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Wall Street Is Still Cheating You

Stimulus, schmimulus. Wall Street can't be fixed the way it is, President Obama. The system needs a total overhaul.

It's not just the bankers who are to blame. Sure, hundreds of them should be in jail -- they cost us billions by taking on more leverage than they could afford and by betting on sure losers like credit default swaps on U.S. government bonds.

It was hubristic. Moronic. And directly linked to the economic conditions that argue for hundreds of billions in stimulus. Thanks for that, guys. Thanks a lot.

But here's the thing: Even if we jail the bankers, we're left with the analysts. Harvard-trained number crunchers who treat stocks as if they were part of some sort of flavor-of-the-month club. They'll cheat you out of a fortune if you let them.

How to give away a fortune
You see, analysts abide by a specific vernacular that begins and ends in 12-month price targets. That's by design; big brokers serve big clients and big clients -- institutional investors such as mutual and hedge fund managers -- move money into and out of stocks as fast as a hyperactive 2-year-old on a sugar high. These traders need to know the flavor of the month, the day, the hour, the minute.

Some even profit from the process. Ken Heebner of the CGM Focus (CGMFX) fund swaps out the contents of his entire portfolio at least three times annually yet he's produced a full decade of 16.3% average annual returns, crushing the S&P.

So why not trade like Heebner does? Two reasons:

  1. There's only one Ken Heebner.
  2. You aren't him.

Actually, there's also a third reason. Heebner almost never gets his ideas from the Street. "I'm not waiting for Morgan Stanley to tell me there's something wrong in China," Heebner told Fortune in a May 2008 interview. "By then it's too late."

Don't downgrade your returns
Heebner, in other words, is proof that following the Street's upgrades and downgrades isn't necessary.

But it's more than not necessary. It'll cost you a fortune. Green Mountain Coffee Roasters (Nasdaq: GMCR  ) , one of the market's 10 best stocks of the past decade, has been downgraded to something less than "buy" six times over the course of that decade.

The first downgrade, by Adams Harkness on Oct. 25, 2002, was from "buy" to "market perform." But of course it didn't just track the market -- Green Mountain was built to outperform. Between that recommendation and now, the stock has been an eight-bagger -- versus a loss for the S&P 500.

But let's not pick on a single analyst. Or cherry-pick dates, for that matter. There's no reason to. The bottom line is this: The data shows that upgrades and downgrades don't matter nearly as much as the headlines suggest.

Every one of these winners was downgraded to something less than "buy" at least once during its five-year run:


5-Year Return

# of Downgrades (Since Feb. 2004)

# of Upgrades

(Since Feb. 2004)

True Religion (Nasdaq: TRLG  )




Monsanto (NYSE: MON  )




Vertex Pharmaceuticals (Nasdaq: VRTX  )




GameStop (NYSE: GME  )




Sources: Capital IQ, Yahoo! Finance.

Following the Street's gyrations might have earned you profits in these stocks, but it might just have cost you fantastic returns. With the S&P down more than 25% over the same period, you'd almost certainly have done better buying after the first downgrade and holding for as long as the underlying business supported your thesis for investing.

Stimulate your portfolio instead
If this process sounds familiar, it should. Fool co-founder David Gardner sustained a decade of 20% returns in the real-money Rule Breaker portfolio by zigging when the Street and major financial press screamed zag. His contrarian investing style echoes Heebner, who told Fortune that he's most comfortable as an investor "when everyone else thinks I'm nuts."

The beauty of this style of investing is that you'll rarely be short of ideas; upgrades and downgrades occur daily. found 20 downgrades on Thursday alone, including Deere & Co. (NYSE: DE  ) and ExxonMobil (NYSE: XOM  ) . This doesn't mean you should blindly do the opposite of what analysts tell you. But when the Street screams, "sell," that's an opportunity to investigate. You may find a hidden gem waiting to be polished.

My favorite idea right now is a current Motley Fool Rule Breakers pick that, last month, was downgraded three times. Crazy. Not only is this business the undisputed leader in an emerging sector of the health-care market, but the stock has doubled since David first picked it for the April 2005 issue. Yet analysts say now is the time to sell -- just as this well-heeled cash gusher is trading within 25% of its 52-week low. Color me thrilled.

Intrigued? Click here to try Rule Breakers free for 30 days. You'll get the name of that stock, as well as our team's five top growth stocks for new money now. contributor and Rule Breakers analyst Tim Beyers didn't own shares in any of the companies mentioned in this article at the time of publication. GameStop is a Motley Fool Stock Advisor selection. Vertex is a Rule Breakers recommendation. CGM Focus is a Champion Funds pick. The Motley Fool's disclosure policy caught a rival disclosure policy cheating at cards last year. That policy hasn't been heard from since.

Read/Post Comments (11) | Recommend This Article (63)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On February 23, 2009, at 11:06 AM, prginww wrote:

    Here I am reading an article written by a cheater telling me all about other cheaters over there... This cheater is trying to peddle a year subscription to Rule Breakers.. Aha..

    What Wall Street needs to be fixed is to forbid short sellers from "borrowing" long positions for shorts without asking holders for permissioin and a cut in the profit on the shorts...

    sure, from time to time, I think the management really sucks and I can use a short seller's help ... I would be more than happy to lend my shares to the short seller for a cut in profit on the short side.. Then I can buy more shares on the lower price with the profit from the short and increase my shares..

    The very idea of a short seller pocketing the entire profit by shorting my very own shares is nothing short of a pickpocketing low lifer..

  • Report this Comment On February 23, 2009, at 11:09 AM, prginww wrote:

    I hear somewhere that I can prevent short sellers from borrowing my shares by instructing my broker somehow... I dont know exactly how...

    This is what you should be writing about...

