I am speaking at the AIA Conference in August so if you have the misfortune to find yourself on the Gold Coast aka Bogan capital of Australia drop in and say hello. However, an invitation is not the point of this piece. I have been collating some of my notes from past presentations and came across two pieces relating to analysts. What triggered this was I was on the receiving end of the ASX – Investor Update . There is nothing intrinsically wrong with the update other than it is the usual collection of narrative fallacies with very little hard data. As I used to tell students all the time without data you are just an arsehole with an opinion. Stories are good for children but adults require data and analysts are the quintessential story tellers who believe that their narrative is superior to not only everyone else’s but also the markets. If each persons narrative represents a fraction of the views on offer then the market represents the collective wisdom of all narratives and it is therefore correct at that instance in time.
However, I digress. When looking through my old notes I found to things the first is a quote by the humourist Dave Barry which I have reproduced below.
Wall Street relies on “stock analysts.” These are people who do research on companies and then, no matter what they find, even if the company has burned to the ground, enthusiastically recommend that investors buy the stock. They are just a bunch of cockeyed optimists, those stock analysts. When the Titanic was in its death throes, with the propellers sticking straight up into the air, there was a stock analyst clinging to the railing asking people around him where he could buy a ticket for the return trip.
The second I found was an editorial comment by Brian Bruce who in The Journal of Psychology and Financial Markets (2002, Vol 3, No 4, 198-201) collated much of the material relating to the structure of analysts recommendations. In reviewing the data he found two interesting pieces of research. Thompson Financial/First Call found that 50% of all recommendations were buys whereas only 1% were sell recommendations. Zacks Investment Research reviewed over 8,000 recommendations for stocks that make up the S&P 500 and found that only 29 were sells. That’s about 0.33% of all recommendations.
The question that naturally arises from such data is why is there such a bias in the recommendations even in the face of overwhelming market evidence to the contrary. The answer as you would expect from the finance industry is greed. Issuing positive recommendations for companies has two effects. Firstly it allows the analyst easy access to the company, this access has a positive impact on an analysts career. Secondly positive recommendations generate corporate business for the broking firm. The fees that arise from this style of business are vast.
Bruce concluded –
“An investor might expect advice that is free of both psychological bias and self interest. Instead they discover belatedly that the advice is a mixture of wishful thinking and self- serving hype.