Stock Ratings Not Better Than Hot Tips

A hot stock tip can be a bum steer as easily as it can be a big winner, but most investors would say that a solid “investment ranking” should never lead them astray.

Except few people understand what goes into rankings and ratings of investments, and yet they rely on those measures as if they were guaranteed recommendations.

Reported by Chuck Jaffe, there’s a fascinating case involving investment researcher Morningstar Inc. and the perception of the company’s powerful ratings system. While the case involves a hedge fund — and Morningstar’s hedge-fund research database is completely different from its traditional fund research — the underlying concepts should get investors everywhere to thinking about the information they rely on to make decisions.

Last week, Morningstar lost a bid to dismiss a lawsuit that alleges that the firm played a part in promoting a Ponzi scheme by giving a fraudulent hedge fund a five-star rating late in 2009.

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