Analysing the Analysts

The motivation for putting together this information emanated from one, somewhat rhetorical, question. Who holds to account those professional analysts who hand out recommendations on ASX stocks across the airwaves, television screens and websites pervading our world? That first question led to a second question, less rhetorical and more inquisitive. Is there a source of information that can help me hold these analysts to account, or at least create a starting point in the process towards answering the first question? Or to loosely quote Elvis Costello, I’m doing a bit of Watching the Detectives.
I decided to put the analytical part of my brain to work, I did a lot of data trawling and came upon a bank of recommendations made by so-called experts in the stock market. I had already done quite a bit of work in collecting important information about various ASX listed businesses, ostensibly for my own purposes. I have come up with some interesting findings, the main one being that some analysts are very good, others are better off trying something else and stop trying to complicate an already complex field.
From time to time I am asked for tips or advice into stock market investing and each time my response is the same, I don’t provide tips or advice. It’s not because I don’t want to help people, it’s because, in part, I’ve considered my advise to be not much better than the next guy and for reasons pertaining mainly to maintaining friendships but also because investing in the stock market is a complex undertaking. You have to ask yourself a series of questions before investing, such as why you’re investing in the first place, and what you want out of it. Stock market investing also requires a deal of nerve, you need to able to hold onto it, and courage, because the stock market is just that, a market, it’s therefore not a logical place to put your money. It is full of potholes and traps. It can however, be very rewarding.
Using the Westpac Investment platform, which is what I use to buy and sell Australian shares, and which provides key information on all ASX stocks, including a pool of analysts recommendations over a period of time and Morningstar, a worldwide investment advisory firm and data analytic company, I decided to list the record of those recommendations against what has actually happened to each stock since that recommendation was made. It’s laborious work, one has to dig a bit to find them but they are there if one knows where to look and what to look for. I then decided to rate the recommendation. Simply, did the respective ratings offered for each ASX listed stock prove to be correct or did the analysts get it wrong? Of course Morningstar will tell you that they are not offering advise, yet they assign an action, to buy, to hold, or to sell to a stock, a direction, presumably, that they would be prepared to stand by.
I have also included in my spreadsheet key quantitative numbers that I believe are important to analysing a company. Of course, none of this guarantees investment success because as I have stated, the stock market is not logical, but the information does provide a good starting point. By no means do these analysts recommendations represent all analysis available but it is a reasonable assumption to make that they are a well respected and oft quoted source of investment guidance. You will find the recommendation that the analyst has made, the date of that recommendation, and what has happened to the share price since that recommendation. From there a rating is given that recommendation depending on how accurate it was.
The spreadsheet does not provide recommendations of my own, nor does it provide other more qualitative information, such as industry trends, company culture or commentary on broader economic issues, or data that you wouldn’t find on many respected investment platforms. Over and above this, it merely provides my rating of the analysts recommendations. My conclusion, broadly, is that the analysts are no better, perhaps not even as good, as I am at picking stocks that prove successful over the medium and long term. Sometimes they get it right, sometimes calling a stock that, if an investment were made on that recommendation at that time, would have yielded a most satisfactory on-paper profit, but equally, sometimes they get it badly wrong. It’s against this background that I have created a summary of my rating of both the consensus and Morningstar recommendations, the links to those summaries are at the top of the page. You can judge for yourself. In short, according to the rules I adopted for these ratings, ranging from one to five, a rating of three is ok, it’s acceptable, a rating of four is good, five is very good, two is bad, one is atrocious.
All of the raw data contained in the spreadsheet is purely objective, it comes from the companies themselves. The only subjective information you’ll find are my ratings of the analysts recommendations. I have used an approach explained on the summary page. You’re free to put your own interpretation on that approach, feel free to disagree, feel free to adjust the boundaries for each of the ratings, feel free to disregard it altogether. It’s completely up to you.
I have listed a portion of the 190 companies that I have compiled information on. Analyse this information with a critical eye. Let me know if this information might be useful. Investing requires educating ourselves about what the market is about, adopting a degree of healthy skepticism but also having some degree of excitement about what the stock market might be able do to help us grow our hard earned money. If nothing else it may help you realise that simply following someone else’s advice is racked with risks if we don’t also do some research and learning of our own. Of course, these analysts will tell that anyway, to cover themselves, while also taking your money. It also serves as a word of warning, that swallowing a pill just because the doctor says so, or in this case, a stock analyst, has it’s own perils.