Stock Market Analysts Are Useless

In this video, I’ll provide more evidence that stock market analysts are useless, with help from Sarah Gordon at the Financial Times, who recently summarized today’s installments.

I call analysts “z-vals” for their 50% mistake rate. It’s a shorthand of the term “zero-validity environment” used by Daniel Kahneman in his book Thinking, Fast and Slow when discussing stock pickers and political scientists whose “failures reflect the basic unpredictability of the events that they try to forecast.”

A 2002 academic paper found that analysts merely follow glamour stocks.

[Paper abstract shown in the video, at 1:20.]

They’re just stock cheerleaders, with far more buy recommendations than sell. A waste of time.

In April 2013, the personal finance website Nerdwallet reported that 49% of analysts’ ratings on the 30 components of the Dow in 2012 were wrong. Have a look:

[Key findings shown in the video, at 2:39.]

Of course they’re better at identifying winners — the stock market rises twice as often as it falls!

If you have to guess, guess that a stock will rise because up is where the market usually goes.

A stock market analyst guessing a stock will rise and then bragging when it does is about as sophisticated as somebody guessing that the sun will rise and then jumping for joy when it does.

Useless!

The strong odds of the market rising is why almost no analyst ratings are “sell.” In February 2015, Bespoke Investment Group put a finer point on it, as reported by CNBC. Take a look:

[Article excerpt shown in the video, at 4:45.]

In this round-up of evidence, we see analysts chasing the same glamour stocks everybody sees in the news, and almost never advising to sell.

This is completely unnecessary to you because you can already accomplish the results of this advice by just owning index funds, which go up with the market two thirds of the time.

Stick with a system of rational price reaction, the way I do. Analyst ratings are useless.


Want more videos like this? Subscribe to The Kelly Letter YouTube channel.

Thank you for watching!

This entry was posted in Uncategorized. Bookmark the permalink. Both comments and trackbacks are currently closed.

One Comment

  1. Michael Graetzer
    Posted March 5, 2017 at 12:30 am | Permalink

    Love it. This makes it simple and clear.

  • Here are your three options:

    Option 1: Annual Subscription (no refunds)

    For just $200 per year, you’ll receive everything listed above to completely upgrade the way you manage your investments. This is 17% cheaper than the monthly option. This is what I recommend:






    Option 2:Monthly Subscription (no refunds)

    If you'd like to try The Kelly Letter  without paying the full year, you can pay $20 per month.





    Option 3:Free Email List

    If you'd like to hear more from me but aren't ready to part with any money yet, you're welcome to join my free email list:

    Join the free list





    Thank you for the work you do. You're a household name here and my wife and I often discuss your letters on Sundays. My ten- and seven-year-old children recognize your name and will eventually be taught to invest using 3Sig and 6Sig. You've had an enormously positive impact on our investing and inspired me to look at the world in more rational and clear terms than I did years ago. I'm sure that thousands of others would say the same. Kelly Letter subscriber Matt Barnes
    Matt Barnes
    Product Line Director
    OCLC

    Join Matt and thousands of other rational investors to invest without stress.

    Subscribe to The Kelly Letter  now!

Bestselling Financial Author