Investors who followed the advice of analysts who say when to buy and sell shares of brokerage firms and banks lost 17 percent in the past year, twice the decline of the Standard & Poor's 500 Index.
From the perspective of someone studying toward their CFA (Charterd Financial Analyst) designation, this isn't exactly the most rosy news. What's even more worrying is the sector within which these analysts' recommendations performed the worst - their own: financials. The question is why?
I can't help but wonder what techniques are being used to analyze these companies that analysts track ...if they do use a consistent technique at all, that is. In preparing for my own career as an analyst, it is precisely on this skill that I spend most of my time working: designing my own style and set of tools used to determine what makes a good investment and what does not. The MBA Association, www.MBAAssociation.Org, just launched their Intrinsic Stock Analysis Tool on which I collaborated and I think that this is a great starting point for anyone interested in the field or anyone interested in investing their own money and having the desire to truly understand the fundamentals behind a stock's price.
What I find interesting is that analysts measure their performance based on their 'Buy' recommendations alone; but what about their 'Hold' or 'Sell' recommendations. If you were to buy the stocks they suggested that you buy, you would be up by 17%, but if you were to do everything that they suggested you do, then you would be down by about the same amount. This implies that the money you would lose would be roughly double what you would gain on the up-side. That's a hell of a lot of volatility!
I find it a little frustrating to follow CNBC's latest stock market game with prize money of $1 million for the traders that generate the greatest returns within the few weeks over which the game runs. While it's great to see such games entice new people to the field of finance, it's worrying to see the style of investment that is encourage: trading, not investing. Everyone wants a quick buck, and it seems no one is willing to spend the time to analyze and develop sound investment decisions.
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