If we had a motto here at “Trust funds for kids” I am sure that part of it would be “Do your own research” and another element would be “Don’t believe the so-called experts”. This was put on amazing display recently in a Bloomberg article (really, if you just look to one place for financial information and analysis, it probably should be Bloomberg) titled “Equity Analysts Prove Hazardous to Returns As Contrarian Stocks Rise 165%“. From the article:
Following the advice of equity analysts may be perilous for your profits. Companies in the Standard & Poor’s 500 Index that analysts loved the most rose 73 percent on average since the benchmark for U.S. equity started to recover in March 2009, while those with the fewest “buy” recommendations gained 165 percent, according to data compiled by Bloomberg.
The equity analysts are “professionals” that rate a stocks’ prospects using a variety of mechanisms, including modeling their financial results into the future to determine if the stock is over or under valued. In the past the analysts had blatant conflicts of interests (i.e. they would recommend that customers purchase a stock in print while they were privately telling other customers via email that it was a piece of sh*t or while selling their own or company’s stake) but this has mostly been fixed; now they are just terrible in their collective recommendations.
Analysts use a scale from “sell” to “hold” to “buy”. If the analysts are generally bullish on a stock and most of them recommend purchasing that stock to investors than this stock is favored. Analysts usually review and recommend stocks that are already moving up.
In a recent post I described the massive run-up in equity values in the US market from the nadir in 2009; if the analysts were going to prove their mettle an excellent time would have been to provide advice when markets were at their (in hindsight) low point.
Instead, from that critical moment, the Bloomberg article proves that the analysts were almost completely WRONG from that point forward. If you BOUGHT the stocks the analysts told you to SELL, then you did well, and if you followed their recommendations and loaded up on those stocks you actually did WORSE than the benchmark.
Remember this as you pay for advice or read through the detailed analyst reports. From the nadir, when the analysts’ advice would have been most valuable, they have been virtually, completely, wrong. It is as if someone predicted the Buffalo Bills to win the Super Bowl at the start of the 2010 season; they could not have been wrong-er.