Skip to main content

Sound Advice: February 10, 2021

It seems as if there are as many investment websites as there are grains of sand on the beach. Each of them trumpets the merits of its own approach, yet the overwhelming majority are either lacking in substance or credibility.

There is more than enough hard information available for investors to make intelligent decisions. The problem is that there is so much information that it can become difficult to sort through and decide what is truly important. There is, in addition, widespread duplication of data, though it is not uncommon for the same data series to vary from site to site. There may be even greater variation when considering forward-looking data, which in most cases is anything but reliable.

What is most useful is data about recent company trends in revenues, earnings, borrowings, valuations, and relative strength. Less useful, or perhaps to be taken with a grain of salt, are analyst recommendations (Buy, Hold, Sell). Neither these nor target prices should be taken seriously.

Recommendations generally come from sell-side analysts who prepare them as part of campaigns to interest major financial institutions in buying sizable positions and thereby earning large commissions for themselves. These recommendations are biased heavily toward the buy side simply because few institutions are interested in hearing about what to sell.

The exercise is one in which the sell-side analyst presents his idea, which may or may not fit with the institution’s objectives.  If the institution has an interest in buying, it will then apply its own sell discipline. Ergo, most recommendations are Buys.

What’s especially troublesome is that Wall Street analysts tend to make recommendations and estimates that are close to the consensus.  Why?  The main reason is that there’s little risk if your estimates were in line with the consensus and the consensus was wrong.  But if your estimates were outliers and you missed the target, you may be at risk for your job as well.

There are also websites dedicated to belief in the wisdom of the masses. These are websites that compile aggregate recommendations of both individual and ostensibly institutional investors in an effort to lead the way to the truth. Some have taken the proposition one step further and dedicated relatively small funds that invest according to the consensus.

To all of these, I say “best of luck.”  The reality is straightforward: Over time, improving company fundamentals will lead to higher prices for their shares.  That’s the basic equation.  Ignore it at your own peril.

N. Russell Wayne, CFP®

Sound Asset Management Inc.

Weston, CT  06883 

203-222-9370

Any questions?  Please contact me at nrwayne@soundasset.com

www.soundasset.com

www.soundasset.blogspot.com

Comments

Post a Comment

Popular posts from this blog

Sound Advice: July 8, 2020

Jobs Are Up, But So Are New Infections Through the spring months, m ost of the economic data was extremely negative, with record declines in employment and consumer spending.  The speed of that decline had no modern precedent. We are now in a recession.   The shortest recession on record occurred in 1980 and lasted just six months.  Second place goes to a seven-month recession in 1918-19, which was tied to the Spanish flu pandemic.  The big question is: When will this recession end? Given surprisingly strong data in May, April may have been the bottom of this economic cycle.  If so, it will have been the shortest recession on record.  With massive support from the Federal Reserve, the federal government, and the reopening of previously closed businesses, employment surged unexpectedly.  At the same time, pent-up demand, stimulus checks, and generous unemployment benefits led to a reacceleration of commercial activity. Still, not all is rosy.   In his recent testimo
Post a Comment
Read more

Sound Advice: December 13, 2023

What You Need To Know About Long-Term Care Insurance Long-term care insurance (LTCI) is a type of insurance that helps cover the costs of long-term care services, such as assistance with activities of daily living (ADLs) such as bathing, dressing, and eating. It can also cover the expenses associated with care in a nursing home, assisted living facility or at home by a professional caregiver. Here's what you need to know about long-term care insurance: 1. Not Covered by Health Insurance or Medicare: Long-term care services are generally not covered by health insurance or Medicare, which only provide limited coverage for skilled nursing care and rehabilitative services. Medicaid covers long-term care, but you need to meet strict income and asset requirements. 2. Costs of Long-Term Care: Long-term care can be expensive and can quickly deplete your savings. LTCI helps to cover these costs, providing financial security and ens
Post a Comment
Read more

Sound Advice: May 17, 2023

Say hello to PEG No, she’s not a new neighbor.   PEG is the acronym for Price-to-Earnings Growth Ratio.   Although stock analysts tend to litter their conversations with shop talk such as PE (Price-Earnings Ratio), ROI (Return on Investment), and Debt-to-Equity Ratio, PEG may well be more telling about the level of stock valuations. The process of evaluating stocks begins with evaluations of the underlying companies.   This includes income statements (a.k.a., profit and loss statements) and balance sheets. Concerns about income statements focus on the trends in earnings, which include profit margins, tax rates, and net income.   What’s important here are the trends over time.   Are margins rising or at least holding their own? Are tax rates following a consistent pattern or have there been interim aberrations? And is the bottom line expanding? Flat or rising margins are good.   Level tax rates are also OK, but if there’s been an outlier, what would have been the impact on net i
Post a Comment
Read more