26 November 2011

About Analysts

One of my friends and former colleagues recently wrote me: “I actually wonder how you analyse so much.” This was after I had summarised for him in six-seven bullet points my opinions about what is going to happen in Europe and to Europe’s banking sector in 2012, and nagged a bit about his access to the professional analysts. In fact, he had tried to speak with the professional analysts and economists, but apparently had not heard much more but that there is uncertainty everywhere.

It seems to me that you cannot expect much more from the experts and professional analysts in large companies. For one thing, they have to be politically correct. That’s, however, not the only issue with the analyses and financial expertise that “people from the street” usually access. Let’s take a closer look.

Issue no 1: Political correctness

Professional analysts are constrained in what they say, à la:
* You cannot tell that major rating agencies are telling crap although they sometimes are.
* You cannot tell that the central bank or IMF is hiding some information.
* You cannot tell something bad about your competitor.
* Etc. etc.
That’s what being politically correct is about. (And it’s not just my guess; that’s what some professional analysts have told me.) It’s like doing a refined analysis that is then adjusted using a method of the hatchet.

Issue no 2: Considerations related to feedback effects

Financial and economic systems are not something objectively given. They are built on trust and as such, we can make them and we can break them.

Therefore analysts in the influential institutions are bound to be selective in what they say. For example, if IMF’s analysts forecasted, that eurozone will break up next year, the probability of precisely this happening would increase tremendously. In other words, by definition any analysis or forecast issued by the analysts of an influential institution reflects a portion of what this institution wants the next few years to be, not what the analysts actually believe.

I know that the above may be difficult to grasp. Many of us have never thought about the logic of finance or the basics of money creation. Most of us do not use to play things through in an Excel spreadsheet to see what the assets and liabilities of a bank or any other organisation would be if this or that would happen. Hint for the analysts: do this, and you will understand how I “analyse so much” by spending far less time than the others.

Issue no 3: Biases caused by the revenue models

The third concern is that the financial expertise and analyses provided by the large companies are biased because of the very way of how these large companies make money by themselves.  For example:
* Asset managers earn their fees as a percentage of the assets under their management. Therefore they are more than likely to explain you how important it is to diversify your portfolio, and that investing into an investment fund is the best way of doing it. Well, the problem is that if you’d be able to diversify all risks, you’d also diversify all revenues, and just end up in paying fund management fees. Don’t you think that it actually pays off to search for one good investment opportunity?
* Brokers (incl. Online Brokerage Platforms) get a commission from each of the executed deal. Therefore their interest is to make you trade as much as possible. The analyses that you can access via your broker are most likely to be “actionable”, meaning giving sort of buy-sell recommendations. Most probably you are going to end up in trading far too much.

Issue no 4: “An anonymous source told that...”

According to my observations, the phrase “An anonymous source told that...” refers to either an intentional leakage of the information, meaning that someone is willing to send a message to the other market participants, or to the fact that someone is just trying to manipulate the markets. Strangely, many people that do not believe into the “mainstream analysts”, tend accept anonymous sources as truth-tellers. Well, it’s not exactly the right thing to do, but with a grain of salt it may urge you to ask right questions.

These are just some reasons why independent observers and self-made analysts can prove to be more helpful than professional analysts.

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