Can investors trust stock analysts?

Posted at 04/18/14 7:18 PM

MANILA, Philippines – Can an average investor rely on the average analyst to predict the future?

This is the question that Andrew Stotz, president of the CFA Society Thailand, wanted to answer when he conducted a 10-year study on the Asian stock market and the accuracy of stock analysts.

Stotz studied all Asian markets except Japan for a 10-year period and analyzed data for 16,500 stocks.

He analyzed historical earnings per share data and compared it with analysts’ consensus estimates for the next 12 months.

“I’ve tested whether analysts are successful in forecasting and the answer is: it is pretty close to a coin flip,” he told ANC’s “On The Money.”

“On average, it’s about 50-50. But when they’re wrong, they’re really wrong. So about 50 percent of the time, I showed that analysts can be wrong in their target prices by more than 30 percent positive or negative,” he added.

Analysts did better during good years, but failed to catch a collapsing market because they tend to have positive bias.

Stotz’s data also showed that Philippine analysts are the only group with forecasts that soundly beat historical numbers, but these forecasts only covered 20 stocks in most years and in a couple of years, analysts had historic forecasts for only one stock.

Despite these results, Stotz noted that analysts are still needed because they make the market more efficient.

“We need analysts. If we didn’t have analysts, the market wouldn’t be efficient…The ability of an analyst to make a difference today is much more difficult than it was 20 or 30 years ago,” Stotz said.

He added that it is acceptable to depend on financial professionals for information, but don’t “over rely.”

“They’re not your all-in-all answer for your money problems,” he said.

Stotz said investors have three ways to avoid being over dependent on analysts:

focus on the past and present;
focus on reducing risk by spreading investments across many stocks, mutual funds, or exchange-traded funds; and
stay invested over a long period of time to get the benefits of compounding money.