Ep 120: Why Trading from Analyst Reports is a BAD Idea!

January 26th, 2017

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Hey, this is Sasha Evdakov.

Today I want to share with you about why you shouldn't focus or a trade-off of analysts ratings.

What I mean by analyst is that analyst reports that you see on different websites.

Different Types of Analysts

For example, you might be going into a website trying to choose which stock to get into. Or what to buy and what is it that you want to invest in.

Different analysts do things differently. Some analysts might give you two thumbs up, three thumbs up, for thumbs up and so forth.

Others may give you stars. This is a 2 out of 5-star rating. They usually give you a price target. It might be a price target of $120 or $80 for that stock. They give you these targets in a way to show you what's the potential.

Maybe you came across something like this. This one is a buy, and another one might be a hold. And then the other one is a sell. There are different types of analyst reports, and they all have their different ways of analyzing and evaluating stocks.

This Is What You As a Regular Investor Must Do

As a casual person who's looking to get in, buy some shares and make some money you are probably looking at these things every day. You think that these people are probably smart.

You think they're probably a genius or know what they're doing. Or maybe they have more experience than you. But when you look beyond the surface when you start digging, in reality, this is going to hurt you much more when you start looking at analyst reports.

I'm going to share with you:

  • why this happens
  • how this happens
  • why you should avoid this

If you think that they know better the reality is farther from the truth. Most of the time you'll choose stocks much better than they will. That's the case because you know your risk tolerance. You know what you want. And you know your holding time, and you know what things work for you.

Maybe one analyst might say you to buy. But if that stock doesn't match to your risk tolerance, personality, and your trading style, then it's probably a wrong decision.

The main reason is that when things go against you, you're going to have to wonder what do you do with that stock.

And coming back to this analyst and they might still say continue to buy it. But your account is panicking and it's going down in a big way.

Looking at things from a surface level this may seem like a good idea. However, it's horrible.

Be Careful Who You Believe

I'll share with you how this works and why also these analysts aren't always precisely truthful on what they genuinely believe.

I won't mention any names, but I want to give you some perspective.

For example, those are analysts:

  • Andy
  • Joe
  • Robert

We have three different analysts that are all looking at a specific stock. We'll call this stock XYZ.

This is the stock they're evaluating, and this stock is trading at $80 per share.

Every time (periodically) these analysts produce reports whether they work for a company or industry.

The output reports that get listed right here. They have collaborations with different companies, and the reports come out. Now here's the thing that happens.

Let's say Andy believes this stock is heading higher in a big way. This guy's positive. Joe is neutral, and Robert thinks it's going to tank in a big way.

This is Andy's point of view:

I'm projecting that this stock is going to go to $120. His projection is $120 a share within six months or 12 months.

This is Joe's point of view:

It's going to be a little flat. He'll say it might increase a little bit. He's still positive on the stock, but it probably won't go up as much.

But Andy put in his analysis report first. So Joe's already looking at Andy, and there is that crowd/herd mentality.

After Joe see that what typically happens is instead of the $120 he might say $90 stock. To him, that's what he sees.

This is Robert's point of view:

He believes this stock is going to go down to $60. He sees all his peers everybody else is positive on the stock. That means that you got to remember - he's worried about his job.

He's working for a company. He's worried that if he's not in alignment and if the stock does go higher he could lose his job. Or he won't be as credible.

Important note: these people are working for a job. This is how politics works as well. Everybody's trying to sugarcoat things, and they're trying to make sure that this one side doesn't get hurt because of this concept - the herd mentality.

They're always worried about themselves first. This is what happens with analysts.

Even though he may believe that $60 inside of him all of a sudden his mindset slowly starts to shift. He might say $80, or he might say $85.

He's not going to go way beyond this because there's no point. His mindset is at $60. He probably won't go to $120 and $90.

The thing is he probably will stick at $80 or $85. If he's brave, he might say $70, but he won't say $60.

Worst Case Scenario - What's Going to Happen?

What happens if it does go up and he's the only one who said this stock is going to go down?

Whereas everybody else said, it's going to go up. If it does go to $120 if he said $60, he could lose his job. And that's it.

He's analyzing in a wrong way. It's essential that they're consistent on a relative basis. This is where the herd and crowd mentality happens.

Because they're all in this basket, they're all shooting in these ranges.

