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TORONTO (GlobeinvestorGOLD) — Some of my best friends are stock analysts. There—I've admitted it. These days, in the wake of the retreat in equity markets over the past two years and a rash of
corporate scandals, analysts are a much-maligned species.
But the equity research professionals who toil just down the hall from my office bear scant resemblance to the few high profile Wall Street denizens (now mostly ex-Wall Streeters) in the eye of the storm. Despite all the finger pointing, my colleagues still offer much that is of value to the average retail investor. That's true even with the corporate world now trying to ensure that analysts don't get the inside scoop before the overall market.
Many investors can't seem to
get beyond the headline recommendations—"buy," "sell," "hold," "don't touch with a 10-foot pole"—which also capture the media's eye. That's a mistake, and one that the pros don't usually make. Your average mutual or pension fund manager wants to come to her own conclusions about whether a company is a worthy investment.
It should be no different for your own portfolio. The only "buy" that really counts is the one you make. If you're buying individual stocks rather than having your money managed for you then you're taking on that responsibility,
like it or not.
Unless you've got no life outside your stock picking, the analyst's role is to do what you can't, which is to monitor and interpret industry and company developments day to day. It's as much about understanding what has happened as it is about what will happen. All their pouring over boring spreadsheets and accounting statements gives you a much-needed shortcut to helping you make up your mind.
But you have to look past the "buy" or "sell" conclusion
and read the whole report. An analyst can like a stock for reasons you won't. An energy specialist could have a "buy" on stocks that will win big if war in Iraq drives up oil prices. You might instead judge Iraq to be a sitting duck, and expect oil to plunge as the U.S. scores a quick military win. But the analyst's list of the energy producers least levered to crude prices would then be of use to your stock selection.
The other reason to get into the meat of the report is to assess the risk of the investment. A good analyst will give a
sense of both the upside and downside, even with their top picks, highlighting what could go wrong as well as what could go right. Your own appetite for risk, and the speculative stocks already in your portfolio, then have to be looked at to see if the analyst's recommendation is still of interest to you.
Finally, analysts are like fine wines—they don't leave you with a hangover if you use them in moderation, and they have the potential to improve with age. Moderation means not letting anyone dictate your investment strategy by
putting too much of your money behind one so-called expert's opinion.
As for age, it's not only that older analysts have more experience. It's also that they've survived the test of time. An analyst that wants and earns a long career is one who keeps investor returns front and centre in his work. Professional fund managers won't give an analyst five minutes in front of them if he fails to live up to a basic credo: do unto investors as the analyst would want done for his own portfolio.
Of course, that doesn't mean that my friends down the hall in
equity research are always right, especially when the overall market is in a sour mood. But the best of them have a high enough batting average that their home runs eventually make up for the inevitable strike outs.
Dr. Avery Shenfeld is a Managing Director and Senior Economist at CIBC World Markets.