Thursday, September 16, 2010

ETR: Why Wall Street Is Always Wrong

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Thursday September 16, 2010


"Analysis kills spontaneity. The grain once ground into flour springs and germinates no more."

Henri-Frederic Amiel

Why Wall Street Is Always Wrong -- and Why You Need to Buy Stocks Now
By Matthew Weinschenk

Some say that individual investors have no chance of making serious money. They say that Wall Street has rigged the game.

Well, it's true that the game is rigged. Wall Street was built to separate you from your money. But you can use Wall Street's own system against them. And you can profit even if you're not an active trader who buys and sells stocks regularly.

Let me tell you why.

For openers, you need to realize that "the analysts" are usually wrong... especially today.

Analysts are the guys in the big Wall Street brokerage houses who publish those "Buy, Sell, Hold" ratings.

This important "market signal" has been right 92% of the time...

An investing strategy based on a rather obscure 1968 accounting study is handing ordinary wealth builders a chance to make a lot of money these days.

The study revealed how publicly traded companies that beat earnings estimates drifted higher 92% of the time. Not surprised?

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More details here.

Make no mistake about it, following those ratings will lose you a bundle of money.

Take a look at Citigroup's upgrades and downgrades during the recent financial crisis.

Ratings come from briefing.com. Excessive "reiterations" have been removed.

For a more striking example, remember MBIA Corp. (MBAC), a company whose business consists of selling insurance on mortgage-backed securities? It nearly imploded -- and the majority of analysts completely missed it.

A downgrade to "Hold" after a stock's fallen from $70 to $12 isn't exactly helpful.

Don't expect great buying ideas from analysts either. Legendary investor Peter Lynch is on record as saying that once analysts finally catch on to a stock, it's already jumped nine- or ten-fold. He considers a consensus "Buy" rating to mean "Sell."

You Need Unbiased Opinions--Not Analyst Opinions

Analysts aren't dumb. In fact, they're very smart guys who are skilled at breaking down how businesses work and modeling the financials.

The trouble is, it's not always in an analyst's best interest to get his predictions right.

Let's say an analyst thinks that Microsoft will earn $1 per share next quarter. But all the other analysts say it's going to earn $0.50. That lone analyst will go back and change his numbers to come up with a result closer to $0.50.

Why? Job security.

If he says $1 and he's wrong, he's out on the street. If he says $0.50 and everyone is wrong... well, everyone was wrong. He can't be expected to figure out what no one else could, so he's safe. Heros make for bad analysts.

One of the textbooks I used during my financial education actually suggested that, after completing a financial model, you should check the published numbers of other analysts. "If your number is close to theirs," it said, "you've probably got it right!"

A more nefarious source of analyst bias comes from the fact that investment banks want to see lots of stocks rated as "Buys."

If a big investment bank generates $100 million in fees from working with Microsoft and its analyst ranks Microsoft a "Sell," that quickly becomes a problem. Firms claim to have a "Chinese wall" separating their analysts from their investment banking... but no one takes it seriously.

You Can Still Use the Analysts for Your Big "Buy" Signals

And there's yet another way that analysts can be incorrect.

A recent McKinsey study showed that they have been persistently overoptimistic for almost the entire history of the stock market. They've typically predicted about 10% to 12% growth a year, when the real number has been about 6%.

But the McKinsey study also pointed out that "actual earnings growth surpassed forecasts in only two instances, both during the earnings recovery following a recession."

In other words, analysts are too optimistic... except when they should be the most optimistic!

How do professionals make such a blunder? Barry Ritholtz of FusionIQ offers the best explanation. These analysts aren't economic forecasters, he says. They can break down a company very well, but when it comes to predicting sales... they simply carry forward what happened last quarter.

This leads to too much optimism during good times and too much pessimism right at the turnaround of a slow economy.

According to numbers put together by Bloomberg, less than 29% of companies are rated as a "Buy" for the first time in 13 years (which is as far back as the data goes).

What's more, the total of "Holds" and "Sells" adds up to 71% of the stocks in the market.

Across the board, these same analysts are estimating earnings growth to be 36%.

When analysts get this down, the market simply must rally.
Let me assure you, the number of stocks that should be considered "Buys" is much higher than 29%.

A new and raging bull market is waiting to take hold. So don't get scared out of the stock market right now. And if you're sitting on the sidelines, don't miss this buying opportunity.

[Ed. Note: As the editor of The FastCap Strategist, Matthew Weinschenk delivers short-term trading opportunities based on earnings announcements. His sought-after research, specializing in scientific innovation and volatility events, is highly regarded within the industry.

Matthew has found a way to profit from the mistakes analysts make every day. For example, it's been proven that stocks that surprise analysts on their earnings reports outperform the market 92% of the time. Matthew tracks them all in his trading service, The FastCap Strategist. Click here to learn more.]

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Fair enough...

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The Language Perfectionist: Gaffes Galore

By Don Hauptman

Here's another collection of errors I encountered recently in major publications:

  • "[The scandal at Hewlett-Packard] has stunted a long search by HP's employees for stability and pride at the patriarch of Silicon Valley companies."

A patriarch is defined literally as "a man who rules a family, clan, or tribe," and, by extension, "the founder or original head of an enterprise." Using the word to characterize an organization rather than a person, as is done here, is something of a stretch. It also creates opportunities for confusion. The reader might wonder: Is the reference to the just-dismissed CEO?

  • "He was dispatched to the Stork Club to pick up a few gallons of the boite's signature perfume; it was to be poured into the blowers of the theater as an aural accompaniment to the first act's eye-popping curtain-closer: a bubble bath for the showgirls."

The audience in 1950 must have been impressed. But the word aural relates to the sense of hearing. The adjective that applies to the sense of smell, and which was surely intended here, is olfactory. Or, if the writer wanted to preserve the alliteration, he could have written "aromatic accompaniment."

  • "Dr. Seuss and Shel Silverstein may have some competition in the children's book department.... But unlike Mr. Seuss and Mr. Silverstein...."

Mr. Seuss? The pseudonym of Theodor Seuss Geisel was Dr. Seuss, correctly rendered in the first mention. Perhaps this writer's tinkering with the honorific was intended as a joke, but if so, the humor is rather lame.

  • "A New York Times reporter pressed the Republican presidential nominee on the draft. Nixon had remained ambiguous about the issue up to this point...."

The word ambiguous ("open to multiple interpretations") more naturally applies to a statement than to the individual making it. The preferable word here is ambivalent ("uncertain, indecisive").

[Ed Note: For more than three decades, Don Hauptman was an award-winning independent direct-response copywriter and creative consultant. He is author of The Versatile Freelancer, an e-book that shows writers and other creative professionals how to diversify their careers into speaking, consulting, training, and critiquing.]

 

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