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S&P Ratings Fraud or Not, Investors Should Have Been Skeptical

Yesterday, a judge ruled the government’s $5 billion fraud lawsuit against Standard & Poor’s can go forward. The basis of the case centers around charges that the firm misled investors with inflated credit ratings on mortgage-related instruments.

Many folks are eager to see S&P hanged, convinced that the ratings agency inflated grades for collateralized debt obligations to rake in more cash from issuers of the investments.

Me, I’m a bit more pessimistic. I think S&P probably wasn’t smart enough to realize what it was doing — and that duped investors were a victim of S&P’s incompetence more so than malice.

How many times have we seen this movie? The “smart money” on Wall Street or the top-notch researcher at some hifalutin organization gets it wrong, and regular investors are stuck holding the bag.

There’s uber Apple (AAPL) bull Brian White, with his $1,111 target for Apple — telling CNBC in late 2012 that Apple stock could get to $1,600 in three years! This guy is either delusional, a publicity whore or both.

Earlier, in May 2012, momentum darling Green Mountain Coffee Roaster (GMCR) dropped from $50 to $30 overnight — and only after the fact did Piper Jaffray downgrade the stock from “overweight” to “neutral” and lowered its price target to $40. The day before, it had a target of $65 on the stock and apparently thought you should be happily buying more shares.

And back in 2011, Barclays Capital started Netflix (NFLX) at “overweight” with a $315 price target and Oppenheimer raised its rating to “outperform” with a target of $360 per share. NFLX finished the year at $70 and didn’t even get back to $200 until just a few weeks ago.

I could go on, but these are just some stupid analyst calls I can recall off the top of my head.

The lesson here, then, is that investors have nobody to blame but themselves if they throw their money around solely based on “expert” ratings of any security — whether it be a kinky collection of mortgages or your favorite large-cap stock.

If you think a stock is low-risk just because of some rating, if you think a fund is a sure thing because Morningstar gives it five stars, or if you believe that chasing after the “smart money” is somehow a path to outperformance … well, you get what you deserve.

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Jeff Reeves is the editor of, and the author of “The Frugal Investor’s Guide to Finding Great Stocks.” Write him at or follow him on Twitter via@JeffReevesIP. As of this writing, Jeff Reeves did not own a position in any of the investments named here.

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