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Sore about stocks? Watch who you blame

If you're still bitter about your shrinking stock portfolio, former equity analyst Philip Rueppel offers a guide to the perplexed.

It seems not a day goes by without some newspaper, Web site or financial expert bemoaning the inability of stock analysts to predict the future of the market.

Some critics even go so far as to suggest that analysts were to blame for this year's spectacular decline in the Nasdaq and other stock indices.

As a former equity analyst, I find this amusing--especially as it is no longer directed at me--given how so few analysts were given credit when the stocks were climbing.

This is not intended to be a column in defense of all analysts. Just as in any profession, there is good and bad--and certainly some of my former colleagues deserve the criticism they've received.

But being an analyst is an extremely challenging job, with multiple conflicting constituencies and the never-ending pressure to predict upcoming events and "be right." And the good ones who want to make you money do exist. If you know how to use analysts, they can be an invaluable source of information.

The following points are suggestions on how best to use an equity research analyst as part of your investment decision process:

• Watch for long-term, not trading-oriented calls
An analyst disseminates new information or opinions in a variety of ways, but the most common is the "morning call"--when he or she is on a global conference call with the firm's sales force, before the market opens. This is where the breaking news is analyzed, and important changes in an analyst's rating or estimates are announced and the sales force then begins calling clients with the news.

First of all, realize that as an individual investor you won't be able to receive much of this information fast enough to make a quick trade--and written reports might not be accessible to you for hours (or even days). You won't be the first to see the news: Every analyst who is good is time-constrained and, as such, prioritizes who he or she will call back. And the No.1 priority is always the institutional investor, or the large mutual-fund companies.

But often an analyst disseminates his or her view regarding the long-term outlook for an industry or particular companies in writing--coupled with an investment thesis on why you should or should not own the stock. These usually have a long shelf-life and therefore can be extremely valuable to an individual investor.

• You need to be a client if you want better access
The free Web-based services such as Yahoo or CBS MarketWatch track analyst moves, but they receive information later than do analysts' clients. If you really want to take advantage of in-depth research, the only way to get is to become a client of a full-service firm.

• Learn how to "read" an analyst
The primary benefit that you, as an individual, can derive from an equity analyst is information about the company, pure and simple. And learning how to understand an analyst is paramount.

• Watch for changes in opinion, not absolute ratings
A downgrade from a "strong buy" to a "buy" indicates that a company outlook is getting worse and you should sell the stock--not "buy" it.

Conversely, an upgrade from a "sell" to a "hold" is a sign of bullishness.

• Watch for analysts who lead trends, not follow them
If their tenure is long, the likelihood that they have made their clients money over time is high.

• Use an equity analyst as just one part of your investment strategy
As an analyst, I was continually reminded of two facts--I was only as good as my last call, and that if I was consistently right, I wouldn't need to work.

Even the best analysts are often dead wrong. That's why it's important to use multiple sources for information if you want to manage your own money. Put together a portfolio of stocks, and invest mainly in companies where you think you have an "edge"--such as more knowledge or a better understanding of the industry.

And finally,

• Take responsibility for your own picks
That one says it all.