November 14, 2008, 7:09 am

Analysts are no Gods

by: The Financial Blogger    Category: Investment, Market and Risk
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“I went to the church the other day, the guy in front of us was telling about the Apocalypse and how close we were to the world’s end”

“Where you at the church or at a financial conference?”

“I don’t know: it fell like a church; people were all sitting and listening carefully to the man in front. They were drinking his speech and hoping for their salute They said they sinned and they deeply regret…”

“No doubts, it was a financial conference!”

Oh! The Analysts at BMO and Scotia are predicting a recession… well people over CIBC and TD were predicting oil at $200 a barrel in 2008-2009… You know what? They are human beings too! They are paid to make prediction, not to design the future.

Credit rating institutions gave their best mark to the ABCP (Asset Based Commercial Paper) while it appeared to be the crappiest thing since junk bonds.

So should we trust analysts when they say something?

Yes and no. While they obviously have a lot of knowledge and show experience in the market, very few of them can brag about being right 90% of the time. In today’s economy, there are so many known and unknown factors that it is being almost impossible to predict the future.

The only thing they can really do is predicting tendency based on what is known, ceteris paribus. For example, it was justified to think last year that the barrel would hit $200 in the upcoming months. But with the recent fluctuation, I’m pretty sure that those papers have been thrown in the recycle bin a while ago!

The best thing we can ever do is to concentrate on our own financial situation and goals. When you look at well known investors such as Warren Buffet, they don’t change their strategy because the economy is on a slump or if the price of gold is dropping (even though it should be increasing). Establish your strategy, buy companies who has enough liquidity to go through rough time (remember cash is king) and don’t listen to analysts 😉

If you plan to retire in 25 years, what is happening right now should be the least of your preoccupation. You lost 25% of your portfolio in a few months? Analysts are predicting that you will lose another 20%. They might be right, they might be wrong, but the sun will sill rise tomorrow morning! Who care? You don’t need this money until 25 years!!

One last point, do you think any analyst would put their job at risk saying that the crisis is almost over or will end in the next 6 months? If everybody says that they don’t know and it is worst than we think, there is no chance in the world to do worst then them if you say the same thing 😉 However, if you take the risk of saying something different, you better be right or you’re a$$ will be on the line and you might not be able to afford your mortgage anymore…

This is probably why it is hard to follow analyst… simply because they are humans 😉

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by: Charles Martineau | November 14th, 2008 (10:55 am)

hi there mike! its been a while but I haven’t stop reading your blog. Great post about analyst. There is a old saying that there are two kinds of analyst:
1. those who don’t know that they don’t know
2. those who knows that they don’t know.

Currently at school, I decided to join a team for the Global Research Investment Challenge by the CFA institute, where we have to write an analyst report on a company and give our prediction on the stock price and if it is a buy or sell. Seriously, I feel that no matter how much work we put, at the end we will all question ourselves about how the hell can we predict a stock future. Like you said, there are so many “unknowns” and analyst are afraid to admit it. I decided to join this challenge just to see how analyst work and think. It will be a good learning experience but at the end, I will come to the same conclusion as you…analyst are just humans and that they must come to the evidence that they don’t know!

by: TKO from Ontario | November 15th, 2008 (1:46 am)

Some analysts and economists, cough *Jeff Rubin* cough,
get paid to play PANOOA by their employer, cough *CIBC* cough.

Out of

Just do the opposite of what he says, and you’ll do fine.

by: Charles Martineau | November 15th, 2008 (1:51 am)

I know a guy at school who is currently working on this website:
I wonder if it will work or not…

by: The Financial Blogger | November 15th, 2008 (9:47 am)

TKO, you are hilarious as usual 😉
Many analysts’ asses stink these days ’cause number are bad everywhere 😉

it’s a pleasure to see that you keep reading my blog and that you are going forward at school. Each day in the financial world is another step convincing me that I’m better off with a good asset allocation and investment strategy than going with stock picking 😉

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