If you studied the prior post on the case study, then you know to do your own work in evaluating a company, ask simple questions, walk away if you are confused or uncertain, and do not blindly follow “expert” opinions.
If you have ever watched CNBC’s market experts (watching for extended periods of time could cause serious brain impairment), do you notice that never do you hear them say, “I don’t have the faintest clue where the economy or market is going.” Few admit that they know they don’t know (Socrates). This should leave you thinking, “If the people that know, don’t say, then the people who don’t know have the floor to themselves.”
To reinforce the above principles click below on the Marketwatch video discussing analysts biases in the history of Enron’s failure.
If you still doubt the wisdom of not following analysts’ recommendations, you should go here: http://www.turtletrader.com/analysts-bias.html
Of course, security analysts who work for underwriters are biased to give buy recommendations, but many investors do not realize that analysts have no clue how to value companies. Instead, these analysts futively attempt to guess next quarter’s earnings which may be meaningless to estimating the intrinsic value of a company.
Another problem with analyst “research” is that too often Wall Street analysts filter down information from the management of the company that they follow. In order to maintain a friendly relationship and stay “tuned in” as a respected source on a company, it is difficult for the analyst to reach negative conclusions that contradict management’s optimism. An industry analyst can ill afford to lose contact with the management of a significant company within an industry the analyst follows.
If you think this writer is a hardened cynic, I beg to differ. Wall Street has always worked this way. Go here: http://www.amazon.com/Where-Are-Customers-Yachts-Investment/dp/0471770892/ref=sr_1_1?ie=UTF8&qid=1317224465&sr=8-1
The book is a humourous take on the lunacy of Wall Street in the 1920s and a great read. Same as it ever was http://www.youtube.com/watch?v=-io-kZKl_BI (Click on minute 1.40)
To reiterate, if you do your own work then you won’t blindly be making the mistakes of another person, and–most importantly–you can correct your own mistakes. Minimizing errors is more helpful to long-term investment returns than picking winners. Long-term performance is highly correlated with error avoidance.
A valuable source of lessons on how to analyze companies and read annual reports can be found below–sorry, copy and paste into your url:
Also, think of the time you save by not watching CNBC, reading security analysts’ reports and, instead, study Value-Line tear sheets and company annual reports to find investments (We will cover in a future post). What you do not do is as important as what you do.
Feedback, criticism and complaints are always welcome.
I want to take a moment to thank the one person reading this blog. Thanks Mom!