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The Motley Fool

Ask the Fool

Rent or Buy?

Q: Is it reasonable to buy a house if I plan to move within a few years? — E.W., Flagstaff, Arizona

A: It’s a risky move for several reasons. For starters, home values don’t always go up over short periods. Your house might fall in value, and when you want to sell, you could end up owing more on your mortgage than the home is worth. Then there are the closing costs when you buy, and the agent commissions you’ll likely pay when you sell. Those can total many thousands of dollars.

Meanwhile, mortgages typically require you to pay mostly interest in your first years of repayments, so you won’t have built up a lot of equity. You’ll also be paying for insurance, property taxes, maintenance and repairs while you own the home.

Renting is often the smart thing to do. Sure, you don’t get a mortgage interest tax deduction and you don’t build equity. But if your rent is much less than your mortgage payment would be, you can invest the difference and build a little nest egg.

Do your own math via a rent-or-buy calculator at Fool.com/calculators.

Q: How can a company’s earnings grow more rapidly than its revenue? Shouldn’t they grow at a similar rate? — K.H., online

A: Revenue (also known as “sales”) is at the top of a company’s income statement, while earnings (or “net income”) is at the bottom; a lot happens in between.

If a company’s revenue holds steady but its costs (such as raw materials, salaries, advertising or research) rise, its earnings will shrink. In contrast, if a company’s earnings are growing faster than its revenue, that suggests it’s becoming more efficient and its profit margin is increasing.

Fool’s School

Look Beyond ‘Buy’

Rating

If you learn that a Wall Street analyst has slapped a “buy” rating on a stock, don’t immediately call your broker. Ratings from analysts are much less meaningful than you might think.

Consider that as of a few months ago, out of more than 11,000 ratings on the (500 or so) stocks in the S&P 500 index from many different analysts, only 6% were “sell” ratings. More than half — nearly 54% — were “buy” ratings. If you’re starting to suspect that analysts tend to be overly rosy in their ratings, you’re right.

One reason is conflict of interest. Wall Street analysts often work for investment banks, which have many corporate clients and want to sign up even more. Clients and potential clients will prefer banks that have given them positive ratings.

Professor Ohad Kadan of Washington University in St. Louis has offered another reason: “Analysts tend to herd. There’s no big penalty if you’re wrong, because everyone else is wrong. You’ve got cover. You’re not going to lose your job. If you take a different opinion, either you get a big prize if you’re right, or you lose your job. An analyst needs to be really courageous to say something different from most other analysts.”

Fortunately, all is not lost — analyst ratings can still be helpful. That’s because they’re often accompanied by research reports, which offer far more insight than a one- or two-word rating. Many brokerages these days allow access to analyst reports for many stocks; look into what your brokerage provides, then read the reports on any companies of interest. There might still be some bias in them, but they should also contain useful data and opinions. Don’t be surprised to see conflicting opinions — there’s rarely 100% consensus about any stock.

EDITOR’S NOTE: The Motley Fool is an investment column created by brothers David and Tom Gardner and distributed by Andrews McMeel Syndication.

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