Whether one side is saying, this is a positive or this is a negative they are all trying to shoot in the middle. Maybe one side is telling that something is bullish or bearish.

You may think, or analyst believes, and he's a little bit out of there (blue dot). Instead of going right here he might bring that evaluation a little bit tighter (to the center).

That way he's not too far away from that range. Because once you're so far away from that range, you could lose your job. And if you lose the job that affects you personally in a big way.

Why Are Analyst Reports Are Useless?

That's what happens with these analysts. All these stuff are useless and garbage. You don't have to pay attention to because it doesn't apply to you in the same way.

Maybe you get good at understanding confident analysts they've been there for a while. And they show you that they're always consistent to show you that it matches your risk tolerance. In that case, this could be helpful.

In general, here's the problem. A particular stock starts to head lower, and things begin to go down, and you put on a trade, and you bought this one stock.

The reason you've done this is that you thought that guy said it was going to go up. However, it starts heading down. Now, what are you going to do?

Are you going to call this guy up?

He's probably not going to be reachable or on the phone. You don't know what to do.

What was his plan?

There are numerous questions out there in your head.

You don't have the same plan. You don't have the same system and strategy. It's not going to work, and you're not going to be consistent. And especially if you start taking things from different people.

Big mistake: One day you choose from Andy. Another day you choose from Joe. And another day you choose from Robert on your stock picks or another month.

There're different analysts. They think differently. Everybody thinks differently. I think differently than other traders. You're constantly hopping around it's good to get a lot of perspectives. But ultimately when you're making trading decisions, it comes down to you.

Ask yourself these questions:

  • what is your risk tolerance?
  • what is your plan?
  • what is it that you are going to do when you take profits?
  • what is it that you are going to do when that stock hits higher?

These analysts reports are useless in my opinion. It's good to give you a great perspective. But don't decide on trading only from those reports. That's my whole point and focus.

When you start looking at these things, don't make your only decision based on this. You can get a perspective. You can say most of them are in the buy so let me evaluate that further.

Ask yourself why are you going to buy it. Why are you going to get into the stock? What's your plan if it goes against me. What are you going to do if it goes higher in my favorite?

That's what you need to be thinking about. But if you're only making decisions based on this - it can whip you around. And you're making blind decisions and blind choices.

Their Main Interest Is Their Job

When it comes to analysts reports, it comes down to their job first. They're not going to be all on one side or another. They're going to try to be close. It's not in their interest to stray too far away from one person or another.

The main reason is if you're in line, you're not going to be punished as severely. And this is how a lot of things work in our society.

This is how:

  • politics works
  • getting a job works
  • your friend circle works

Let's say you take your five closest friends, average them out and it's probably you. It's the same theory.

Most people have trouble getting away from that range. They have problems when it comes to getting new friends or experiencing differences in their lives. They are afraid of trying new trading strategies.

Pro tip: create your strategy, your risk tolerance, and your risk level. Figure all those things out and start making a plan. Start building a trading idea and concept of how you're going to attack every single trade.

And be ready for things like this:

  • what you're going to do if it goes against you?
  • what you're going to do if it goes in your favor?
  • how are you taking money off the table?

That's what trading is all about. Watching your risk and taking that money off the table. The smartest thing is to create a plan for you because everybody is different.

You're not the same as another person. Even if it's your best friend, your brother, your sister - you all have different concepts. You all have different mentalities and different ways of looking at things. Your perspective and your model of reality are different from someone else's.

Conclusion

A lot of beginners get a little bit tricked into thinking how the analyst knows better. Or that analysts might know something that they don't.

You can't look at things like that. Even if you're starting and trading don't believe a lot of these reports that come out.

Look at yourself, educate yourself and that way you can make your own logical and rational decisions. It's all about you growing and building your personal choices in the future.

Author: Sasha Evdakov

Sasha is the creator of the Tradersfly and Rise2Learn. He focuses on high-level education speaking at events, writing books, and publishing video courses on business development, internet marketing, finance, and personal growth.

I'm Sasha, an educational entrepreneur and a stock trader. In addition to running my own online businesses, I also enjoy trading stocks and helping the individual investor understand the stock market. Let me share with you some techniques & concepts that I used over the last 10+ years to give you that edge in the market. Learn More

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