On July 8, Morgan Stanley downgraded Google. Their reasons?

Given Google’s aggressive hiring plans, rising compensation costs and heavy advertising spending on Chrome and other products, the company’s EBITDA margins will decline this year and next year.

Morgan Stanley said Google is on pace to add 7,000 new staffers this year, well above the previous estimate of 4,000 new hires.

Investors, presumably including many of Morgan Stanley’s own wealth management clients, promptly sold off GOOG, causing its stock to tumble 3% that day.

On July 14, Google announced profit and sales results that shattered Wall Street’s dim view. The stock rallied 12% after the earnings announcement. Just imagine the chagrin on the faces of those investors who listened to Morgan Stanley.

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What’s the lesson here?

Don’t listen to Wall Street analysts! Why?

1. They tend to cover only glamour stocks.
2. They put too much focus on near term earnings.
3. Their earning projections are like a monkey throwing darts

I read a story once that Warren Buffett received a research package from a famed Wall Street analyst. He kindly sent back a note: “Next time, please just send me the stamp.”

That’s about the right attitude towards Wall Street analysts.

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