Why We Publish Neutrals
Good ideas are hard to find. While we don’t set out to publish neutral reports, they are sometimes a natural result of our process. As we delve deeper into researching a company, our understanding sharpens, and our questions become more nuanced. This often leads to uncovering critical information in the later stages that challenge our initial assumptions or preconceptions, reshaping our overall conclusions. A comprehensive view of a company only emerges after a thorough analysis has been completed.
One of the most common mistakes analysts make is becoming too attached to a name simply because they have invested significant time, spoken to management, or conducted detailed interviews with former employees and industry contacts. This intense exposure has a way of convincing analysts that a name is worth owning even when the full evidence doesn’t quite support that view. This tendency might be related to the endowment effect described in behavioral economics, where people tend to overvalue what they happen to be in possession of.
We strive never to fall into the trap of believing that the time spent on a name justifies a buy rating. Letting go of work without actionable conclusions is a necessary skill in our world, and one that many find difficult because people inherently want their efforts to mean something. We prefer to err on the side of issuing a neutral rating over a premature buy rating. It’s worth noting that some of our neutrals may eventually become buys when the time is right, and having already done extensive work on a name allows us to act swiftly when an opportunity emerges.