Financial analyst - opinions?

[JJH]

Andy, I respect your opinions, but your logic in this matter is a bit tenous.

Who has the ability to predict future? No one. That's why most of us needs to get a job.

Isn't an analyst's job essentially about trying to predict future

A simple calculation:
No one can predict the future 100% correctly, but assume there is an expert analyst, who can get the direction of interest rate, currency rate, stock price etc. predicted correctly 70% of the time. (Remember a coin can do it 50% of the time)

Now, if anyone is this good (without influencing investors and thus self-fulfilling the prophecy), why not simply be a trader - get rich and retire early?
Let's say you place your wealth in a prediction that can either gain you 20% or lose you 20%. If you are correct 70% of the time, you will, on average gain 8% each time you make a trade. You only need to make about 60 of these types of trades to 100x your wealth (1.08^60 = 101.3).

And please don't be cheeky and say that investments don't pay fixed amounts etc. I'm sure you still get the point: being able to predict future directions of economic variables even 60-70% of the time is a major advantage and if someone can do that, why would they work as an analyst wasting their skill?


I want to thank people participating in this discussion, it's been interesting.

 

[daleholborow]

Let's say you place your wealth in a prediction that can either gain you 20% or lose you 20%. If you are correct 70% of the time, you will, on average gain 8% each time you make a trade. You only need to make about 60 of these types of trades to 100x your wealth (1.08^60 = 101.3).

.... being able to predict future directions of economic variables even 60-70% of the time is a major advantage and if someone can do that, why would they work as an analyst wasting their skill?

*sigh* I really doubt the validity of phrases like "correct 70% of the time" and "you only need to..."

I have friends who have asked me something like this... "surely, if I can just make a few percent profit every trade, I can get wealthy easily?" In the same way that options trading seminars that i receive as junk mail keep telling me I can get "100% returns easily..", with apparenly disregard to the obvious fact that anyone getting 100% returns "easily" should ... well, you know... own the world...

For information on just how useful the average analyst is, I think you really need to read this:

Why Paul Miller in Virginia Is Wall Streets Best Stock Picker - Bloomberg

"Of approximately 6,000 calls made by analysts on the 300 stocks during the year, fewer than 1,500 were accurate, Bloomberg data show. "

Gold.

 

[JJH]

That's what I was trying to explain dale, just how ridiculous it is for someone to say that they can make genuine predictions about the future.
I'm not sure if you understood me correctly? I'm the one trying to underline what nonsense the analyst business appears to be.

 

[Tsotne]

That's what I was trying to explain dale, just how ridiculous it is for someone to say that they can make genuine predictions about the future.
I'm not sure if you understood me correctly? I'm the one trying to underline what nonsense the analyst business appears to be.

JJH(I'll address you so since I don't know you name). You believe that the qualitative analysts are of no value right? In the previous post I made a distinction between what quants are capable of doing and what such analysts can do. In some cases both deals could be overlapping. But as I said, they might be the only ones in a situation where a decision must be made. You don't see their role?!

 

[darth]

"That's what I was trying to explain dale, just how ridiculous it is for someone to say that they can make genuine predictions about the future."


Suppose there is some bike race happening frequently.I have been following all the racers and their activities.I see racer X going to practice
most rigorously, also I came to know that he has got some nice enhancements in his bike. And for the past few races he was finishing close.I can certainly claim that I can genuinely predict the future better than others as I am armed with these facts.

"I know many cases where a powerful analyst buys an asset, then writes something like "Because of the reasons x,y and z, I find company A's stock underpriced, therefore I recommend buying it"

Just the fact that he bought the asset , Implies that x,y,z are definitive.
He himself must be having some reasons to buy that asset class b4 making others delve into that investment.

 

[JJH]

Suppose there is some bike race happening frequently.I have been following all the racers and their activities.I see racer X going to practice
most rigorously, also I came to know that he has got some nice enhancements in his bike. And for the past few races he was finishing close.I can certainly claim that I can genuinely predict the future better than others as I am armed with these facts.

If only stock prices would move according to real facts and not people's opinions about the future This is mainly why I have a negative attitude to predicting stock prices. (Yes, stock price tend to follow what's happening with the company in the real world, however, analyst business is often criticized being unethical because their stories can have a negative impact on a company's stock when in reality the firm might be doing well and the analyst's view is biased.)

Just the fact that he bought the asset , Implies that x,y,z are definitive.
He himself must be having some reasons to buy that asset class b4 making others delve into that investment.

Uh, I'm not going to argue with this because it's not possible to prove right or wrong. But think about this: If you bought an asset, wouldn't you want to tell as many people as possible that you bought it and that you expect it to do well in the future?

 

[JJH]

You believe that the qualitative analysts are of no value right? In the previous post I made a distinction between what quants are capable of doing and what such analysts can do. In some cases both deals could be overlapping. But as I said, they might be the only ones in a situation where a decision must be made. You don't see their role?!

I don't think a quant analyst is any better than a qualitative analyst at predicting stock prices or currency exchange rates. However, I see many other useful tasks for quants (and in fact, for qual analysts too) that are not related to giving public announcements about which stock to buy or sell.

 

[HyperVolatility]

I just want to give my 2 cents to the thread:

1) I agree with the fact that being a well-known analyst can affect what large investors do

2) Being a stock analyst and an Index analyst is a completely different story because stock prices are much more volatile then Indices'ones and therefore more difficult to forecast

3) Do you really think that 50% is equivalent to throwing darts? Do you think that markets just go up and down? Usually sideways movements are the predominant trend in the majority of markets (stocks,indices, commodities,etc) and flipping a coin won't be enough unless you have a triangular one.

4) You can't really compare quant analysts with financial analysts. The fact they have the same title does not mean they do the same job

5) Do you want to get it right the 85% - 90% of the times? piece of advice: remain in academia

 

[JJH]

HyperVolatility, I completely agree with you in every point!

Regarding market movements and flipping a coin, I have been talking about predicting the direction of a stock price or a currency exchange rate (can only move up or down), hence getting it right 50% is equivalent to flipping a coin.

 

[euroazn]

Look, some of quantitative analysts (involved in trading on organized stock exchanges, high-speed algorithms trading) make intuitive decisions and they may fail sometimes. Since they have to make decisions in seconds time. What you mean by "their believes" is of a great interest for employers. That's why employers look the backgrounds of quants and assess their performances, education level, experience, etc. Finance is generally an art of "guessing". So it's never gonna tend to last short (as you said) for quant jobs to exist. What corporate clients do is that they go to more powerful, informed, specialized institution(employing analysts) and their belief is that they'll get the proper advice (or service generally) which they couldn't arrive at without quants' help. Quants are not machines (or even if they were) not to fail anytime. Sometimes they are wrong, which doesn't at all mean that "corporate clients catch them on".

Recall LTCM collapse when in 1998. Who could have considered that Russia would decline to repay all the international debts?! (quants failed)

9/11-Did anyone know on 10th of September that 9/11 would occur?! NO. So quants failed again.

Who could have predicted that stock market would crash unexpectedly in 1989. Noone. Quants failed again.

But in normal circumstances they do their job well. So you can't say they invent their own stories. They follow the procedures and instructions based on theories which have withstood decades.

I hope you got the idea

Somebody has to read The Black Swan