The Millionaire Next Door

Should You Listen to Your Analyst?

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. 

2 thoughts on “Should You Listen to Your Analyst?”

  1. One of our best friends is a broker who does extremely well financially. My wife thinks it is funny that he calls and asks us what trends we see so that he can sound knowledgeable when he talks to clients. In other words, he is simply a purveyor of securities. There have been instances when he has even parroted back to us things that we have previously told him.
    He only gets our bond investments because even though he is a friend I do not trust him with anything else.
    P.S. He also is always trying to guess our net worth. He has never guessed high enough although my answer is always, “that is our business.”

  2. My boyfriend used to have a close family friend in New Jersey who is a financial analyst/accountant. He has some very big clients (of which I cannot disclose) but we once thought the world of him.

    However, he recently revealed to another friend that he feels he was put on this planet to show others how “wrong” they are. Basically, he feels that it is more important that his advice and predictions for client’s finances is seen as being right than being truthful. He will leave out information and purposefully sabotage a client and/or friend just so he can feed his ego. Needless to say… he is no longer a “close” friend.

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