Ignore the daily analysts

Investors ought to avoid the daily analysts on news channels. Yes – the ones we see on TV. This is because they play different games. While analysts are rewarded for being right, investors earn or lose money based on how right they are. Let me illustrate the difference.

Consider a stock that observes the following movement in one week. Let us assume that both the analyst and the investor are “bullish” on the stock during this period.

Day 0: Rs 1000
Day 1: Rs 1010
Day 2: Rs 1017
Day 3: Rs 1024
Day 4: Rs 1020
Day 5: Rs 1060
Day 6: Rs 1064
Day 7: Rs 970

Based on the prices from the previous day, the stock price rises on 5 days out of 7. The analyst was right on about 70% of the days. The investor, though, is more concerned with net losses or gains. Since the closing price on day 7 was 970, she stands to lose Rs 30 per share. Besides, it is quite common for a stock to display a small upward trend over a long period to only to fall suddenly at the outbreak of bad-news or events beyond anybody’s control.

Be wary of taking advice from any professional whose incentives are not aligned with yours.

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