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  • Christian Armbruester

Analysis Paralysis

Why in our next lifetime we should all come back as equity analysts.

He should have known better, but I suppose when you are devoid of any performance accountability this is what happens. I had calmly pointed out that with the stock trading at 20 and his price target at 10, the market was telling him that he was wrong. Clearly, that did not sit well with our bank’s highly paid automotive analyst. However, when you shout that you don’t care about the markets to a room full of hundreds of traders, ridicule is most resolutely assured. He begrudgingly departed back to his ivory tower to rapturous laughter, never to be seen on our floor again.

The thing about equity analysts that I will never understand is how they can get their numbers so spectacularly wrong. According to findings from the internet the failure rate for stock price targets is greater than 81%. Equity analysts are specialists in particular sectors, most have achieved high academic pedigree, and some have even worked in the industry gaining valuable experience in their chosen field of interest.

They also tend to cover only a handful of stocks and clearly, looking at the same things year in and year out would make an expert out of most of us. However, the added advantage the analysts have is that they get access to management of the companies they study. Banks are in the business of lending and taking companies public or helping them when they merge with others. As such, the directors are naturally inclined to give information to the lieutenants of the institutions that can hold their future in their hands.

How can we then explain that you have evidently very smart people, looking at the same numbers and using the same discounted cash flow model, yet producing vastly different results? One of the reasons is timing of course and fundamental valuations remain rather static, whereas markets do not. Banks may also have an interest to do business with a particular company, which would necessitate a particular rating on a stock. The SEC clamped down on the industry in the nineties when essentially everything was a “buy”, but even now you will still find the majority of ratings to be favourable.

Whatever happened to the stock that led to such a comical interaction with angry man? Kudos that he had the courage to rate the company a “sell”, but the shares went up another 50% from there. Not entirely surprisingly, he never admitted that he was wrong. Instead, he simply dropped coverage of the stock. Not long thereafter he went to another bank and from what I can gather he is still losing money for his clients to this day.


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