Trusting Analysts

The herd mentality is well-documented outside the investment world. While it is not given much thought within the investment world (exceptions include discussions on the topic from both Ben Graham and Stephen Jarislowsky), it plays a large role in the investment decision-making process: investors feel much more comfortable buying stocks when they believe that others are also piling in. To that end, investors often rely on analysts, who are expected to be “experts” in guiding investors on stock selection.

But just how good are analysts at predicting the directions of stocks? A decent paper (though dated) is available here which discusses the difficulties in truly evaluating analysts. However, at the very least, if analysts were at all useful, they should be able to tell the difference between a company that has value and one that is about to go bankrupt. Yet these two very different realities in a company’s status continue to baffle these “experts”.

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