Rich Bernstein and Why Analysts are Bad for Stocks

This Alan Abelson quote last weekend of Merrill Lynch’s Richard Bernstein got my attention:

Rich [Berstein] asserts that the investor who concentrated
on the 50 stocks in the S&P 500 that are followed by the fewest
Wall Streets analysts wound up with a rousing 24.6% gain in the 12
months ended Dec. 29. That handily beats the quite decent 13.6% advance
of the S&P 500, or, for the matter, the 14.6% rise by the index
when calculated on an equally weighted basis.

Neck-snapping, non? For sure, and while the obvious interpretation is that equity analysts are bad for a stock’s health, there are other ways to look at it.

You might, for example, think about why some stocks are over-followed and others aren’t. They tend to be heavily followed when they trade actively and have done well for investors. Those that are less well followed tend to be the reverse: less actively traded, and poorer performers, at least recently. Put differently, you could call Bernstein’s fade-the-analyst-hordes strategy just a restatement of contrarianism with an anti-analyst gloss.

Then again, maybe analysts are just plain bad for stocks. Heck, it’s possible.


  1. I knew analysts tended to subtract value, but I had no idea is was of order 10%. Analysts are a bigger drag on the economy than lawyers!

  2. I’m somewhat skeptical of drawing any more general conclusions from a single analysis of a 12 month period. “Past performance is not an indicator of future returns” holds as true here as anywhere.
    I bet you can find a 12 month period where the exact opposite return proportions held true.

  3. I’d like to see a breakout of the 50. Were there a few outlier stellar performers that skewed the group or were the 24% gains more or less even across the board.
    Sure there are a lot of ways the stats could be flawed but maybe this is Heisenberg’s uncertainty principle at work: to look at something is to change it.
    The herd mentality probably does have some quantum component. A spooky science quotient. Analysts get spooky sometimes.

  4. I have come to believe that some analysts provide what Hitchcock called a “MacGuffin”.
    “A MacGuffin (sometimes McGuffin or Maguffin) is a plot device that motivates the characters and advances the story, but has little other relevance to the story.”
    For “story” substitute “price” and for “advances” substitute “moves”.
    Here is recent testimony from one such analyst:
    It is not terrifically difficult to “reverse engineer” a list of stocks that will fall and the method by which it will happen. Picking the date can be hard.