In an earlier blog, I mentioned that, out of the 200 top high income job categories, financial analysts consistently rank among the top ten in the proportion of those who have annual realized incomes of $200,000 or more. Then I asked, “But are they wealthy? Many of them are. The financial analysts group ranks #1 in terms of the percent of its members with $1M [net] or more in investments. But be selective in listening to analysts; not all of them have a great track record. And not all are excellent at transforming income into wealth.” According to my estimate, they rank 116th in this regard. It takes the equivalent of 154 high income analysts to produce 100 millionaires. As so, they are more productive than physicians and surgeons, attorneys and senior coroporate executives. (See Stop Acting Rich)
In a recent USA Today article, a study by Edward Swanson, a finance professor at Texas A & M, was cited which analyzes the recommendations of investment analysts. The study was first published in The Accounting Review. According to the article:
. . . you could add significant performance to your stock picks by combining information from analysts and short sellers. . . . specifically: buy stocks that have a ‘sell’ recommendation by analysts yet have a very low amount of shorting activity. Sell stocks that have a ‘buy’ recommendation by analysts yet have lots of shorting activity.
What is the meaning of “lots of shorting activity”? It means that there are a lot more investment dollars wagered in anticipation of the stock declining than rising.
Clearly, this doesn’t say much for analyst research. And it does give a great deal of credit to short sellers – not what they say but what they do.
In fairness, some financial analysts have an excellent batting average. Many of those who do are mentioned in The Wall Street Journal’s annual profile of top analysts. Part of being a wise investor is to determine the reliability of various sources of information.