Ever wondered how effective equity analysts are in accurately predicting the prices of the stocks they monitor? Bloomberg reports that the prices of the stocks in the S&P500 that received the most "buy" recommendations from analysts rose 73% on average since March of 2009.
However, the stocks with the fewest "buy" recommendations gained 165%. For perspective, the S&P500 index has gained 88% since hitting a low of 1,271.50 on March 9, 2009.
Bloomberg found that the companies with the most "buy" ratings gained 8.7% in 2010. The stocks with the fewest "buy" ratings rose 20%.
What can we make of this? It is very difficult to predict what will happen with the market, much less individual companies. Analysts know more about the companies they follow than anyone except the senior management of the companies themselves. Even then they are not very good at predicting price movement. In addition, we may wonder about the incentives they may have to issue ratings.
Once again we turn to low-cost passive investing as the most intelligent approach for long term investors.
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