Reliability of analyst recommendations for investing

One of the most common stock selection methods among savers is to follow the recommendations of stock market analysts and "advisers" provided by their bank for free. We saw recently in this blog how financial means were not a reliable source for investment advice. As we will see below, investment recommendations from professional analysts are not, in many cases, either. In this article we will analyze why the recommendations of professional analysts when investing are not reliable and we will see what alternatives exist to this type of advice.

Studies on the reliability of the recommendations of professional analysts

Before explaining the reason why I do not recommend you to rely on the recommendations of professional analysts, I want to show you the results of a few studies that question the reliability of the recommendations of professional analysts.

A very interesting study is that carried out by Professors Lawrence Brown (Temple University), Andrew Call (Arizona State University), Michael Clement (University of Texas) and Nathan Sharp (Texas A&M). The study, called “Charlie Munger He never tires of reminding us not to underestimate the importance of incentives. In this table you can see the importance of different aspects in employee compensation.

Remuneration of analysts who make recommendations to invest in the stock market

What stands out in this table is that the least important aspects when it comes to remunerating an analyst are the profitability of their recommendations and their precision when estimating the profits of the companies they are in charge of analyzing. Without a doubt, these are results that should at least make us reflect.

Another interesting study is the one carried out by the investment website "nerdwallet". According to this study learn to invest as well as analyze each of your investments. It is an exciting world that ends up hooking those of us who are part of it. However, if you can't or want to dedicate time to this, this may not be the ideal option for you.

The other option is to hire an independent financial advisor to help us manage our investments. I would like to emphasize the importance of being independent, since in this way we avoid conflicts of interest, which is what happens when we let ourselves be guided by the “free” advisers of our bank. I do not think it is necessary to remember the case of convertible bonds and preferred shares, which I am sure will be repeated in the future but changing the name of the products.