Apparently when they get it wrong stock analysts stamp their feet and threaten to hold their breath until they turn blue
STANFORD GRADUATE SCHOOL OF BUSINESS — Like oracles in the stock market, securities analysts come up with earnings estimates that are supposed to signal the worth of a company’s stock. But what happens when a company’s actual performance proves an analyst’s quarterly forecast is wrong?
Instead of fully incorporating new information into their forecasts, many of those analysts stubbornly stick to their erroneous views on the company, a tendency that might contribute to market bubbles and busts, according to recent research.
Analysts who make “extreme” quarterly forecasts — above or below the consensus or median estimate among all analysts following a given stock — tend to dig in their heels after being proved wrong, says John Beshears, an assistant professor of finance at the Stanford Graduate School of Business and coauthor of research exploring the phenomenon of stubbornness among stock analysts. Once a company reports quarterly earnings showing the analyst was too optimistic or too pessimistic, the extreme incorrect analyst will revise his or her full-year forecast, but will move less aggressively in the direction of the earnings surprise than other analysts.This stubbornness hurts an analyst’s overall forecasting accuracy, say the researchers.
This raises the as yet unexplored question of – who gives a monkeys bum what analysts think after they have been proved wrong. A better question would be WTF do people listen to them in the first place after they have been consistently proved to be as useful as a friggen chocolate tea pot.
A much more useful piece of research is this article from the Journal of Psychology and Financial Markets 2002, Vol 3, No 4 198-201 which begins with a very perceptive quote from Dave Barry
Q: Why didn’t Wall Street realise that Enron was a fraud?
A: Because 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.
—Dave Barry, Humour Columnist
To save you the trouble of reading this piece here is the take home message –
Investors who turned to analysts and investment houses were often disappointed with the projections and recommendations on which they based stock purchases. An investor might expect expert advice that is free of both psychological bias and self-interest. Instead they discover belatedly that the advice is a complex mix of wishful thinking and self-serving hype. In many cases, a non professional investor could have attained a better idea of a stocks’ value by doing a brief reality check.