“My experience is that the recommendations of Wall Street analysts are wrong more often than they are correct. An investor told me that he once had an account with one of Wall Street’s most respected firms. He told the Wall Street firm immediately to purchase any stock that was added to the firm’s overweight list—and immediately to sell the stock when it was removed from the list. After several years of following this approach, the investor closed his account with the most respected firm because his results were particularly poor.
Why do analysts tend to be substandard stock pickers? Most analysts follow only one or a few industries and tend to have deep knowledge about the companies they follow. However, there is a large difference between knowledge and judgment. It is said that knowledge is knowing that a tomato is a fruit, but judgment is not putting it in your fruit salad. To have good judgment, you need to have the knowledge, but, in my opinion, you also need many other qualities, including common sense, stable emotions, confidence, and, quite possibly, an indefinable sixth sense.
Furthermore, in my opinion, most individuals, including securities analysts, feel more comfortable projecting current fundamentals into the future than projecting changes that will occur in the future. Current fundamentals are based on known information. Future fundamentals are based on unknowns. Predicting the future from unknowns requires the efforts of thinking, assigning probabilities, and sticking ones neck out—all efforts that human beings too often prefer to avoid.
Also, I believe it is difficult for securities analysts to embrace companies and industries that currently are suffering from poor results and impaired reputations. Often, securities analysts want to see tangible proof of better results before recommending a stock. My philosophy is that life is not about waiting for a storm to pass. It is about dancing in the rain. One usually can read a weather map and reasonably project when a storm will pass. If one waits for the moment when the sun breaks out, there is a high probability others already will have reacted to the improved prospects and already will have driven up the price of the stock—and thus the opportunity to earn large profits will have been missed.”
Warren Buffett wrote:
“A simple rule dictates my buying: Be fearful when others are greedy, and be greedy when others are fearful. And most certainly, fear is now widespread, gripping even seasoned investors. To be sure, investors are right to be wary of highly leveraged entities or businesses in weak competitive positions. But fears regarding the long-term prosperity of the nation’s many sound companies make no sense. These businesses will indeed suffer earnings hiccups, as they always have. But most major companies will be setting new profit records 5, 10, and 20 years from now. Let me be clear on one point: I can’t predict the short-term movements of the stock market. I haven’t the faintest idea as to whether stocks will be higher or lower a month—or a year—from now. What is likely, however, is that the market will move higher, perhaps substantially so, well before either sentiment or the economy turns up. So if you wait for the robins, spring will be over.”
Ref: “Common Stocks and Common Sense.” Wiley