Google-Apple Valuations. Link: and actually, let’s talk about analysts.
Bloomberg loves to quote analysts. And institutional investors pay attention to what analysts are saying, and vote for them in annual “who’s-the-best-analyst” competitions.
But before we get there, let’s just be clear about what analysts actually do:
- they speak to the management in the companies that they’re analysing,
- they play with valuation models,
- and then they write comment notes to their clients.
Some incentive issues:
- Firstly, an analyst is only as good as the volume of information he’s getting from company management. But is he going to get information from company management if he’s negative about them? Not even a little bit.
- Secondly, an analyst’s clients want to go with the best analyst. That doesn’t mean the analyst that is right most often – that just means that analyst that gets it the least wrong compared to all the other analysts.
- If everyone else is saying the price will go up,
- and our analyst says that the price goes up,
- And the price actually goes up
- Then everyone wins.
- And if the price goes down,
- then everyone was wrong,
- so no one is better/worse than anyone else,
- and our analyst doesn’t lose clients.
If, on the other hand:
- everyone is saying that the price will go up,
- and our analyst says that the price will go down,
- and then the price goes up…
- then our analyst loses his clients for being a knob.
- And, because he was negative about the company, the company’s management stop speaking to him.
- So now he really can’t do anything.
Contrary to popular** belief, analysts are heavily incentivised to follow the market, not predict it.
Which means that when an analyst like Adnaan Ahmad from Berenberg Bank cuts his Apple rating to sell, and lowers his price target for the stock from $800 to $360, then we should all just ignore him. Because he’s obviously an idiot.
Just look how wrong he was to begin with!
So the empirical evidence suggests: do the opposite.
**And by that, I mean the general public’s belief – because I think most institutional investors realise this and then read between the lines…