Financial analyst - opinions?

[JJH]

I have been interviewed for a financial analyst's position in a large commercial bank.
I'm not particularly keen on the position, I'm more or less trying to find out what I want to do.

To me, a (qualitative) analysts job has always seemed like bogus, sort of like fortune telling. To my understanding, there have been surveys and research results that show that even the best analysts are right like 60% of the time? (50% is throwing darts) Taking into account the factor that very powerful/influential analysts probably affect the market's behavior with their forecasts, it might be that the true skills are non-existent in the field?
However, these guys can make a huge amount of money. The person who interviewed me makes close to 1M dollars a year.

What is Quantnet users' opinion on the analyst business? To me it seems that the largest part of their job is making up stories based on their own beliefs. Might be fun but can also be far from the truth. These kind of jobs don't tend to last long, is it only a matter of time when corporate clients catch on and quit paying them?

 

[JJH]

Over 200 views, no opinions. Come on guys...just let me know what you think!

 

[Tsotne]

What is Quantnet users' opinion on the analyst business? To me it seems that the largest part of their job is making up stories based on their own beliefs. Might be fun but can also be far from the truth. These kind of jobs don't tend to last long, is it only a matter of time when corporate clients catch on and quit paying them?

Look, some of quantitative analysts (involved in trading on organized stock exchanges, high-speed algorithms trading) make intuitive decisions and they may fail sometimes. Since they have to make decisions in seconds time. What you mean by "their believes" is of a great interest for employers. That's why employers look the backgrounds of quants and assess their performances, education level, experience, etc. Finance is generally an art of "guessing". So it's never gonna tend to last short (as you said) for quant jobs to exist. What corporate clients do is that they go to more powerful, informed, specialized institution(employing analysts) and their belief is that they'll get the proper advice (or service generally) which they couldn't arrive at without quants' help. Quants are not machines (or even if they were) not to fail anytime. Sometimes they are wrong, which doesn't at all mean that "corporate clients catch them on".

Recall LTCM collapse when in 1998. Who could have considered that Russia would decline to repay all the international debts?! (quants failed)

9/11-Did anyone know on 10th of September that 9/11 would occur?! NO. So quants failed again.

Who could have predicted that stock market would crash unexpectedly in 1989. Noone. Quants failed again.

But in normal circumstances they do their job well. So you can't say they invent their own stories. They follow the procedures and instructions based on theories which have withstood decades.

I hope you got the idea

 

[JJH]

Look, some of quantitative analysts (involved in trading on organized stock exchanges, high-speed algorithms trading) make intuitive decisions and they may fail sometimes. Since they have to make decisions in seconds time. What you mean by "their believes" is of a great interest for employers. That's why employers look the backgrounds of quants and assess their performances, education level, experience, etc. Finance is generally an art of "guessing". So it's never gonna tend to last short (as you said) for quant jobs to exist. What corporate clients do is that they go to more powerful, informed, specialized institution(employing analysts) and their belief is that they'll get the proper advice (or service generally) which they couldn't arrive at without quants' help. Quants are not machines (or even if they were) not to fail anytime. Sometimes they are wrong, which doesn't at all mean that "corporate clients catch them on".

Recall LTCM collapse when in 1998. Who could have considered that Russia would decline to repay all the international debts?! (quants failed)

9/11-Did anyone know on 10th of September that 9/11 would occur?! NO. So quants failed again.

Who could have predicted that stock market would crash unexpectedly in 1989. Noone. Quants failed again.

But in normal circumstances they do their job well. So you can't say they invent their own stories. They follow the procedures and instructions based on theories which have withstood decades.

I hope you got the idea

I appreciate your frantic defense for quants, but you are on a rampage for no reason. See, I am with you in this matter, I am one of the "quants".

The question here was about qualitative financial analyst jobs. Do you even know what those people do? We are talking about people who may have no education in finance or mathematics, who give public recommendations to buy or sell certain stock because "the cell phone market looks unstable now" or because "yesterday's presidential election in Tadzikistan may have an effect on future oil price".

