The recent big moves in APPL after the earnings announcement lead to a lot of bashing on analysts. People were screaming how could the analysts ‘miss that piece of data’, how could they have been so wrong? Analysts are usually very bright people. The question is not whether they are smart enough or even whether they missed something – well, that does happen, but not as often as you think. Read on to find out why.
One needs to understand how an analyst operates, what’s really important to them. The biggest problem analysts face is not one of intelligence, or of gathering the pertinent data, or even making great calls, the real problem is something closer to groupthink; but not the classic type of groupthink.
Believe it or not, most analysts would prefer to publish an opinion that is roughly in-line with the majority of their peers as opposed to publishing an opinion at the edge or beyond,. This is often true even if they do happen to have a different opinion –they keep that one private. Why?
Think about the job of a big analyst at a major firm, or even a small firm. A big part of what they do is attract business to their firm – other business like institutional order filling, investment banking, research, and such. If an analyst publishes a strong minority opinion and it turns out to be wrong, they are forever thought of as an idiot, and it reflects poorly on the firm. If they publish a strong minority opinion that turns out to be correct they are praised – albeit only temporarily. If the published opinion is roughly in line with their peers and it turns out the opinion is wrong…well, lets call it safety in numbers – no big deal…. your job is just as secure as it was before you were ‘wrong’.
I’ve worked directly with analysts at major banks, and I can tell you that they are usually very bright, hard working people…. the problem is that for many reasons – not mentioned here – their published opinion is not always a true reflection of their analysis.
Disclosure: I’ve held APPL long-term for 4 years, it is not a trading stock for me.
ADDENDUM – Additional disclosure on 10/18/12 – Since writing the above blog, my wife has been hired by Apple as Global Head of iAd Sales Enhancement (yes, iAd, not iPad). I will no longer mention AAPL.
Thanks for the post. Honestly though, if they are so bright is the job that important to them to constantly censor themselves? How can a man live like that? Is it like me, where I constantly ‘put in a cage’ my right-brained personality/habits while trading and then do they let loose outside of their job/market?
Is this what corporations do to bright men? Shackle them or is this all just part of the money game?
peace
Hedvig
“Approve”
For many, but not all, the job is so important to them that they will censor themselves.
I think there’s a lesson here for us in trading. Traders can censor themselves too, and do so all the time. For example, when a trader doubles down in a loser (not just adding to a good idea) and hopes for it to come back, they are in a way censoring themselves….they know deep down what they are doing is wrong or very risky, but they will go ahead with it anyway.