Investors simply emulating the masses and failing to think independently constitutes a well-known blunder. Less well known and in a sense more alarming, is the fact that analysts do it too. Given that both institutional and private investors rely on these people to guide them and their money in the right direction, it is disconcerting to know that they also often , John Graham drew attention to some of them. For example, it may be that many analysts receive the same information, which would inevitably lead to herding. That is, it is not clear exactly how much private information is really available and how much it is used. Analysts may also investigate companies the same way, which is really a kind of "investigative" herding rather than behavioral.
What Does This Imply About Analysts?
Firstly, investors really need to know if they are using or being influenced by bold or herding forecasts. This is fundamental, as the two are completely different in approach and value. Reading analyst reports carefully and comparing them with others, should make it possible to figure out which one you are dealing with; but of course this is a time-consuming nuisance and should not be necessary.
Secondly, there is the issue of cost and value. Are herding forecasts of any real value? This is debatable, and they are surely not worth paying much (if anything) for. The views of the masses are, after all, out there in the mass media.
Thirdly, watch out for hidden herding analysts. If you have an actively-managed fund or portfolio with a broker or bank, they may be influenced by such analysts. Is this what you really want? You certainly have a right to know, one way or the other.
Fourthly, analysts themselves should consider their real roles and duties. They should bear in mind that if they are bold and get it right, they will surely be rewarded over time. If they are wrong for legitimate reasons, such as an act of God or an unpredictable market change, they, their employers and their clients should be able to live with this.
How to Prevent Analyst Herding
Given the factors described above, a degree of analyst herding seems inevitable. If both private and institutional investors make it quite clear that they want original and free thinking, however, this might encourage bolder forecasts. Likewise, employers of analysts must ensure that such forecasts are duly rewarded and that there is no censure for rational and well-researched views, even if they ultimately prove wrong. In career terms, being bold needs to pay off for the analysts themselves, and getting ahead must not be fostered by conservative and consensus-driven mediocrity.
The Bottom Line
The reality of analyst services is that they are subject to herding in a similar, but not identical, manner to private investors. This is not good news, because herding implies suspending original thinking and playing it safe, which surely runs counter to the whole point of analysts. The consensus opinion may be of some use, but one definitely needs to know whether or not this is what one is getting. Bold is not necessarily better, but a lot of the time it surely will be. The industry itself needs to encourage boldness and make it more of a career winner.
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