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« Weighing the Week Ahead: Big News and Low Volume = High Volatility | Main | Investment Profits from Understanding Government »

June 27, 2011



wsm - Here is my interpretation, which I confess seems rather obvious. The researcher and the author conclude that analysts are getting worse. As evidence they offer three recessions as data points. The bottoms up analysts (the ones I find to be useful) missed by 25% the first two times and by 40% the last time. The last recession was much more severe than the first two, and included huge write downs in financial earnings. There was even a negative quarter.

So if you think that the next recession, whenever it comes, will be worse than the last, the estimates will probably be worse and the authors will have a fourth data point.

If (like most of us) you think that the next recession will be less severe, then this piece of research will quietly disappear, never to be mentioned again.

Meanwhile, it is a favorite sport to criticize analysts. The critics never seem to offer any alternative -- one that has a good track record of earnings forecasts.



wsm -- Apologist? Moi? No way! I pretty much ignore projected growth rates and definitely ignore buy and sell ratings from analysts.

I do think that the "bottoms up" analysts do the best job on one specific task: Forecasting earnings for the next twelve months.

I will comment further shortly, but first I am curious about what you think. In particular, do you think that the very interesting chart suggests that analysts are getting worse, as the author suggests? Does it prove that earnings estimates will be even less accurate in the next recession?

Thanks for bringing this up, and I'll give you a chance to answer before I do.



Jeff - I know you have been an apologist for sell-side analysts, as per several of your posts over the years.

I was wondering what your reaction would be to this article:



Leigh -- I will follow your progress with great interest. The wisdom of crowds approach works well under some circumstances. One strength is that many of those in the crowd figure out which experts are worth following and take cues.

While I do not really agree with your premise about analyst motives, I strongly support the idea of having many approaches with different methods.

Thanks for alerting us, and I hope you will send links when ready.



Jeff, we're currently building Estimize specifically for this purpose. The old regime of sell side analyst estimates is broken, we all know that their incentive structure is not aligned to giving the most accurate estimates. By sourcing estimates from the entire market, and yes that does mean "amateurs" as well, we can get a better picture of what the entire market is expecting, and most likely through the wisdom of crowds produce more accurate estimates.

I'll be very interested in your feedback when we launch shortly, we're building this for the social finance community and want to tailor it to fit that group.


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