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Why Wall Street Is Always Wrong

“Analysis kills spontaneity. The grain once ground into flour springs and germinates no more.”

Henri-Frederic Amiel

Why Wall Street Is Always Wrong — and Why You Need to Buy Stocks Now
By Matthew Weinschenk

Some say that individual investors have no chance of making serious money. They say that Wall Street has rigged the game.

Well, it’s true that the game is rigged. Wall Street was built to separate you from your money. But you can use Wall Street’s own system against them. And you can profit even if you’re not an active trader who buys and sells stocks regularly.

Let me tell you why.

For openers, you need to realize that “the analysts” are usually wrong… especially today.

Analysts are the guys in the big Wall Street brokerage houses who publish those “Buy, Sell, Hold” ratings.

Make no mistake about it, following those ratings will lose you a bundle of money.

Take a look at Citigroup’s upgrades and downgrades during the recent financial crisis.


For a more striking example, remember MBIA Corp. (MBAC), a company whose business consists of selling insurance on mortgage-backed securities? It nearly imploded — and the majority of analysts completely missed it.

A downgrade to “Hold” after a stock’s fallen from $70 to $12 isn’t exactly helpful.

Don’t expect great buying ideas from analysts either. Legendary investor Peter Lynch is on record as saying that once analysts finally catch on to a stock, it’s already jumped nine- or ten-fold. He considers a consensus “Buy” rating to mean “Sell.”

You Need Unbiased Opinions–Not Analyst Opinions

Analysts aren’t dumb. In fact, they’re very smart guys who are skilled at breaking down how businesses work and modeling the financials.

The trouble is, it’s not always in an analyst’s best interest to get his predictions right.

Let’s say an analyst thinks that Microsoft will earn $1 per share next quarter. But all the other analysts say it’s going to earn $0.50. That lone analyst will go back and change his numbers to come up with a result closer to $0.50.

Why? Job security.

If he says $1 and he’s wrong, he’s out on the street. If he says $0.50 and everyone is wrong… well, everyone was wrong. He can’t be expected to figure out what no one else could, so he’s safe. Heros make for bad analysts.

One of the textbooks I used during my financial education actually suggested that, after completing a financial model, you should check the published numbers of other analysts. “If your number is close to theirs,” it said, “you’ve probably got it right!”

A more nefarious source of analyst bias comes from the fact that investment banks want to see lots of stocks rated as “Buys.”

If a big investment bank generates $100 million in fees from working with Microsoft and its analyst ranks Microsoft a “Sell,” that quickly becomes a problem. Firms claim to have a “Chinese wall” separating their analysts from their investment banking… but no one takes it seriously.

You Can Still Use the Analysts for Your Big “Buy” Signals

And there’s yet another way that analysts can be incorrect.

A recent McKinsey study showed that they have been persistently overoptimistic for almost the entire history of the stock market. They’ve typically predicted about 10% to 12% growth a year, when the real number has been about 6%.

But the McKinsey study also pointed out that “actual earnings growth surpassed forecasts in only two instances, both during the earnings recovery following a recession.”

In other words, analysts are too optimistic… except when they should be the most optimistic!

How do professionals make such a blunder? Barry Ritholtz of FusionIQ offers the best explanation. These analysts aren’t economic forecasters, he says. They can break down a company very well, but when it comes to predicting sales… they simply carry forward what happened last quarter.

This leads to too much optimism during good times and too much pessimism right at the turnaround of a slow economy.

According to numbers put together by Bloomberg, less than 29% of companies are rated as a “Buy” for the first time in 13 years (which is as far back as the data goes).

What’s more, the total of “Holds” and “Sells” adds up to 71% of the stocks in the market.

Across the board, these same analysts are estimating earnings growth to be 36%.

When analysts get this down, the market simply must rally.
Let me assure you, the number of stocks that should be considered “Buys” is much higher than 29%.

A new and raging bull market is waiting to take hold. So don’t get scared out of the stock market right now. And if you’re sitting on the sidelines, don’t miss this buying opportunity.

[Ed. Note: As the editor of The FastCap Strategist, Matthew Weinschenk delivers short-term trading opportunities based on earnings announcements. His sought-after research, specializing in scientific innovation and volatility events, is highly regarded within the industry.

Matthew has found a way to profit from the mistakes analysts make every day. For example, it’s been proven that stocks that surprise analysts on their earnings reports outperform the market 92% of the time. Matthew tracks them all in his trading service, The FastCap Strategist.]