    The only way I know how is to take delviery of my stock certificates physically and tucking them in a safe box somewhere.. This way, my broker cannot touch my shares because it is in my name not in street name...

    Also, I can sell my stock certificates anywhere... But no broker would do it for me without first opening my account there... This means I have to open accounts all over...

    Wall Street is a hell of a set up!!

  • Report this Comment On February 23, 2009, at 11:38 AM, prginww wrote:


  • Report this Comment On February 23, 2009, at 11:42 AM, prginww wrote:

    cusip numbers is not numbers of certificates.. it is a number of a corporation for identification purposes... Stock certificates comes with its own individual numbers like you see on your dollar bills... No number is alike anywhere.. If you ask your broker what your certificate number is, chances is that he will give you CUSIP numbers which is not meaningful.. It is the number of stock certificate that you are presuming that your broker is holding for you but actually dont... It is bundled up with others and put in State Street accounts or so called commingling... Comming stocks is illegal but it is somehow legal if held in street name.. which is all the same.. just legalese for crooks at Wall Street..

  • Report this Comment On February 23, 2009, at 11:43 AM, prginww wrote:

    I am wrtiing this because Wall Street is still stubborn with holding on Big Oil Stocks that is long overdue for a crash!! Lets get over with it now!!

  • Report this Comment On February 23, 2009, at 11:50 AM, prginww wrote:

    There is so much more than just Wall Street cheating on you.. It is also investors cheating on investors... especially the priviliged investors with assistance of brokers are swindling from other investors . Wall Street had been planning on slowly declining stock prices so that they can swindle from investors much longer for more profits on the downfall.. We need to hurry and crash the markets and be over with it now.. To make it short and sweet... So that everyone see nowhere to go but back up again... Only Big OIl stocks stand in the way toward completion of our market crash... Actually , other stocks can actually start climbing already at the same time Big Oil is crashing.. But it is not happening.. It looks like we need to crash the other stocks even further in order to pay the Big OIl investors who is selling Big Oil stocks... it looks like there is still not enough suckers buying into the bear rallies to bail out Big Oil shareholders before big oil stocks crash... It is really impossible to describe the stock market events behind the scenes... It is far easier to lie about it... than to tell the truths behind it..

  • Report this Comment On February 23, 2009, at 11:53 AM, prginww wrote:

    If anyone of you feel I am getting somewhere , but are still clueless aboutit... I have a very simple solution for you... Just start carpooling... It is so simple to destroy demand on oil and will force big oil shareholders to flee.. Then the market crash will be completed. Just do it! Or continue to suffer economic ills.. far longer.. It is all up to you... Just solve problems like you trap rats ... Just kill rats ! at once!!

  • Report this Comment On February 23, 2009, at 11:59 AM, prginww wrote:

    even with OPEC cutting back producition and Americans drviing somwhat less.. I am still not satisified with the results.. America has no choice but to cut back consumption even further even on top of that... Keep at it inidefinitely... This will really send a strong message to wall Street and will bring them down to knees.. America will rebound and using even less fossil fuels... Wall Street is cheating by saying that falling oil prices is a sign of lingering economic ills.. Quite on the contrary, our economy can rebound by now and keeping cutting back on oil consumption as we m ove toward other sources of energy ... People are mistaken for believing that we have no choice but to wait for fossiil fuel prices to go up before it is economical to move away from them.. No, wrong... now is the best time to start moving away ... from big Oil & Gas! with the money saved now from low prices... Invest them now or we will spend more again on higher oil prices and will be unable to afford to m ove away from oil...

  • Report this Comment On February 23, 2009, at 12:00 PM, prginww wrote:

    I have no shame about blabbering about anything becausae it is better than what all of you are doing now .. still nothing but just sitting on fences watching people being miserable...

  • Report this Comment On February 23, 2009, at 2:57 PM, prginww wrote:

    Look at California budget voting and those few Republicians jumping ship to pass the budget after several months of fighting.. What a bitter end?? Same is still going on Wall Street.. as political investors are fighting or repressing other investors by cheating or refusing to invest whiule the stock market is falling... This is destructive behavior... Something got to be done about it... It is ilike trying to drag a stubborn donkey to drink water.. You cant grab investors to come back with money to invest.. But you cannot allow investors to continue to think that they can use money as a political weapon either... They can lie all they want., but we got to make directions and forge ahead with or without them.. I cannot care anymore about what they think we should do or shouldnt do ... They are still doing nothing themselves just simply because they are in other political camp... So what!! Ignore them.. Go ahead and shrink Big Oil and they will scream |!!!

  • Report this Comment On February 28, 2009, at 2:11 AM, prginww wrote:

    Based on the past weeks, the stock market has been a place for the guys to rally & show their frustration towards "Robin Hood".So, no matter what stocks u thinking of..forget it....

    Ultimately, do you know who's the real fools? Ha..Ha..

    Real fools are the one who plunge their own economy to zero together with the $787 billion stimulus plan. Why?

    They'll be slapping their own face caused it opens up the opportunities & competition to the "third" world to buy all the "CHEAP" US Companies..Arabi, China, Kuwait & maybe Iran, Iraq etc...

    Based on the recent news, US companies are selling off thier valuable assets (technologies, bank etc) in order to pull through the crisis & who are they selling to? Make a guess....AIG went to China, Singapore etc selling off their stakes..Another is selling their US technologies or commodities caused they're ridden by billions of dollars debt....At the end of the crisis, what will the US companies who once holds the supremacy in technologies, banking etc become? "Zero" is my answer...

    Who the losers? The real losers are the next generation facing the real US....

    There's a old chinese teaching:

    "To break one chopstick is easy..

    To break a bunch of chopstick, is difficult"

    To the real fools, WATCH OUT!!! Ha..Ha...

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