Weather forecasters get a pretty bad rap for their accuracy.
However, this post isn't about ripping on weather forecasters. In fact, quite the opposite. I bring them up so that I can compare them to another group of individuals whose profession should really be brought into question.
You see, meteorologists often get blamed whenever a forecast is wrong. If it rains on a day when sun was predicted, they get called out for a ruined picnic or day at the beach. Clouds instead of the predicted sun can put a big damper on an outdoor activity. The list goes on.
As I've gotten more interested in weather and looking at things, I've actually become a lot more tolerant of meteorologists. If you look at what they do, it's in fact pretty amazing that they get it right as often as they do. They look at weather as it stands, then look at things that are happening hundreds, if not thousands, of miles away, and make predictions on what's going to happen hours, and even days, down the road. There are many things that can change, each with potential impact on what actually happens. If you're on the East coast and reading this, consider that your forecast for what's supposed to happen is based on weather that hasn't even hit land all the way across the continent.
What If There Were No More Forecasts?
So, what does this have to do with another profession that is pretty much useless? I'm getting there. Stick with me as I stay with the weather forecaster example for just a bit longer.
Imagine, for a second, that meteorologists stopped forecasting the weather. What if all they did was talk about what already happened? Think about tuning into the 5:00 news and having the four minutes dedicated to the meteorologist telling you what happened. The Weather Channel would just talk about the last few days. Online weather sites and apps would give up to the minute information about weather that already happened.
It sounds pretty useless, doesn't it.
So, why do Wall Street analysts get to do exactly that?
Reporting News From Yesterday And Beyond
There are a lot of Wall Street analysts out there, and from what I've been told, they get paid a lot of money to do what they do. Which is to come up with snazzy reports with lots of important sounding language that rehashes information that, for the most part, has already been released and is well known.
Where do I sign up?
Upgrades and Downgrades On Yesterday's News
I've noticed a troublesome pattern over the past several years as I track stocks I own or stocks that interest me. The upgrade and downgrades that accompany reports seem to come out after big news has been announced, and therefore, after the stock market has already moved the stock in response to that news.
Citi, for example, released poor earnings. The day of the earnings report, twelve analysts released reports that downgraded the stock, after it lost a few percent in early trading. Wow, really big leap on that one.
In other words, they effectively said “And yesterday's weather was..”
Do you know how many analysts downgraded Citi leading up to the reports?
Not a one.
Recently Ford has been under a lot of pressure. A poor earnings reports, reduced guidance for 2014 sales, and a monthly sales report sent the stock on a slow slide. After it slid for about six weeks, losing nearly 20% of its value, an analyst downgraded the stock, citing risk from the very items which had already been reported as threats to the stock price.
You don't say.
Where do I sign up?
The Lost Value Of This Profession
Now, it seems to me, that these recommendations and analysis would have been more useful to investors before the report.
Some would argue that the data isn't there. Maybe that's true, but I know that at many rating agencies, there are analysts dedicated exclusively to one company. All day, every day, their job is to understand what's going on. At one company. So while the company may not (and shouldn't) release data to that analyst, if they're not able to get some sense of what the company is doing and how they're performing, and the challenges or opportunities that go into a report, what value is there in that job?
I'm thinking very little if any at all.
But, these analysts get paid a lot of money. Probably a lot more than meteorologists. They get recruited from the best business schools. They are held in high prestige. Their information gets printed in glossy reports that get sent out all over the place.
But for what?
So they can release a report after the company in question releases theirs to say the same thing and guide investors to do what they've already done in the time between the actual drivers and the report being released.
Where do I sign up?
Once Upon A Time
I'm wondering if there was once value in this profession. Before the internet when news releases were sparse and data wasn't available and digested within moments of a company announcement, maybe these reports held value. Back then, a report released hours or days after an earnings announcement may have held value if the market was slower to respond and there were days available to price in a driving factor.
But, that window doesn't exist anymore. Earnings, guidance, profits, sales, whatever the drivers are, those bits of data are processed and priced into stock prices in a matter of seconds.
Thanks But No Thanks
At this point, I take analyst recommendations at face value. What that personally means is that for about every recommendation I see, it's too little, too late, and it doesn't tell me anything that has not already been reported.
If you ask me, I'd just as soon they disappear altogether. And, if you're used to reading them and wonder what else you could do, here's a suggestion.
Go look up the weather forecast. You might actually get some useful information.