The job is often simply making guesses based on what they saw in the news or read in the papers, and how they think it is going to affect on the future price of a certain stock or a currency rate.
Qualitative analyst is a much more common job than a quant. Analyst is the fortune teller in the economic world. But are the successful? Do they deserve to be paid hundreds of thousands a year? Can quants outperform them?

 

[JJH]

My understanding (potentially wrong at that mind you) is that analyst is a job ranking, the lowest on the ladder. On wall street it goes analyst -> associate -> vice president -> etc.

http://en.wikipedia.org/wiki/Financial_analyst

As far as the job of the guys that make newsletters and opinions, their primary job is to get people to trade. They take some data and spin it into an opinion about the movement of an asset. And they do this professionally - as in they know they are expected to say that something will move in some way, and even if they can't find anything they still have to issue a report, and it has to be one that makes a convincing argument for moving into a position. Obviously, a large number of these reports are not very accurate. It's not a job I'd want to have. But that's more personal than anything else. Also take into account that this is my perception and it may or may not accurately reflect reality.

This is what I was talking about. Can anyone find a report that says how accurate analysts' predictions really are? Also, one needs to take into account the fact that analysts are also part of a financial advisor's investment plan, i.e. they have the power to affect on future stock prices by making up stories that people believe and then take actions. For example, a very powerful analyst could first take a position on a stock and then tell people that it is going to rise rapidly in the near future -> people who believe the analyst will buy the stock, thus making its price go up -> analyst wins, makes the bank a lot of money and becomes famous.

 

[Tsotne]

I appreciate your frantic defense for quants, but you are on a rampage for no reason. See, I am with you in this matter, I am one of the "quants".

First, there is some misunderstanding. I'm not on a rampage. Just explained my idea. I'm not even trying to defend any profession. I only disagreed on several issues. Second of all, prediction can be made in qualitative or quantitative ways, who can tell you which is more reliable?! Consider such situation, we had a historical data of oil price and quants are performing well in their mathematical forecasting techniques. But the Egypt shock can effect the data which cannot be reflected easily and directly in those mathematical/statistical models. Someone other is needed with experience who can tackle with the problem. Those ones who could anticipate the increase in the oil price due to the Egypt revolt were qualitative analysts. Which we more generally call economists(not necessarily though, I don't mean econometricians).

Both of the specialization is valuable and important in by the same level. I combined these two ones because quants can do what qualitative analysts cannot and vise versa.

Analyst is the fortune teller in the economic world. But are the successful? Do they deserve to be paid hundreds of thousands a year? Can quants outperform them?

As for their compensation, we can argue infinitely as for other Wall-Street executives if they deserve such compensation. But still, they are doing a good job for the corporations. They look far inside future where mathematics cannot reach or at least cannot be reliable).

Sorry I got stuck in this Egypt problem but consider again a corporation employing a qualitative analyst who could more or less (in some accuracy) anticipate such disaster and could translate it into the economic effects. How do you think, would the mathematicians(quants) be capable of making such prediction provided that they have a dynamically changing historical prices of oil(in this case)? I don't of course say that those economists could have stated months earlier and advice the corporation's investment department to immediately engage in speculative actions that could benefit the corporation. But those economists who are able to state the effects of a change in money supply/interest rate/ oil price in different economic climate are of most value for a corporation. So I think they deserve to get paid solid amount.

One more thing. Those qualitative analysts can prevent us(quants) from relying on models which are supposed to fail from the qualitative point of view but math says otherwise. They advice us to take into account those economic variables which otherwise would be neglected by us. Suppose we are constructing the Principal Component Analysis model which is a pure quantitative issue. One of the first steps is to state the economic variables to be passed through filtration. Who is a better predictor of those variables - quants or qualitative people?

All in all, My opinion is that they are of equal importance for a corporation even though one of them may have more considerable job to do everyday.

 

[Ezra]

I have been interviewed for a financial analyst's position in a large commercial bank.
I'm not particularly keen on the position, I'm more or less trying to find out what I want to do.

