Follow Analysts at Your Own Financial Risk

One of our major themes around here is that investors need to learn to think for themselves.  That may be obvious, but unfortunately, it needs to be repeated.

In the past, we have noted the dangers of imitating the trades of Billionaires, listening to the news media, aping the pundits, or trading based on the calls of analysts.

Now, that doesn’t mean that there aren’t some analysts who have insight, or are value added. We have found that its worth paying attention to those analysts who have shown a good tracking record of forecasting earnings for a particular stock AND are outliers to the rest of the analysts forecast on that stock. But overall, the entire analyst community does not facilitate individual investors.

Which leads to this article from Bloomberg:

"Investors who followed the advice of analysts who say when to buy and sell shares of brokerage firms and banks lost 17 percent in the past year, twice the decline of the Standard & Poor’s 500 Index.

Buying shares on the advice of Merrill Lynch & Co.’s Guy Moszkowski, the top-ranked brokerage analyst in Institutional Investor’s annual survey, cost investors 17 percent, according to data compiled by Bloomberg. Deutsche Bank AG analyst Michael Mayo’s counsel to purchase New York-based Lehman Brothers Holdings Inc. lost 59 percent. Citigroup Inc.’s Prashant Bhatia still rates Merrill “buy” after its 56 percent retreat from a January 2007 record.

Of the 38 analysts tracked by Bloomberg who follow stocks in the Amex Securities Broker/Dealer Index, 31 produced losses for investors. Investors who bought brokerages on "buy” recommendations, sold when they switched to “hold” and speculated prices would decline when analysts said "sell,” lost 17 percent in the last year through June 3, compared with the S&P 500’s 8.5 percent drop.

Analysts Lose 17% for Investors in Brokerage, Bank Stock Picks
By Eric Martin and Josh Fineman
Bloomberg, June 6  2008

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What's been said:

Discussions found on the web:
  1. Max Thrax commented on Jun 6

    George Costanza was right.

  2. BG commented on Jun 6

    You know I can accept the shortcomings of an analyst who works hard and makes mistakes in his analysis; but I am forever amazed how some can powder their nose and come on TV and lie like the bunch of sorry bastards they are.

    How the fuck do they sleep at night? I am insulted to think that they think they are so smart and we are so fucking stupid that we can’t get in out of the rain!! I hate a lying bastard. I don’t care what the party affiliation is or who the hell they are.

    A person who lies and deceives the less informed will be especially punished in hell for their dastardly deeds here on Earth. In short (in case you did not fully understand my disposition) I hate the SOBs. They go a VERY LONG WAY toward explaining what is wrong with this Country!

  3. tranchefoot commented on Jun 6

    Far be it from me to stand up for analysts, but are the goalposts in the right place? How would’ve the analysts have done, I wonder, versus a buy-and-hold the brokerages strategy? Isn’t that the better comparison?

  4. bk commented on Jun 6

    Well, there’s always Meredith. She seems to be having a grand old time telling it like it is. Has anyone charted her numbers?

  5. larster commented on Jun 6

    Does Meridith mindlessly repeat herself or think things through?

  6. stuart commented on Jun 6

    Can’t argue with that. Most analysts, particularly IBs, treat the public’s money as if its a crop to be cultivated and harvested.

  7. Jay commented on Jun 6

    Oh my God, you mean Wall Street is just a big bucket shop?

    Doesn’t anyone see an opportunity to take, for instance, the most compromised analyst of the lot, and buying or selling contrariwise? If, as everyone has suspected, those at the levers of power give the analysts their marching orders and fleece the suckers, we could all be making 17% returns instead of losing them.

  8. B.B. commented on Jun 7

    I agree, everyone makes mistakes. But Dick Bove call last month of “buy financials, they are a generational buy”. I am sorry I know lots of us posted then he is crazy, now time will verify that. Glad I am not Dick. :)

  9. Andrew commented on Jun 7

    I’m with the wrong goal posts here.

    Looking at XLF, it’s down nearly 14%, so yeah the analysts did worse, but it’s not as dramatic as the article implies.

  10. Jim Haygood commented on Jun 7

    There’s a fundamental, irresolvable conflict of interest between underwriting and analysis. How can an analyst at an investment bank say that an underwriting client’s earnings prospects suck? It just don’t pay.

    Underwriting/broking and analysis should reside under separate roofs. The viability of independent analysis houses shows that the business model works.

