Academic Study: “Analysts’ revisions are typically information-free”

The Irish Times notes that Wall Street analysts…you better sit down for this…often don’t know what they’re talking about:

The Citi research looked at analyst recommendations over the last 15 years. It found that analysts were at their most bullish at the end of 1999, despite the fact that price-earnings ratios suggested markets had never been so over-valued. The dotcom crash in early 2000 triggered a vicious three-year bear market during which analysts grew progressively bearish. This bearishness increased even as the market bottomed in the autumn of 2002. Bullishness took root as the market rose over the following five years, peaking just prior to the outbreak of the financial crisis. Since then, analyst bearishness has risen inexorably.
The report also looked at the difference in performance between the stocks most favoured by analysts and the stocks least favoured by analysts. It found that the furious global rally off the March bottom has caught analysts completely by surprise, with forecasters more off the mark than at any other time during the period under study.

Later on.

The Financial Times reported this month on an academic study that looked at the effect of analyst recommendations on stock prices. It found that “buy” and “sell” tips have little appreciable effect on prices. “Analysts’ revisions are typically information-free,” the study concluded, adding that investors were aware of this.
One analyst who has been consistently critical of his fellow professionals is James Montier of Société Générale. The award-winning analyst said last year that it was “transparently obvious that analysts lag reality”. They “only change their minds when there is irrefutable proof they were wrong, and then only change their minds very slowly”, he said.
The latter study appears to confirm this – almost 80 per cent of analysts’ changes in recommendations came after major corporate events. Analysts are “like rabbits caught in the headlights”, Mr Montier said, and are “seemingly incapable of any form of independent thought”.

Do rabbits stare at headlights?
Maybe analysts should start listening to this guy who has almost zero private sector experience:

The market is up 35% since then.

Posted by on June 2nd, 2009 at 9:16 am


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