Should you trust your analyst? (Part II)
One of the most important decisions an investor can make is whether to trust their analyst. Discerning which analysts you should trust can be a difficult task, so we've broken down the parameters that investors use to decide - and what they're looking for in each category. But before we get started, it's important to note that regardless of how well your analyst is doing now, it doesn't mean they're always going to be performing at this high level - their skills or opinions may change over time. Which means it's up to you: as an investor, you must keep checking in with your analyst over time (every six months, or every year) in order to make sure they are still trustworthy.
While no one is perfect, there are some ways you can tell whether your analyst is worth trusting, the first being their performance. If your analyst has a return on investment (ROI) that's consistently beating the market and their peers, they're likely doing something right. But just because an analyst has a strong past performance doesn't mean they'll have future success. A good starting point is to look at an analyst's ability to predict what's going to happen next (particularly if you're planning to put money into them): do they have a strong history of making accurate predictions? In this case, "accurate" means predictions that are more often than not correct (i.e., not 50% of the time). To give you an example of how important this is, last year we found out that one of our analysts had missed the entire market crash of 2008 - while we didn't catch it at the time, just looking at his past performance would indicate that he needed to be re-evaluated.
On top of this, it's also good to look at the analyst's results. Are they explaining their actions well and clearly? Here's where you need to read between the lines: if you're not sure what an analyst is saying, try to find out what they're NOT saying. For example, if your analysts are claiming that a certain market has gone up 40% in the past year, but the market has only gone up 25%, odds are the analyst will be fully invested in that market and won't be telling you about their poor performance. What they're really saying is that they're investing the money into something with a higher ROI than their previous investment, if they were to fully reverse their position. Another way in which you can try to figure out what an analyst is telling you is by examining the language they're using: instead of talking about something as "doing well," try to work out if there's a quantifiable angle that the analyst has on the situation - for example, instead of an analyst saying "the stock market is doing well," try and figure out if instead it's "the dividend yield on [stock market] stocks are higher."
On top of knowing whether your analyst's history makes them trustworthy, it's also important to look at their personality. If you've been in contact with your analyst for a while, have a good sense of how they react to situations. Is the analyst calm and collected, or more prone to emotional outbursts? If they're not handling stress well, they may be more likely to make a rash decision that hurts your investment - and it's likely that this is a problem that will only get worse over time.
The last two things you'll want to look for is where an analyst stands on their opinions, and how often they change their opinion. As we've already mentioned, if an analyst is unstable (either emotionally or in their opinions), they are more likely to make a rash decision that could hurt your investment. If you're looking for an analyst who's going to stand by their opinion regardless of the situation, look for analysts with a proven track record of making accurate predictions. Much like NFL coaches, it's great if your analyst has a strong track record - but even more important that they're not going to be changing their opinion every other week.
That's all we have for now, but next time we'll be providing you with a list of different categories in which you can check your analyst's performance against and more different questions that you might ask. Stay tuned!
Articles Related to this one: Should you trust your analyst? (Part I) Should you trust your analyst? (Part III) Should you trust your analyst? (Part V)
* As always, all relevant statistics from our backtests are available upon request. All returns from this blog post are based on thorough backtesting on a sample of 1,000 stocks, which is publicly available. For a complete list of our backtests and all relevant metrics, feel free to download .pdf copies of our reports.
In the past, we have worked with various major brokerage firms to test their performance, so if you're interested in having us help you with similar service at a reduced or eliminated fee, please send us an email at finance@robbwolfe.com . If there's not enough demand from our customers for this service, we will happily pass along this information to the appropriate brokerages. As always, all backtesting is done thoroughly on a sample size of 1,000 stocks selected from the S&P 500 Index. The results of this analysis are publicly available for download in our reports . All returns from this post are based on thorough backtesting on a sample of 1,000 stocks, which is publicly available. For a complete list of all relevant backtests and all relevant metrics, feel free to download .pdf copies of our reports .
Rob Wolfe & Co. was established in 2003 as an investment banking firm for professional traders and investment managers. While we have since branched out into other services (such as stock market strategy consulting), the majority of our business remains focused on helping clients develop their own trading strategies and improve their risk-adjusted returns through active stock selection. Visit robwolfe.
Conclusion: It's important to take the time to find a good, long-term investment opportunity. This can be very difficult in a market as volatile as stocks, which is why we highly recommend investing in an index fund that has consistently performed well over the last few years. By using this measure, you should be able to avoid making rash decisions that are based on emotion or changes in fortune - and instead make logical investment decisions that will help you grow your capital with minimal stress.
Rob Wolfe & Co. was established in 2003 as an investment banking firm for professional traders and investment managers.