Author Topic: How about buying a stock based on 45 analysts prediction, if the price is low?  (Read 4261 times)

andysandp

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Would you buy a stock based on 45+ analysts or prediction?

Let's use Facebook as an example.  I'm not saying buy Facebook, but I just want to go through the thought process of buying something based on analysts' prediction.

4 Traders Website has 42 analysts saying Facebook is a strong buy with only 1 analysts saying to sell.  So far sounds good.

42 analysts has a mean prediction of Facebook going to $208.  Some of those analysts has a high prediction of it going to $240 by the end of the year.

Right now it's priced $187.

So doesn't it sound like a good buy?

Let's say Facebook drops to $160 while the mean prediction is still $208.  So isn't buying on the lower side of  the Mean prediction (of 42 Analysts), a good buy?

Please grill me if you want, I just want to learn.  Thanks!
« Last Edit: January 07, 2018, 06:38:20 AM by andysandp »

obstinate

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No. If the analysts knew anything, they'd shut up and invest their own money.

Llewellyn2006

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I wouldn't do it without doing some of my own research first.

rab-bit

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I think analysts are subject to groupthink or herd mentality, so the fact that a bunch of them agree is neither surprising or an good predictive indicator.

ILikeDividends

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If you really want to pick stocks, the only way to get
an edge is to find a stock, and develop a thesis, that
the analysts haven't found yet.

With 45 analysts covering FB, there's pretty much no
edge over all those others following and acting based
on those analyst projections (not unless your thesis is
in opposition to those analysts--and you happen to be
correct
); it's all already priced into the stock.
« Last Edit: January 06, 2018, 06:15:51 PM by ILikeDividends »

obstinate

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Also, there is no way to know if a stock's price is "low." That implies that there is some correct price for a stock, which is higher than its current price. I worry for you if you are a trader and don't know this.

ysette9

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My investment policy statement tells me to buy passive index funds, not individual stocks. Therefore I wouldn’t buy stocks no matter how many analysts said what.

Retire-Canada

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Please grill me if you want, I'm just want to learn.  Thanks!

I'm just want to teach you! Don't stockpick. Buy index funds.

Zamboni

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I think analysts are subject to groupthink or herd mentality, so the fact that a bunch of them agree is neither surprising or an good predictive indicator.

This.

OP, have you not seen the movie Wallstreet?

Indexer

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If you know there are 42 analysts rating it a buy and only 1 rating it a sell, then assume everyone else knows that too.

For you to buy the stock someone else has to sell it. Why? What do you know that they don't or what do they know that you don't? Assume they also know about the analysts, but they are choosing to sell the stock anyway.

When you trade individual securities always assume the person on the other end of the trade is CFA working for a big investment company who does this everyday for a living. What do you know that they don't, or more likely, what do they know that you don't?

Conclusion: just buy index funds.

facepalm

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4 Traders Website has 42 analysts saying Facebook is a strong buy with only 1 analysts saying to sell.  So far sounds good.

42 analysts has a mean prediction of Facebook going to $208.  Some of those analysts has a high prediction of it going to $240 by the end of the year.

A mean prediction . . . is absolutely meaningless.

Most of the people offering analysis on the internets are really only interested in driving traffic to their website. They want clicks. Clicks = $$$.  Their opinions are secondary.

Save your time and money.

Mighty-Dollar

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Unless they have insider information (which would be illegal) then these analysts don't know anything that anyone else knows. Just ignore them. Google "efficient market hypothesis".

marty998

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You should also be aware that very few analysts ever slap a sell recommendation on a stock.

This is because their employer (usually an investment bank or stockbroker) would like to remain on friendly terms with as many companies as possible, so that they can pitch deals for takeovers, mergers, divestments, capital raising etc etc.

Telling the world you think a company and management are shithouse is a surefire way to lose a client...

enCasa

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Stock price calculation is just to discount future cash flow according to someone's best estimate.

Everyone would have different view of how the future earnings may be, but it will be in a ball park as each best guess would be based on the historical earnings mixed with company's future strategy.  All those analysts (I am talking about those hired to do the analysis, not from the online forum) would public their numbers (guesses) with the data support written down and should be reviewed by someone in that company as the number represents the company.  If you just keep throwing out a random estimate, you are going to lose the trust and no more investors come (and lose the job too).

I don't think average of 45 analysts' estimate is meaningless, but you definitely have to have a cushion on that number given there is still room for unforeseen events.
« Last Edit: January 09, 2018, 07:54:33 AM by enCasa »

Maenad

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I think analysts are subject to groupthink or herd mentality, so the fact that a bunch of them agree is neither surprising or an good predictive indicator.

Exactly. Pick up "A Random Walk Down Wall Street" and read the first part, specifically how many analysts were rating tech stocks as strong buys in early 2000 that imploded later that year.

And anyone who actually has a method to beat the market keeps their mouth shut, because once a lot of people start using a technique it loses its effectiveness. Bernstein's "Four Pillars of Investing" goes into the mechanics of this when he talks about Peter Lynch and the Magellan Fund.

Just buy index funds. I know it doesn't bring the adrenaline surge of a hot stock pick, but it gives you the best return per unit of time spent.

omachi

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42 analysts has a mean prediction of Facebook going to $208...
Right now it's priced $187.

So doesn't it sound like a good buy?

