Should you heed the advise of equity analysts (this includes me)?
If you ask the McKinsey team the answer is a NO!
Why?
Because we are too optimistic, which means "we" (the industry) have usually been off the mark.
The McKinsey Quarterly team explains,
``This pattern confirms our earlier findings that analysts typically lag behind events in revising their forecasts to reflect new economic conditions.
``When economic growth accelerates, the size of the forecast error declines; when economic growth slows, it increases. So as economic growth cycles up and down, the actual earnings S&P 500 companies report occasionally coincide with the analysts’ forecasts, as they did, for example, in 1988, from 1994 to 1997, and from 2003 to 2006.
``Moreover, analysts have been persistently overoptimistic for the past 25 years, with estimates ranging from 10 to 12 percent a year, compared with actual earnings growth of 6 percent."
My comment:
First of all, optimism is basically a "neural network" related trait not only for analysts, but for most people.
Second, it's all about incentives. In the Philippine setting, one reason for the "optimism" bias is that the underdeveloped financial market industry earns only from one direction-the upside!
Lastly, not all analysts share the same methodology of research. Here, most of the mainstream framework is confined to the micro sphere or analysis based on corporate or micro economic fundamentals, while yours truly is concentrated on "inflation" cycle based political-economic analysis.
Moreover, we don't subscribe to the "animal spirits" and "spending the way out to prosperity analytic" in contrast to macro mainstream practitioners.
This means that speaking of track records, this blog should serve as evidence.
My recommendation for everyone is to heed investing guru Peter Lynch's advise, ``The list of qualities [an investor should have] includes patience, self-reliance, common sense, a tolerance for pain, open-mindedness, detachment, persistence, humility, flexibility, a willingness to do independent research, an equal willingness to admit mistakes, and the ability to ignore general panic."
If you ask the McKinsey team the answer is a NO!
Why?
Because we are too optimistic, which means "we" (the industry) have usually been off the mark.
The McKinsey Quarterly team explains,
``This pattern confirms our earlier findings that analysts typically lag behind events in revising their forecasts to reflect new economic conditions.
``When economic growth accelerates, the size of the forecast error declines; when economic growth slows, it increases. So as economic growth cycles up and down, the actual earnings S&P 500 companies report occasionally coincide with the analysts’ forecasts, as they did, for example, in 1988, from 1994 to 1997, and from 2003 to 2006.
``Moreover, analysts have been persistently overoptimistic for the past 25 years, with estimates ranging from 10 to 12 percent a year, compared with actual earnings growth of 6 percent."
My comment:
First of all, optimism is basically a "neural network" related trait not only for analysts, but for most people.
Second, it's all about incentives. In the Philippine setting, one reason for the "optimism" bias is that the underdeveloped financial market industry earns only from one direction-the upside!
Lastly, not all analysts share the same methodology of research. Here, most of the mainstream framework is confined to the micro sphere or analysis based on corporate or micro economic fundamentals, while yours truly is concentrated on "inflation" cycle based political-economic analysis.
Moreover, we don't subscribe to the "animal spirits" and "spending the way out to prosperity analytic" in contrast to macro mainstream practitioners.
This means that speaking of track records, this blog should serve as evidence.
My recommendation for everyone is to heed investing guru Peter Lynch's advise, ``The list of qualities [an investor should have] includes patience, self-reliance, common sense, a tolerance for pain, open-mindedness, detachment, persistence, humility, flexibility, a willingness to do independent research, an equal willingness to admit mistakes, and the ability to ignore general panic."
totally agree, always best to do analysis on your own -- to the point of experimenting rapidly with various methods and later honing one that fits your investment character.
ReplyDeleteThese charts are reveal a few glaring realities:
"overoptimistic" - shows the utter volatility and uncertainty of markets (what Taleb dubs "Extremistan") that are disconnected with a more 'smoothed' linear direction that lulls the majority into submission
"Off the Mark" - interesting to note when gathering analysts' eps consensus, best is to cull the highs and mids. Seems that high eps guesstimates garner only 20% hit ratio for a 25 year period. Better to err on the side of the skeptic, do our own homework and temper the eps to the low-side of the consensus
Hi Gully, Thanks for your inputs. Best, Benson
ReplyDelete