“On the eighth day of Christmas my broker gave to me…8 analysts analyzing…”
What is an analyst and what is their job? This is a great question and I have a quick answer. In the investing world, an analyst is there to look at a specific company, industry, or even the market as a whole. Their job is to give an opinion of how those particular investments will perform the next 3, 6, 9, or 12 months, sometimes even longer. They obtain information such as income statements, balance sheets, as well as other publicly available information. Financial analysts use these pieces of information to spot trends and develop forecasts with their proprietary software. What does that mean to us as investors? That means these analysts are PREDICTING a specific return on investments that these companies will make.
This is what the “analyst expectations” are when you hear them on the news. This news is huge after the end of the quarter when the results of sales comes out. At this time we find out how well those predictions held up. If the majority of the analysts low with their predictions and the company made more money than expected, then that is generally when we see a stock price jump quite a bit. What happens if the analysts were too generous with their predictions, if they said the company actually made less than the expectation? The stock drops significantly. Stock price move up or down on any given day due to the expectations that millions of people have for any given company.
That is why stock picking is a fool’s errand. No one can accurately predict the price of any stock on a consistent basis. NO ONE, which is why diversification (owning many stocks) and allocation (owning many different kinds of stocks and bonds) help to mitigate the noise in the markets and help to create better peace of mind when it comes to investing. You need to find a financial coach that can help you with these ideas of investing.
Philip A. Guske