I have recently received a fruitful comment from Elli known as Toronto realtor asking me a really nice question “Does that mean that the stock analysts are wrong most of the time in their assumption?”.
This comment added after reading my previously posted article “Required approach to macro and micro economic factors”. I thought it would be nice if I post an article on the subject, how a value investor treat analyst predictions.In the world of investing, getting analyst reports and tips are so easy. If you open the business page of any daily, any business magazine or watching business channels, you can have lots of analyst reports time to time and everywhere.As a value investor, how you want to treat analyst reports and what should you need to do after receiving such tempting hot tips or analysis on a company? We will start with an example. Once an investor asked to a famous investor, I am sorry but, I forgot his name, to tell him some stocks that would go up in the near future. The reply from the legend investor was very funny but it was sarcastic. He relied to the person “If I had the name of stocks that appreciating huge in the near term, I would have been sitting in the shore of my own island now”.This answer should raise a question in an investor’s mind on the reliability of analyst predictions and foolishness of believing tips and reports. Except god, once if you believe on him, no one can predict the future of a stock or stock market. But, one can easily predict the future of a company if he analyzes the trusted reports properly. This is also for the long term focus but, not for short term.
In this context, believing an analyst report and acting as per that will certainly cost an investor. As I said with my previous article, most of the analysts preparing their reports based on the macro economic factors but, not based on the micro economic factors. Macro economic factors related to the changes coming or on going with the economy. Of course, this will affect the stock market and price of the stocks for some extend but, the truth is, stock market has ability to recover from such macro economic related events. We have past experience like stock market crashes due to economic recessions but the recovery of the stock market later. In other words, the factors with macros economics doesn’t have capacity to long last. An example, a general election, a forthcoming budget, economic recession, all related to macro economics.
But the other, the micro economics, directly related to the health of a company and the demand-supply. Legend investors always trusted on micro economics than previously said macro economics. Warren Buffett is the best example for that. He never trusted on any macro economic factors but, never failed to utilize the possible chances of buying great stocks from the volatilities happening by these macro economic factors.
Analysts, most of the time, just predicting based on some facts on their mind, most of the time it will be a macro factor, and flush their ideas to the investors world. A true value investor never gives ear to his words. In my experience, analyst reports always intended for stock traders or short term investors, who interested to invest for short term to get profit from possible changes in the near future, due to the report’s nature of seeing any forth coming or on going temporary issues.
I will ask a question to the readers in this last line. Suppose, once after you find a valuable treasure, will you try to grab the same by yourself or will you enter to the nearest hill and start proclaiming the same to the public? Of course, you will hide the treasure and grab the same as your own as soon as possible. You will certainly keep such things as top secrets. This is happening in the case of analyst reports too. If a person knows the extra ordinary profit generating future of a stock, he never going to share that secret to anyone but, try to invest his maximum possible money to that stock.
If an analyst says some stocks are going to zoom in the near future, ask them how much of the same stock you personally have in your portfolio. Most of the time the answer will be “Zero”. There you can find the foolishness of believing and acting as per any analyst reports. An analyst has just doing his job and someone paying for him. He not only not going to invest on any stocks that he recommending to the investors but also, try to add a small line at the end of his report saying “The analyst who personally not holding any stocks on the above recommended company”
Now it’s your turn. Believe or not, you are the only one going to get the final result.
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