On holding stocks

I never understood one thing about investment analyst reports – the “hold” recommendation. This is “between” the “buy” and “sell” recommendations (which are self-explanatory), and it tells an investor to hold on to the stock if he already owns it, but not to buy if he doesn’t.

The problem with this is that the difference between buying and holding a stock is small, especially given the current efficiency of equity markets and consequent low transaction costs. The only difference between holding and not holding a stock is that in the latter case, you spend the transaction cost of buying the stock. That is all. Based on this, it is intriguing that the two have remained distinct analyst recommendations for ages now.

I can think of two possible explanations:

 

  1. One can assume that the investor is fully invested (not holding any cash), and so buying a stock means that he has to sell something else in order to allocate capital to this stock. So in other words, the cost of getting the stock into you portfolio is higher than the trading cost itself – it comes in at the cost of another stock. With these increased transaction costs, it’s possible that it’s not worth buying the stock .

  2. Analysts hate to admit it (look at the precision with which they dictate price targets), but there is a wide band of error around their estimates of what price the stock will trade at at some point of time in the future. So the buys are those that are much more likely to be trading up than the holds. So by saying “hold” you are saying “yeah this stock might go up, so I’m not so confident about it so don’t bother buying if you don’t have it already”.

But then there is this school of thought that says that analyst’s buy/hold/sell recommendations do not matter at all, and the value they add is in providing the investor access to the company’s management. Matt Levine has written plenty about this, and you should read his latest stuff on this.

Useless LinkedIn

I’m not a big fan of LinkedIn. I mean, I use it, and fairly regularly at that (check it at least once a day), and I think conceptually it’s quite useful. However, in practice, I think there are a number of sticking points about the service, which makes it quite useless.

For starters its apps (iPad and Android) are quite lousy, and offer nowhere close to the kind of experience that the web interface offers. Things are extremely unintuitive (down to the tabbing order – you compose message, hit tab and enter, and you don’t send the message. It takes you to the profile of the person you’re messaging instead) on the website. Sometimes the apps show notifications even after you’ve checked them on the web, and so on.

In other words it’s an extremely poorly engineered product, but which is surviving (and thriving) thanks to network effects!

I might have commented on this in the past but there is this thing on endorsements. This was something that coincided with the time when LinkedIn went public (if I’m not wrong), and you could endorse people for their “skills” on LinkedIn. For a while I played along with the game. But then I completely lost it when a distant uncle who I’m sure has never traded derivatives endorsed me for “derivatives”. I quickly deleted my skills.

Then there are the LinkedIn recommendations, which has inherent selection bias and hence adds no value. And then you have the “say goncrats” feature, where LinkedIn prompts you to “say congrats” on people changing jobs or hitting job anniversaries. I’ve found this mildly useful (dropping a note when someone switches jobs is a good way to stay in touch), but there are the bugs in terms ofjob downgrades and people getting fired.

And of late, there has been serious spam in terms of people’s status updates. I don’t know when it became popular to post silly puzzles on professional networking sites, yet I find several of them popping up on my timeline every day, and the number of people who have shared each is not funny. Then you have these cartoons (Dilbert and the copycats), and “guru quotes” that appear in the form of images that further spam your timelines! The only way I can think of these being useful is that they act as a negative indicator when you’re checking out the profile of someone you are looking to hire or do business with!

To summarise, LinkedIn seems to be an extremely badly engineered product on several counts, but thanks to network effects (so many people are already on it that entry barriers for competitors are really high) the site still manages to do well! I wonder what it will take to disrupt it. Facebook for business is not the answer for sure – the potential havoc caused by a breach in chinese walls there will scare people enough to not sign up.

What do you think? Here is their stock price movement for reference: