Warren Buffet has mentioned once that whenever he wants to have a laugh, he reads Analyst reports. Is he joking? We will see this later. Everyone who is investing in stock market or share market is interested in analyst reports. They believe that such reports will show how to invest, where to invest and guide through the vagaries of stock exchanges.
Recently, on 12th Mar 2012, there was an article in Financial Times that most of the analysts are now more positive in their outlook for 2012 and hence the stock market may move up. (Analysts views still hold some good fire power!)
In order to understand the value of listed companies, many investors refer to the Analysts forecasts. They also refer – sometimes pay hard earned money – to get the valuation done by them. This is because of the information advantages Analysts perceived to have:
1. They study the competitors and may be able to arrive at meaningful conclusions. If a steel manufacturer in a country suffers poor performance it could be due to some common industry factors, which the analyst can apply to other companies in the same sector.
2. They also subscribe or have access to studies and reports on general economy, industry, etc. which a common man may not have. Based on such information, they may be able to forecast the future cash flows of the business with more realistic assumptions
3. Analysts sometimes visits the companies they track and get more information . This puts retail investors who rely on public information at a terrific disadvantage. That is why Warren Buffet mostly advises the retail investors – who don’t have the time and patience- to invest in index funds.
4. Better analytical tools and techniques. Professional analysts can use information such as cost of capital, profit retention, profit margins trend, impact of introduction of new products, impact of shifting the production base to China (as has been recently done by Nokia) in a professional manner and assess the impact on cash flows. A non-finance retail investor may find such task equivalent to ‘climbing’ the Everest. How to invest and where to invest questions always linger around!
Does all this mean that Analysts are always successful in understanding the business dynamics of the companies they follow in such a manner that they are able to take advantage? No is the answer. Many studies have highlighted this. It is equivalent to Moody’s or S&P giving investment rating to some company (e.g. Lehman) , which just collapses a few months later. Similarly, a company recommended by an Analyst may shut down the shop a few months later. Well, it is the nature of the game. There are several reasons for that – but we don’t delve into that ; however would like to mention that some analysts report may be written to serve vested interests! . Let us focus something more interesting.
Most analysts focus on EPS while the fundamental valuation techniques advocate the reliance on other metrics such as FCF, EBITDA, etc. It is quite possible that sometimes Analysts miss the significant shifts in the Market, Industry or Company itself. There is significant value in identifying the significant differences between analysts forecasts or valuation and real facts. That may offer a wonderful business opportunity. Many of Warren Buffet investments falls in such categories – the best example is American Express which he invested heavily, committing a significant proportion of the partnership’s assets in mid 1960s, when the general (Analysts) view on the company was otherwise. Warren Buffet also focused on stock market or share market to park his money. However he approached the questions how to invest and where to invest in a different manner.
Although Warren Buffet says that he laughs at a few bad (or written to misguide) anaytical reports, his own strong point is analysis. He is the best in analysis since late 1950s or early 1960s, ever since he read and digested the book 'Security Analysis' by Ben Graham &Dodd. However, to the techniques mentioned in the book, he added his own secret receipe. This is the secret of his success. (Although he tells a few things now and then, the real strategy may not be fully disclosed yet - just as magician won't tell all his secrets.)
Of course, Warren Buffet himself is an excellent analyst and Financial Thoughts believes there are (& were) several other excellent analysts in the stock market or share market. Why then many analysts are not as successful as him? Well it is due to the personality factors and circumstances – in his younger days, Warren Buffet got the best mentor one could ever imagine. Possibly, it is time that Warren Buffet also mentors a few Analysts. Moreover, during 1970s, he developed necessary leadership and motivating skills that 100+ smart CEOs report to him, either directly or indirectly.
Warren Buffet seems to believe in the motto ' It is wise to be otherwise' while taking decisions on how to invest and where to invest. For him stock market or share market is always a best friend helping to take decisions on where to invest
