When Charlatans Believe Their Own Hype

Just like sports reporters, stock analysts primary job isn’t prediction, its narration. Much of the finance industry exists as entertainment for the elite who wouldn’t do anything lowbrow like pay attention to sports. The endless analysis of trades, players, speculations and “new” tactics serves the same purpose in sports and finance – it’s solely entertainment.

There is a large amount of data supporting the fact that analysts are literally no better than the man on the street than predicting stock prices or earnings.

This quote is from the Mr. Random Walk himself, Burton Malkiel:

Security analysts have enormous difficulty in performing their basic function of forecasting earnings prospects for the companies they follow. . . . Bluntly stated, the careful estimates of security analysts (based on industry studies, plant visits, etc.) do very little better than those that would be obtained by simple extrapolation of past trends. . .

The same argument with more mathematical rigor was made by studying 80,000 analysts forecasts over a period of 20 years,

The odds are staggering against the investor who relies on fine-tuned earnings estimates. They estimate there is only a 1 in 170 chance that the analysts' consensus forecast will be within 5% for any 4 consecutive quarters.

Analysts estimates are better a predicting other analysts’ estimates than anything else. Indeed, an analyst of any skill would move to the bigger paychecks of the hedge fund world as soon as possible.

In order to keep up the illusion of skill the analysts go through an elaborate show which typically includes; talking with management, visiting plants, and constructing exceedingly elaborate models. When their forecasts are close they can take the credit since their hard work apparently paid off. When they inevitably fumble – well…no one else got it right either.

When one of the analysts threatens to lift the curtain on the whole scheme the charlatans panic and start their denouncements. What makes this story so entertaining is that the criticism is not based on analysis – only the method, knowing full well its makes no difference.

A Wall Street analyst has raised eyebrows among competitors and customers because he did not speak to the senior management he wrote about prior to launching coverage of seven well-known pharmaceutical companies.

For decades, when compiling their initial reports, analysts have traditionally met with corporate management, such as the chief executive, or at least the chief financial officer.

More "Wisdom" From the Cultural Elite - Harvard Bigshots Sink Fund

I remember thinking how stupid it was for Harvard to get rid of fund manager Jack Meyer because he made too much money. He was the guru who made Harvard over 16% a year for 10 years while trading billions. Incredibly even that market beating return wasn’t enough for Harvard to keep him around.

The lamentations of the privileged were too much and Harvard brought on less well paid help to manage their $18 Billion endowment. They got what they paid for according to Bloomberg, “Harvard's return on its endowment fund slipped to 16.7 percent in the fiscal year ended June 30, the lowest in three years, and behind rivals Yale University and Stanford University.”

Unfortunately the article didn’t cover any of the important questions, like why do people still contribute a school that already is sitting on $18b?