The StressTest column appears every Sunday on Fool.com. Check back weekly, and follow @TMFStressTest.
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.