google Finance) and Vanguard FTSE Asia Ex Japan Shares Index ETF  (ASX: VAE) (listed as VGDFTSEASA/ETF on Google Finance) make great alternatives for investors that don’t have the time or the interest to research individual shares.

For those of us that are willing to go a step further and find the next best performer such as Altium Limited (ASX: ALU) and Afterpay Touch Group Ltd  (ASX: APT), should we be basing our investment decisions on broker ratings?

After all, most top brokers are “experts” who spend their entire day researching shares in specific industries, right?

My personal view is that broker notes typically have well thought out analyses and are a good way of learning the market’s view on certain companies or just reading an alternative view (there is often value in doing that).

However, I think it’s important for investors to maintain an independent mindset and not blindly follow broker ratings for the following reasons:

  1. Time periods differ. A company that’s rated “sell” might be a sell in the short term because its industry is cyclical. That doesn’t necessarily mean that the company won’t do well in the long term.
  2. Opinions differ. People who have access to the same information can come to two different conclusions.
  3. Price targets are just estimates. Most brokers place price targets on the companies they cover but these are usually just estimates over the short term which can be affected by all sorts of random events. One of my favourite features about the Motley Fool’s premium services is that each service has a scorecard which allows you to see the track record of every buy recommendation. Over the long term, I think that’s a much better indicator of the quality of advice within the services.

Foolish Takeaway

Overall, I think whilst some insightful information can be gleaned from reading analyst reports, it’s important for investors to maintain an independent mindset and in the words of Warren Buffett, “stay within your circle of competence”.

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Motley Fool contributor Kevin Gandiya owns shares of AFTERPAY T FPO and VANGUARD FTSE ASIA EX JAPAN SHARES INDEX ETF.

You can find Kevin on Twitter @KevinGandiya.

The Motley Fool Australia owns shares of AFTERPAY T FPO and Altium. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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