We have all heard the stories…An analyst gives a company a “buy” rating in exchange for their child being admitted into a prestigious private school where the company CEO sits on the board. Or a heavy dose of “buy” ratings are given to companies by investment houses that also get a lot of investment banking and advisory fees. This is commonplace and a lot more commonplace than many on Wall Street would like to admit.
But here is the most OBVIOUS reason why an analyst’s opinion shouldn’t matter. They don’t know sh*t and even if they did know sh*t, it’s too difficult to put a “sell” rating on something that everyone loves and is going up with momentum and equally as difficult to put a “buy” rating on something that has been beaten down because of investor discomfort, for whatever reason.
The most difficult part of investing is finding value where others see garbage. It’s the way you are going to make above average returns. You won’t make above average returns, over the long haul, by investing in what everyone wants and avoiding what everyone else doesn’t. You have to look at companies and real estate in different ways. I preach this non-stop and I won’t stop preaching it. It is the HARDEST thing to do in investing.
I am 100% honest when I say I don’t even look at analyst opinions at all. I used to. When I lacked confidence in investing. Fifteen years ago. In addition, evidence has shown how wrong analysts are on a routine basis. And it’s not just randomness…it’s consistently true. Why? Because it’s hard to keep your job when you say a company should be sold and it keeps going up, or vice versa.
Have you ever noticed what % of companies are even rated with a “sell” rating? It’s disturbingly low.
Just think for yourself. If you can’t look at a company and analyze it’s three major financials, then don’t buy individual stocks. Buy index funds that invest in sectors or major indexes. Learn to understand whole sectors and indexes. You can make a lot of money that way too.
But don’t think for one second that Billy Bob at Wells Fargo who is 23 years old and graduated from Wharton is suddenly an amazing analyst. He is given models to follow and that’s that. Learn how to read financials…you don’t need an MBA to do that. In fact, I don’t know many MBAs who even read financials (and by “don’t know many” i mean “i know zero”)