How Important Are Stock Analyst’s Forecasts?
Should investors pay close attention to stock analyst’s forecasts? How reliable are these ratings and earning predictions? Keep in mind that no one can predict precisely, with 100% accuracy, the earnings results of a company before its earnings announcement!
Professional Analysts Are Not Always Right
Analysts are paid a huge amount of money to give their forecasts on how they think a company is going to perform when its’ earnings reports come out! However, analysts frequently “miss” on these quarterly earnings forecasts. Many analysts are not good at predicting the future. No one knows for a fact what company’s stock will be the next big winner.
Many investors, when making economic decisions, heed the analyst’s advice. However, an investor should not always take these figures “to heart” because professional analysts are not always right. The analyst’s main focus is not on long-term earnings results! Even though the goal of the investor should be to hold their stocks long-term for maximum gain.
Analyst Reports Can Affect The Stock Price
Granted, analyst reports can cause quarterly “swings” in a company’s stock price! For example, at the end of every quarter, if the company’s stock exceeds analyst expectations it often raises the price of the company’s stock. On the other hand, if the quarterly earnings of the company don’t meet the analyst’s predictions the stock price can plummet.
Analysts reports cause “volatility” in the stock market. Volatility informs the investor of the uncertainty, and inherent risks, involved in securities or market indexes. It is commonly measured by employing the standard deviation. The “higher” this volatility is the riskier the security is! “Lower” volatility, on the other hand, would signify the security does not fluctuate as much. Keep in mind volatility can go in “either” direction.
Make Your Own Stock Forecasts
Warren Buffett, considered to be the greatest investor of all times states: “Forecasts may tell you a great deal about the forecaster; they tell you nothing about the future.” The retail investor in stocks would do best to take these forecasts with “a grain of salt.” In other words, after careful study, make your own forecasts! Investors should strive to do their own independent research on the underlying company and its’ fundamentals. Many successful investors use their judgment and perform their own analysis of their stocks.
Warren Buffett does not agree with analysts and ignores them. He performs his own research and makes his own long-term judgments always preferring to think for himself. And, advises other investors to do the same for “optimal” performance results in their portfolios.
In addition, it is important to note that most analysts have a tendency not to issue “sell” ratings on stocks but “buy” ratings instead. And, in doing this, if earnings do rise, it makes the analysts stock-picking skills appear superior.
Analyst Predictions Are Their Best Guesstimates
It is important to keep in mind that when an analyst publishes their earnings expectations they are, in essence, providing investors with their best “guesstimates.” Certainly, the analyst will visit a company and will often communicate with management in the process. And, they do perform their research, analyzing the financial statements and studying the quarterly and annual reports. However, analysts predictions often fall “short of the mark!”
No analyst has perfect foresight into future earnings. There are too many “unknown” factors to take into consideration. Analysts can only offer their assumptions.
In conclusion, I agree with Warren Buffett that too much importance is placed on analysts reports by Wall Street. Analysts often miss their earnings estimates. Their estimates can cause major price swings in a company’s stock, even though the company still has strong fundamentals.
Unfortunately, however, analysts reports continue to cause “volatility” in the market. I, for one, will make my “own” forecasts, taking Warren Buffett’s approach, and not base my buy (or sell) stock decisions on analyst “estimates.” Always keep in mind that analysts make mistakes. No one can predict the future!
Hi Linda,
I like to review analysts estimates when I’m doing a review on a dividend stock. Mainly just to see the trend and set some type of expectation for myself. But quarter to quarter, I do not pay much attention. Tom