Every Kind of Analyst on the Stock Market, Explained

Is it still research and analysis if I do it later?

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A generic list of upgrades for NVDA. Source: Nvidia.

If you’ve been on the stock market for the last few months, you’ve probably noticed the words across the edge of the screen:

ABC stock upgraded/downgraded by [your favorite analyst’s name goes here]. Raises/lowers price target to [new price].

It’s generally accepted that people will read these results and take them at face value. We rarely get a glimpse into the actual analysis and we are lucky if we get a description of what they did to arrive at their results.

In reality, most analysis and analysts follow a clear pattern, except it’s the pattern you’d least expect.

Is it bad if I’m following trends? Nobody is looking, right?

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Analyst coverage of a stock, May 2019 to present.

This is the chronicle of a fool, foretold. Analysts will regularly follow trends instead of creating the path for the future. It takes no shame for an analyst to change their tune as the stock price changes. In fact, they can rest assured that the casual retail investor won’t even look them up on a search engine.

Analysts like these are a poison to the investing ecosystem for a few reasons:

  1. The casual change of heart over short periods of time calls into question the integrity of the analyst’s opinion.
  2. The entire opinion of the analyst is called into question.
  3. As an analyst, you’re incentivized to pull with the market to keep your job.

All in all, it’s an IQ test. Analysts that do this fail. For this one in particular, his success rates on ratings stand at 45%. You would be losing money by following his advice.

And that’s even after non-sense changes with the tide.

My beliefs are true no matter what the crowd believes.

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Analyst coverage of a stock, 2019 to present.

These are the analysts grounded in the most reason. Their opinion doesn’t change to hedge against the loss of a job. They’ve had their views from the beginning.

The greatest analysts have had unchanging views for some solid, simple reasons. Good examples of this analysis are people who had buy ratings on Netflix from 2011 even after the Qwikster debacle. After that event, Netflix’s core business didn’t change at all. Netflix’s stock price fell from $50 a share to approximately $7. Analysts at Goldman Sachs, Citigroup, J.P. Morgan all removed their buy ratings for the stock.

The only thing better than the Netflix story going to over $600 a share is the story of the underbelly that has been wrong over and over and over again.

This includes folks like Jim Cramer who told investors to sell AMD if it “doubled to $5 or $6 a share”. His reasoning for this was that “you don’t see your stock fall below $2 if you are doing a good job.”

AMD trades at over $90 a share today.

Rendering, rendering, rendering…

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Analyst coverage of a stock, 2019 to present.

With any professional job, there are consequences to being wrong.

We exist in a medium of percentages, where being right at the wrong time can hurt a reputation irreparably. These analysts try to stay in the middle ground — as being too far on one side or another can either make you seem like a genius or an absolute idiot.

Analysts that partake in appeasing the current trends, such as these, temporarily deflate equities by adding to the bearishness of the moment. These tides act like a rubberband: Until the trend of over-selling and shorting ends, the equity won’t see the light because the market won’t regard it as worthy.

In that sense, analysis and analysts overall work to artificially move the market in directions that may very well be opposite to its true position. With many technology companies, we are seeing the opposite of this effect.

Whereas, in these examples, we are looking at an equity that’s pummeled, analysts can get overly optimistic about companies they don’t fundamentally understand. The rubberband, in that example, is pushing in the opposite direction: Overly bullish.

These days anyone who invested in the NASDAQ over 10 years has become a millionaire, at least.

There is a constant waft of inaccurate pricing in markets. Whether that is too high or too low, these are bubbles.

Timing could be boiled down to the event horizon that usurps analyst opinion and washes over the bullish or bearish attitudes investors are showing.

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Nasdaq Composite index, last 10 years. Source: Chart courtesy of stockcharts.com.

Time will tell when the rubber band is meant to snap on this rally.

Written by

UC Berkeley, mathematics. Los Angeles. Long-time runner. Top writer on Quora, 100M+ total content views. New to Medium. Inquiries: Moumj@berkeley.edu

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