Should You Trust a Stock Analyst’s Opinion?

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”)

Why Do Fundamentals Matter?

With a booming market, everyone forgets fundamentals.  Someone, the other day, told me that “You don’t need profits to pay bills” when talking about Amazon.  If that’s not a sign of euphoria and not understanding how wealth is built, I don’t know what is.

The reason fundamentals matter in the long run is that wealth is built on cash flow, profit, and overall returns.  Yes, a company can profit but if you’re paying too much for that profit, it’s going to hurt you in the long run because there will be a time when your investment is out of style and everyone will revert back to to fundamentals.  It happens in every bear market.  People flee the exciting fast growing stocks that aren’t doing as well financially to go to companies that generate cash flow and build their balance sheet.

Not only in stocks.  Real estate as well.  The last 15 years have been a boom in real estate, even after a big bust.  Real estate is driven by income.  I randomly pulled 28 markets that I could think of in this country and looked at their median income growth and their real estate value growth since 1990.  The direct correlation from one city to another wasn’t exactly there, but when you looked at all 28 cities as a whole, they were very much in line.  Median income growth was 2.32% per year on average and the average real estate growth was 2.6% per year.  Not exact, but close.  During the recent 15 years of booms in major markets (that were also in my 28 city analysis), we were seeing 15-20% growth per year even though income wasn’t growing NEARLY as much.  Then we saw a massive drop in prices and another rebound, so everyone assumes that the past problems were past problems.  We shall see.

The bottom line is that everything reverts to the mean.  We are never exactly fairly valued. We are either overvalued or undervalued in every investment asset.  You are either a buyer or seller of assets.  It’s that simple.

I choose to wait until asset prices get to the point where they are undervalued enough to make me feel that above average returns will be experienced based on historical averages.  Does it require A TON of patience?  Absolutely.  Is it frustrating at times?  100%.  To hear the so-called “experts” tell me that I’m missing it and I don’t understand and “This time is different” has become annoying.  But I stick to fundamentals.  And at the end of the day, they win out.

Fundamentals are the only true way to measure value.  You have to find out what truly defines the price of an asset and buy when the asset is selling for below that fundamental point.  Is it just one thing?  No.  But is it a ton of complicated points?  Absolutely not.  There are a few things that matter when looking at investments and it is the job of a true investor to understand what those are and where they have stood historically (not just over 25 years but over 60+ years).

Is the Stock Market Rigged?

I overhead someone today saying that no one can beat the market because the “whole system is controlled by the wealthiest people in the world and they’d never let it fail.”  To be honest, that’s probably one of the dumbest things I’ve ever heard.  Especially during a roaring bull market. I heard it a lot in 2009 when stocks were down a ton and everyone was saying that people who controlled money caused the crash so they could buy stocks very cheap and make a ton of money while the little guy lost everything.  <eye roll>

The stock market is not rigged, in general.  Are there shady things happening within companies that cause certain things to appear rigged or may actually be rigged?  I’m sure there are.  There have been in the past and there’s no reason that has ended today.  The entire 2009 financial crisis, if you read all about it, is a massive cluster f**k of a bunch of Harvard MBAs who thought they were smart and created financial instruments that were recipes for disaster when they forgot about fundamentals…

If the market was rigged, it would never go down because there are only a handful of investors who WANT the market to go down so we can buy stocks cheaper.  The rest of the people (billionaires included) want to see stocks go up because when stocks are up, their brokerage accounts are up, and they are “richer.” It’s logical.

In addition, the market goes into long (secular) bull and bear markets.  What is the logic behind a group of people conspiring to make the market go sideways (secular bear) for 15-20 years? Just think about that for a second.  You have SO much power to rig a $20 Trillion institution and your first order of business is to make it go sideways for 20 years…how is that helping you out?  And then one day, valuations are so low that the next 20 years sees 15% growth per year!

The market isn’t rigged.  Human beings are lemmings.  They don’t stick to fundamentals and they just buy what their neighbor is buying or what they see on TV going up and up and up. Don’t blame the ups and downs on a few guys conspiring in some back room to make their wallets bigger.  The best investors in the world were average people and are mostly average people who just happened to invest very well.