Over at Zerohedge, Tyler Durden has an amusing piece on why it’s probably not advisable to follow the public pronouncements of Goldman Sachs. Recently, Goldman raised its rating of many European bank stocks from “underweight” to “neutral,” which enabled it, in a cynical reading, to dump off its holdings onto unassuming, and perhaps naively optimistic, clients. While Goldman is telling its clients to buy these stocks, its recommendation is likely self-serving. Durden notes:
Our advice, as always, do what Goldman’s flow desk is doing as it begins to unload inventory of bank stocks.
A bit later he continues:
Sure enough: European banks (as per BEBANKS) are now down 3.84% today alone, or -1.5% from the Thursday close…
This raises an issue that’s not, in my callow understanding of things, emphasized enough. And that is to what extent should we, as lay consumers of information provided by experts, trust that those providing the information aren’t doing so to further some ulterior motive? Surely it’s not in the interest of Goldman Sachs to offer – basically for free on, say, CNBC or whatever – information it otherwise spends loads of resources acquiring. And while it’s not inconceivable that it would offer accurate information, which could both help the public and strengthen its positions; it’s just as conceivable that it would offer bogus information in order to benefit only itself. There are many other possibilities too: it could offer genuine advice that is good for a while but, due to some event (perhaps unpredictable, perhaps not) turns out to be a mistake if followed in the long-term.
If a bunch of people follow advice Goldman offers (keeping in mind of course that Goldman generally takes positions before giving advice and so stands to make a much higher profit) for a while everyone might be happy. The stocks rise and everyone pats themselves on the back for following sound advice at the proper time. The problem is, because Goldman is able to trade massive quantities at massive speeds, the moment it cashes in on its trade, the stock in question starts plummeting and your average investor has no time to react. With the resources it has at its disposal, Goldman can take its position first and unload it first – so it makes the most profit. Other investors enter later and leave later, which often nets a loss. The best part is, Goldman was actually being sincere. Its advice was (in a way) good advice, at least at the time it gave it. Again, Goldman is under no obligation to make public everything it knows – and so it offers certain (fairly accurate) information at certain (fairly un-terrible) times.
Having said this, there is a naturally correcting phenomenon at work which discourages perpetual insincerity. If Goldman screws over its clients or the general public every time it opens its mouth, then no one will trust its utterances anymore. So while it might be in Goldman’s interest to protect its information mightily and even intentionally mislead its clients and the public, it’s also in its interest to periodically let some good advice out, if only to maintain a reasonably acceptable level of trust between itself and others.
But like playing poker against Phil Ivy, the best advice for those in the other category is simply not to play.