It's Time to Stop Listening to Wall Street Analysts

Sell-side Wall Street analysts can be brilliant people, but that doesn't mean you should pay attention to them.

Feb 16, 2014 at 8:30AM


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Few people on the planet know more about a given company than a sell-side Wall Street analyst. They can recite growth rates, measure market opportunities, and probably tell you the name of the CEO's youngest grandson. Despite of all of these things, you are probably a better long-term investor.

A few weeks ago, First Niagara (NASDAQ:FNFG), a regional bank in the Northeast, reported earnings and informed investors of the bank's plans to accelerate investments needed to boost revenue and improve the long-run fundamentals of the business. Sounds like a good plan, right? Wall Street didn't think so, and the stock dropped more than 10%.

Because the plan forgoes the "consideration of near-term profitability," analysts at Deutsche Bank found the move "perplexing" and lowered their price target, because looking out three to four years is "beyond many investors' time horizons."

In some sense, the analysts were doing their job and catering to their hedge fund clients, who apparently see three years as just too darn long. This move isn't too surprising. A survey of analysts found only 35% considered "the profitability of [their] stock recommendations" to be very important. The evidence backs this up as well. 2013 was a spectacularly bad year for the "brains" on Wall Street as the stocks with the most sell ratings crushed the market.

If you're still not convinced most Wall Street analysts aren't exactly Warren Buffett 2.0s, consider the fact that on January 23, a Citigroup analyst downgraded Lamar, the outdoor advertiser, from buy to neutral. Just two weeks later, the same analyst upgraded Lamar back up to buy and raised his price target. The reason? He expected lower cash interest expense and divulged that "since then, we've received feedback from clients on 3 fronts..."

It wouldn't be farfetched to think a few big hedge fund clients weren't too pleased with the recent downgrade and made a few phone calls. So much for analysts being objective.

Most of you reading this do not have an active relationship with a team of Wall Street sell-side analysts, so why even listen to their recommendations? They are serving a client base with a completely different mind-set and situation than you. These analysts don't know you, how much time you have until retirement, your current salary, your debt situation, or how many kids you need to send to college.

When's the last time you saw a Wall Street recommendation that said this:

We are downgrading Company XYZ from neutral to sell because Jim is 55 years old with two daughters entering college, and we believe selling to pay for their education is a better idea than taking out a second mortgage on his suburban home.

Trick question. That's never been written.

The idea isn't to be completely cynical about Wall Street analysts, but to be aware of their incentives, client base, and expertise -- which is not recommending stocks to hold for decades. The key to building wealth over time isn't about predicting next quarter's earnings per share or jumping when others say "jump," but the ability to focus on your individual situation and think about investing in terms of decades instead of tomorrow's headlines. 

Listen to a long-term thinking billionaire instead
Warren Buffett didn't make his billions listening to Wall Street, and he wants you to be able to invest like him. Through the years, Buffett has offered up investing tips to shareholders of Berkshire Hathaway. Now you can tap into the best of Warren Buffett's wisdom in a new special report from The Motley Fool. Click here now for a free copy of this invaluable report.

David Hanson has no position in any stocks mentioned. The Motley Fool owns shares of Citigroup. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

4 in 5 Americans Are Ignoring Buffett's Warning

Don't be one of them.

Jun 12, 2015 at 5:01PM

Admitting fear is difficult.

So you can imagine how shocked I was to find out Warren Buffett recently told a select number of investors about the cutting-edge technology that's keeping him awake at night.

This past May, The Motley Fool sent 8 of its best stock analysts to Omaha, Nebraska to attend the Berkshire Hathaway annual shareholder meeting. CEO Warren Buffett and Vice Chairman Charlie Munger fielded questions for nearly 6 hours.
The catch was: Attendees weren't allowed to record any of it. No audio. No video. 

Our team of analysts wrote down every single word Buffett and Munger uttered. Over 16,000 words. But only two words stood out to me as I read the detailed transcript of the event: "Real threat."

That's how Buffett responded when asked about this emerging market that is already expected to be worth more than $2 trillion in the U.S. alone. Google has already put some of its best engineers behind the technology powering this trend. 

The amazing thing is, while Buffett may be nervous, the rest of us can invest in this new industry BEFORE the old money realizes what hit them.

KPMG advises we're "on the cusp of revolutionary change" coming much "sooner than you think."

Even one legendary MIT professor had to recant his position that the technology was "beyond the capability of computer science." (He recently confessed to The Wall Street Journal that he's now a believer and amazed "how quickly this technology caught on.")

Yet according to one J.D. Power and Associates survey, only 1 in 5 Americans are even interested in this technology, much less ready to invest in it. Needless to say, you haven't missed your window of opportunity. 

Think about how many amazing technologies you've watched soar to new heights while you kick yourself thinking, "I knew about that technology before everyone was talking about it, but I just sat on my hands." 

Don't let that happen again. This time, it should be your family telling you, "I can't believe you knew about and invested in that technology so early on."

That's why I hope you take just a few minutes to access the exclusive research our team of analysts has put together on this industry and the one stock positioned to capitalize on this major shift.

Click here to learn about this incredible technology before Buffett stops being scared and starts buying!

David Hanson owns shares of Berkshire Hathaway and American Express. The Motley Fool recommends and owns shares of Berkshire Hathaway, Google, and Coca-Cola.We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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