Let's pretend the predictions were worth something. Your mean prediction is 11.2% gains before taking inflation into account. Call inflation 2% since that's about what it's been. Returns are predicted at 9.2% real. Broad index over the long term is something like 7% after inflation, right?

And if you aren't holding the shares in an tax advantaged account or holding them for a year you can get hit with short term capital gains when you sell the position, too. Instantly worse returns than long term index investing.

And let's be honest, you're not going to stock pick with the entirety of your wealth, are you? So discounting taxes, it's a possibly slightly better return on a modest portion of your money.

Why bother with the heartburn? Just dump it in an index and go about your life.

enCasa

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And let's be honest, you're not going to stock pick with the entirety of your wealth, are you? So discounting taxes, it's a possibly slightly better return on a modest portion of your money.


Actually, I have index fund only about 15% in my portfolio and the rest I handpicked the individual stocks.  I already knew what stocks I am going to pick and just used the average price to find an entry point, which means the time when I see at least 10%-15% margin.  Maybe I am just lucky, but after almost 4.5 years, my total return is close to 110%, while index fund is about 85%.

I am not promoting the individual stock picking, but just don't like the low return from index funds.
« Last Edit: January 09, 2018, 12:43:26 PM by enCasa »

Retire-Canada

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I am not promoting the individual stock picking, but just don't like the low return from index funds.

Good luck keeping that up for the next 50 years. You might be one of the few people that beats an index long-term after fees/taxes, but you are probably not.

enCasa

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Good luck keeping that up for the next 50 years. You might be one of the few people that beats an index long-term after fees/taxes, but you are probably not.

First, 0 fee on my brokerage account as I managed my own account, and 0 transaction fee also if you hold enough money in the account.

Second, tax is not much different from whoever owns the index fund as I don't sell any of my picks within 1 year time frame.  It's all under long term capital gain tax rate.

Last, I do understand not many companies can survive over 50 years time frame.  This is just required more effort to rebalance the portfolio once in a while.  However, I am willing to do so as long as I can have better return.

Retire-Canada

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However, I am willing to do so as long as I can have better return.

The data does not support that outcome to be likely. That's my point.

Travis

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By the time these "analysts" make their findings public, the brokers and investment houses they really represent have already bought that stock and driven the price up past the point of profitability for you.  These banks and institutions have supercomputers connected by fiber to the stock market servers. Unless you're buying a stock they have no intention of buying that day, they're most likely pricing you out of that hot tip. Even if they weren't doing all of this, you have to compete against millions of other folks just like you reacting to this stock tip.  Are you faster than all of them?

Are these analysts telling you at what point to lock in your gains and sell the stock? As Marty mentioned, they rarely do.  Telling you when to buy, but not telling you when to sell is only half-good advice.  The only time they tell you when to sell is when that company is nosediving and everyone is past the point of seeing any profit on those stocks.  If that company is doomed, it's apparent to everyone and you didn't need an expert to speak on it. If it's a noticeable drop but they see it as temporary, they're telling you to sell while telling their hedge funds and friends to buy it up at a discount.

Picking when to buy and sell at the right moment requires a very high level of skill and luck.  Imagine playing poker as a day job and the number of hands you'd have to win consistently for it to be profitable enough to live by.  There are only a literal handful of people in a generation who can do this.

enCasa

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I would say I don't worry much of the selling signal as I only bought the ones I see it will run well for next 3-5 years at minimum.  After that time frame, harvest and rebalance the portfolio.

Picking a healthy and dominating company is more important in my investment strategy than the entry timing.  I do agree no one can time the market, but you can pick the best of S&P 500 for every couple years while they are rotating.  I also don't pick any small or medium cap companies as they could fail quickly just within 1 year. 

I do take more risks for sure, but so far, I am getting better return too.
« Last Edit: January 09, 2018, 01:07:08 PM by enCasa »

omachi

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And let's be honest, you're not going to stock pick with the entirety of your wealth, are you? So discounting taxes, it's a possibly slightly better return on a modest portion of your money.


Actually, I have index fund only about 15% in my portfolio and the rest I handpicked the individual stocks...

Well, 85% isn't all your wealth, but you've strayed into territory where indexes have the lesser effect so we'll call it close enough. Just curious though, if you actually think you can consistently beat the market, why keep even 15% in indices?

bacchi

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Everyone's a stock market genius when the market is going up.

enCasa

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Well, 85% isn't all your wealth, but you've strayed into territory where indexes have the lesser effect so we'll call it close enough. Just curious though, if you actually think you can consistently beat the market, why keep even 15% in indices?

Majority of the 15% is from 401k where I just picked index fund as that's the best option from the list.

enCasa

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Everyone's a stock market genius when the market is going up.

It depends.  I still have two friends bought Under Armour before the 50% drop.

Also, a healthy and dominating company still can perform better than index fund while the market is down.  Just hold it like index fund while the market is bad.  The good company will bounce back.
« Last Edit: January 09, 2018, 01:25:22 PM by enCasa »

zoltani

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Or buy what everyone hates.

Right now I think energy is a good play going into late cycle.

And telecom has been doing poorly.  Perhaps it will be time to buy that soon, too.

I agree, and in fact my last two stock purchases were energy utilities. If I weren't overweight in AT&T I'd probably get more of that too.