Do Your Own Research

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.

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One thought on “Do Your Own Research”

  1. It is virtually impossible to predict a certain stocks path, but much easier for me to try to predict a sector. And I have time on my side. Most of my investments are loooong, say 3-5 years so that is a built in advantage that smoothes out the spikes.

    The biggest problem that most of these analysts (and many money managers) get into is trying to predict the short term movements of WAY too many stocks. I think you could come up with some good predictions if you followed a few companies (say 20) but you REALLY need to dive DEEP into what these companies look like on a bunch of metrics, along with knowing what their future plans look like.

    I had a manager of some of my midcap funds that had a universe of SEVENTY FIVE stocks he was invested in. I called the manager and asked him how on earth he could seriously track that many companies and he didn’t have any good answers so I canned him. The new guy has twenty five or so in his universe, give or take.

    Like

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