As I mentioned in my post on BNN personalities, I really didn’t care for Michael Hainsworth’s habit of mentioning the 12 month target price, both when he’d ask guests for their opinion and when he’d give analysts’ opinions of the price in a year’s time. I think that trying to figure out where a stock will be in a year is kind of foolish. An investor should buy a company because it’s the best use of their dollars as they work toward their investment goals.
Going one step further, I urge every single one of you to not listen to analysts when making investment decisions. Don’t get me wrong, analysts are hardly idiots. They have extensive education and training when it comes to the capital markets. They are smarter than you or me, financially speaking. At the end of the day however, they’re really just pulling numbers out their ass.
What do you think analysts thought of Bear Sterns or Lehman Brothers just before they went down? You’d think some of the smartest minds on the street would have studied the books and come to a conclusion that each company had a scary balance sheet and that investors should avoid them. And you’d be dead wrong.
How about Ipad sales? Just check out this article from last week, outlining all the analyst opinions on how many ipads will be sold. As I write this, it’s looking like Apple will sell 700,000 of them on the first weekend. No analyst was even close on their numbers. Guessing by very smart people is still guessing.
In defense of analysts, they often are in a conflict of interest that makes them unable to give their true opinion of a stock. If an analyst works for the same bank that does investment banking business with a company, it’s foolish for us to believe that analyst has any motivation for giving a bad opinion on that stock.
Even though every financial advisor is different, I wonder how many of them are using opinions from their company’s analysts to influence investor decisions. If they do, I am sure that the conflict of interest is never discussed.
I’m still going to use analyst opinions on earnings when I do my stock analysis. Analysts can be a valuable tool when it comes to guessing a company’s earnings. Their guess is better than mine. It should just never be presented as anything more than a guess.