It took a special kind of incompetence to get to where we are today. After years of "producing" billions of dollars using sophisticated financial instruments, investment banks and nominal retail banks alike got crushed by the consequences of excessive leverage and convoluted investments.
Good thing we've stopped trusting our finances to what those bozos have to say.
Yeah, good thing
Then again, maybe we haven't completely. After all, we're still relying on analyst forecasts.
It's a well-documented fact that analyst earnings estimates tend to be wildly inaccurate; off by some 40% on average, according to an extensive study by two Penn State professors. Then there's the herd mentality that figures into buy and sell recommendations.
In his book One Up on Wall Street, legendary former Fidelity Magellan fund manager Peter Lynch explains why so many Wall Street analysts copy one another, rather than risk their reputations on unusual opinions: "Success is one thing, but it's more important not to look bad if you fail."
See, as my colleagues Brian Richards and Tim Hanson revealed, the trouble with analyst price targets is:
1. You get no context.
2. The vast majority of stocks -- not surprisingly, for an industry that makes money by persuading you to buy stocks -- are considered "undervalued."
Really? The vast majority?
Yes. According to data I've collected using Capital IQ, an institutional software package, the Wall Street consensus is that fully 95% of S&P 500 companies are undervalued -- even after the recent run-up.
Consider these standouts:
Each of these companies has played a central role in the financial crisis and is now the target of Wall Street reform. As the Senate bill currently stands, the ratings agencies would lose their federally mandated oligopoly status. Over the next day or so, lobbyists will try to kill a provision banning FDIC-insured banks from trading derivatives and are blocking a vote on a provision that would ban them from speculating. Without the ratings agencies' oligopoly or Fed support for banks that speculate in derivatives and other financial instruments, the business models of these companies would change dramatically.
But on a broader note, it's absurd to think that the vast majority of the S&P 500 -- an index that captures the most carefully scrutinized publicly traded companies -- would be undervalued.
Remember, many of these "buy" recommendations come from the same Wall Street firms that couldn't properly analyze their own businesses. And while that doesn't mean none of them employs very capable analysts, or that no stocks are undervalued today (many are), it does raise another problem with price targets …
3. You have no way of assessing the analyst's past record.
If all you have to go on is that someone at Citigroup says you should buy Goldman Sachs, how on earth are you supposed to estimate the quality of the analysis, much less decide whether you agree with that opinion?
Here are three cheap stocks expert investors love right now
Good thing we've stopped trusting our finances to what those bozos have to say.
Yeah, good thing
Then again, maybe we haven't completely. After all, we're still relying on analyst forecasts.
It's a well-documented fact that analyst earnings estimates tend to be wildly inaccurate; off by some 40% on average, according to an extensive study by two Penn State professors. Then there's the herd mentality that figures into buy and sell recommendations.
In his book One Up on Wall Street, legendary former Fidelity Magellan fund manager Peter Lynch explains why so many Wall Street analysts copy one another, rather than risk their reputations on unusual opinions: "Success is one thing, but it's more important not to look bad if you fail."
See, as my colleagues Brian Richards and Tim Hanson revealed, the trouble with analyst price targets is:
1. You get no context.
2. The vast majority of stocks -- not surprisingly, for an industry that makes money by persuading you to buy stocks -- are considered "undervalued."
Really? The vast majority?
Yes. According to data I've collected using Capital IQ, an institutional software package, the Wall Street consensus is that fully 95% of S&P 500 companies are undervalued -- even after the recent run-up.
Consider these standouts:
Company | Recent Price | Consensus Target Price | Upside Potential |
|---|---|---|---|
Goldman Sachs (NYSE: GS) | $137.40 | $203.50 | 48% |
Moody's (NYSE: MCO) | $21.03 | $31.20 | 48% |
McGraw-Hill (NYSE: MHP) | $28.95 | $41.70 | 44% |
JPMorgan Chase (NYSE: JPM) | $39.02 | $55.50 | 42% |
Bank of America (NYSE: BAC) | $15.95 | $22.50 | 41% |
But on a broader note, it's absurd to think that the vast majority of the S&P 500 -- an index that captures the most carefully scrutinized publicly traded companies -- would be undervalued.
Remember, many of these "buy" recommendations come from the same Wall Street firms that couldn't properly analyze their own businesses. And while that doesn't mean none of them employs very capable analysts, or that no stocks are undervalued today (many are), it does raise another problem with price targets …
3. You have no way of assessing the analyst's past record.
If all you have to go on is that someone at Citigroup says you should buy Goldman Sachs, how on earth are you supposed to estimate the quality of the analysis, much less decide whether you agree with that opinion?
Here are three cheap stocks expert investors love right now
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