Uncategorized

Bloomberg finds piggybacking analysts sucks

close

Email a Friend

John Dorfman, investor and Bloomberg columnist, has been following the 4 most popular and hated stocks among Wall Street analysts for the past 11 years.

According to Dorfman’s research:

For 11 of the past 12 years, I have studied the performance of analysts’ four favorite stocks, and the fate of the four they most scorned…Their favorites, on average, were flat during those years while the four stocks they hated most gained about 6 percent annually. The Standard & Poor’s 500 Index had an average gain of about 9 percent.

Wall Street Stinks

winners-and-losers1Dorfman attributes this bad performance to the fact that analysts are “not all-knowing” and like most human beings,  “extrapolate the recent past as a guide to what comes next.” Check out the whole article to see which 4 stocks are currently most highly rated by security analysts and which 4 are currently the pariahs.

Dorfman concludes with a short review of each of the stocks.  I’d like to delve just a bit deeper here, though.  There is definitely a divergence in Wall Street’s sell side and Stamford’s buy side in the ability to accurately pick stocks.

Buy side vs. sell side: winners vs. losers

Whereas research like Dorfman’s show an inverse relationship of the best ideas in the sell-side community to stock performance, research like Cohen, Polk, and Silli’s “Best Ideas”  and Martin and Puthenpurackal’s “Imitation is the Sincerest Form of Flattery” indicate that investors have a lot to gain by piggybacking the best ideas and cloning guru investor portfolios.

So, why is Wall Street, which is just as smart IQ-wise as the buy-side, so bad at picking stocks?  I just don’t think Dorfman’s “they’re just human” critique is sufficient because buy-side guys are human, too.  In fact, I’d wager that the majority of good buy-side analysts cut their teeth on the sell-side.  Does moving to Connecticut improve stock selection (like to see that research paper)?

Companies like AlphaClone are entirely focused on helping investors exploit the alpha produced by certain professional investors (see my AlphaClone: The cure for investor insanity).  Why the divergence?

Rather, there are structural reasons why piggybacking the buy-side works, while aping the sell-side doesn’t.  Some possible reasons for this underperformance:

  • Wall Street analysts are reactive, not nimble enough with changes in ratings to make investors money on the way up or down
  • industry coverage structure requires that each analysts has to have some buys and some sells in an environment that a good portfolio manager may completely avoid such a sector
  • unlike popular folk wisdom, good companies don’t make good stocks and vice versa.
  • Analysts are trained like MBAs to take a more organic, longer term view on companies while the market continues to focus on shorter milestones

Thoughts?  Let me know in the comments below.

[Hat tip: My Investing Notebook]

0 comments on “Bloomberg finds piggybacking analysts sucks”

Events, Uncategorized

New speakers announced for Tearsheet’s Resilience Conference

  • The Resilience Conference will celebrate the people, teams and companies successfully navigating through this crisis.
  • 3 new speakers have just been announced.
Tearsheet Editors | June 25, 2020
The Customer Effect, Uncategorized

Inside Yielders, the UK’s first regulatory compliant Islamic crowdfunding platform

  • Yielders, an equity-based crowdfunding platform for real estate, is the first Shariah-compliant financial technology company to get regulatory approval in the U.K.
  • The platform's user base is 35 percent non-Muslim, some of whom may be attracted to the ethical investing principles.
Suman Bhattacharyya | May 18, 2017
Sponsored, Uncategorized

FinTech is changing your life, and you don’t even know it

Brandeis University | May 01, 2017
Uncategorized

FinTech Week: By the numbers

  • Empire Startups' inaugural FinTech Week begins today in New York
  • In preparation for 25 forthcoming events over four days, here's a breakdown by the numbers.
Tanaya Macheel | April 24, 2017
Uncategorized

Hi 5! The top five fintech stories we’re following today

  • Retailers may be looking into the future as opposed to implementing for today.
  • Banks are working to get more people comfortable using mobile apps.
Zack Miller | February 06, 2017
More Articles