Tuesday, March 30, 1999

Buy, Sell, Hold, Huh?

by Shannon Womack

I was watching CNBC the other day (which, as far as I can tell, is a network dedicated to having CEOs and market experts attempt to sum up the United States economy in three minutes or less), and they were speaking to the chief financial advisor of some major investing firm. He was discussing one of my favorite stocks, America Online (NYSE: AOL), with the host. And he said something like this:

"America Online is poised to become one of the leading retailers of Internet commerce and is currently one of the few Internet companies making a profit. We currently have a hold recommendation on AOL. We think the stock is somewhat overvalued right now, but we are optimistic about their future prospects."

That got me thinking. He did not recommend that I buy AOL right now, because it's really expensive. He also did not recommend that I sell AOL right now, because it has great prospects. So, like so many other financial institutions, he recommended that I hold AOL.

What is the purpose of recommending to hold a stock? Essentially, a hold recommendation says: "Those of you who own this stock should wait, for greater returns are ahead. But those of you who don't, look elsewhere, because you have missed out on this one." The hold recommendation is like a yellow traffic signal; some people hit the brakes, and some people accelerate. It sends a mixed message.

If a company has good fundamentals and outstanding future potential the way AOL does, financial advisors should always recommend buying the stock, regardless of the price. And if that financial picture turns sour, they should recommend selling the stock. Holding should be an individual investor decision, not a financial recommendation.

Of course, one assumes that the buy-sell-hold recommendations mean anything at all. If Foolishness has taught me anything, it's that I should not be making my decisions based on financial advisor recommendations.

[For more on buying and holding great companies (like AOL), head over to our real-money Rule Breakers Portfolio.]

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