    “Chinese walls” are a preposterous lie. No matter how talented and brilliant they may be, I have never paid the slightest attention to analysts at investment banks. They are not being straight with their clients, and they can’t be, by virtue of where their bread is buttered. I mean, is a vendor of hair plugs going to give you objective advice about your pattern baldness? Don’t be a sucker.

  11. Chris Noyes commented on Jun 7

    This year, Mr. Adam Monk, the Sun-Times’ stock-picking monkey who has beaten the market for four years running, is into erectile dysfunction. He’s also into syringes, women’s clothes and fresh fruit and vegetables. But don’t get the wrong idea. These are the businesses of Mr. Monk’s latest stock picks, made last week exclusively for the Sun-Times. And that means only one thing: It’s time again for the Sun-Times Monkey Manager stock-picking contest, celebrating the wisdom of the everyday investor and primate.,CST-FIN-curious14.article

    These are the businesses of Mr. Monk’s latest stock picks, made last week exclusively for the Sun-Times. And that means only one thing: It’s time again for the Sun-Times Monkey Manager stock-picking contest, celebrating the wisdom of the everyday investor and primate.

  12. Marc commented on Jun 7

    Are you suggesting that analysts can be wrong??? (shhhh, don’t let that get out or you’ll ruin my favorite contrary indicator…analyst opinions)


  13. SteveC commented on Jun 7

    I use analyst calls in a contrarian manner, and so should you. IMO these guys are nothing but paid shills, trying to manipulate market action to their firms’ and clients benefits. If they’re so interested in passing out free advice, they shouldn’t object to doing it on Friday after the close like S&P.

  14. m3 commented on Jun 7

    Well, there’s always Meredith. She seems to be having a grand old time telling it like it is. Has anyone charted her numbers?

    Posted by: bk | Jun 6, 2008 8:00:12 PM
    she lost 16% AND had a buy on lehman, according to the bloomberg article.

    apparently, she sucks too.

    bove did better than her, ironically.

  15. Richard commented on Jun 7

    the financials will be a good buy, but not right now. housing still sucks, oil is at ugly levels, wages are stagnant and the US debt fueled consumption run of the last 20 years seems to be at teetering levels. where’s the upside? anyone with half a brain can see that this shake out isn’t nearly done yet.

  16. Jay Weinstein commented on Jun 8

    I have been a pro in this business for 21 long long years.

    Wall Street analysts write excellent reports chock full of useful data and information about companies and industries.

    Then they come to the exact wrong conclusion on whether to buy or sell the stock.

    My advice: 1) Take the hard copy of a report. 2) Rip off the first page and shred it. 3) Rip off the last page and shred it. 4) Read the middle. 5) Make up your own mind!

  17. cinefoz commented on Jun 8

    Looks like I picked a good time to become an independently minded over educated smart ass.

    Investing is gammbling, pure and simple. Wall Street wants to emulate the house and take a piece of all the action. The only way to beat the house is to either figure out the game they’re playing on everyone else and grab a piece when the game first starts (such as oil), or wait for the retard instinct to take them over and buy low when the inevitable explosion occurs.

    The latter is my preferred method. As long as the Fed is making money free and easy for Wall Street, I think this will be a golden age for my technique. Moral Hazard plus Stupid is just another way for some to say cha ching.

    You have money, they want it, and just about all will suggest gold is free for the taking if you only give them all your savings. The research providers and the friendly stranger on financial tv are just a part of the pitch. From what I have read, success, on their part, is getting the bonus before the scheme blows up. Then, do the same thing somewhere else with a new scheme while your former employer and investors pick up the pieces.

    Maybe after the 2008 elections, enough new laws will be passed so that Investment goes back to meaning something other than paper flows and asset inflation. Maybe money will go towards factories, real jobs, and actual betterments for all. Then again, I’m probably just a pollyanna on this topic. 8 years of supply side thieves might be only the beginning.

  18. mind commented on Jun 8

    I’m up 1% for the year – 80% in cash, trading 20% in commodities with tight stops. Completely sat out the bear market rally. Best I can do for a know nothing.

  19. VennData commented on Jun 8

    Of course all this talk about ‘Chinese walls,’ ‘Inherent Conflicts of Interest,’ ‘People coming into the pick up the pieces after they leave’ does NOT apply to the Bush White House and the BLS. That would be pure sophistry.

  20. A Random Person commented on Jun 9

    I am in the middle of reading “A Random Walk Down Wall Street” at the moment and this pretty much backs up the what the book says.

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