To me, a (qualitative) analysts job has always seemed like bogus, sort of like fortune telling. To my understanding, there have been surveys and research results that show that even the best analysts are right like 60% of the time? (50% is throwing darts) Taking into account the factor that very powerful/influential analysts probably affect the market's behavior with their forecasts, it might be that the true skills are non-existent in the field?
However, these guys can make a huge amount of money. The person who interviewed me makes close to 1M dollars a year.

What is Quantnet users' opinion on the analyst business? To me it seems that the largest part of their job is making up stories based on their own beliefs. Might be fun but can also be far from the truth. These kind of jobs don't tend to last long, is it only a matter of time when corporate clients catch on and quit paying them?

I think that if this is your attitude toward the role, then it is most probably not an appropriate fit for you.

In my opinion, an analyst can be very good and add value, but this obviously is not always the case. (Just in the case of money managers, while the average money manager might not outperform the market, that doesn't preclude the existence of a small set of individuals who consistently do, e.g. Paul Tudor Jones, Warren Buffet, George Soros and countless other traders) I also think that in reality financial institutions and advisors who rely on analyst reports don't take the buy rating at face value, and consequently aren't looking for an analyst who can outperform the market on their buy/sell recommendations, but are looking for an analyst who provides good information, and sounds reasoning in their assessment of what is pertinent to the economics of an industry or operations of a company.

A money manager can't keep on top of a large number of companies and industries without sacrificing focus, and analysts just help in this division of labor, whether it is in-house (e.g. an analyst at a hedge fund) or someone working for a big bank.

This becomes particularly useful when a money manager might want to get a quick answer to something outside his or his in-house analysts' range of expertise. They can employ the knowledge of someone more steeped in a particular company or industry without having to hire and train a new employee or spend a unecessary amount of time researching themselves.

 

[Andy Nguyen]

Quant analyst and financial analyst (which is well explained in the wikipedia link) have little to do with each other so don't be surprised if your answer don't get many attention among this audience.

There are bad analyst. Exhibit 1: Henry Blodget - Wikipedia, the free encyclopedia who now runs BusinessInsider website.

And there are other well-known analysts such as Mike Mayo or Meredith Whitney - Wikipedia, the free encyclopedia

As an analyst, you will cover a very specific sector or company. Your job is to know more than everyone else about that company, product, sector. You need to listen to CEO press conference, talk to lot of sources, follow leads, just like journalists covering a story.

You can't deliberately make up stuff and expect to get away with it. A lot of people in the industry will not wait to put you away.

 

[JJH]

Thanks Andy for your input.

You can't deliberately make up stuff and expect to get away with it. A lot of people in the industry will not wait to put you away.

I have to disagree with this one: a well-known analyst has an incentive to take an investment position and then write a public report concerning their holding.

For example, I know many cases where a powerful analyst buys an asset, then writes something like "Because of the reasons x,y and z, I find company A's stock underpriced, therefore I recommend buying it". Writing and publishing this through a powerful channel makes it a train people don't want to miss - the price will go up once investors read the report and if the analyst has a good reputation, they will follow his advice. It's a self-fulfilling prophecy.
A powerful analyst can write any bulls*it he wants, because if he has a good reputation, and has good journalist skills to make up a believable story, investors will believe him.

For the same reason, less well-known analyst almost always mimic the actions of more powerful analysts, because if they are wrong, they will be laid off.

 

[Ezra]

Thanks Andy for your input.



I have to disagree with this one: a well-known analyst has an incentive to take an investment position and then write a public report concerning their holding.

For example, I know many cases where a powerful analyst buys an asset, then writes something like "Because of the reasons x,y and z, I find company A's stock underpriced, therefore I recommend buying it". Writing and publishing this through a powerful channel makes it a train people don't want to miss - the price will go up once investors read the report and if the analyst has a good reputation, they will follow his advice. It's a self-fulfilling prophecy.
A powerful analyst can write any bulls*it he wants, because if he has a good reputation, and has good journalist skills to make up a believable story, investors will believe him.

For the same reason, less well-known analyst almost always mimic the actions of more powerful analysts, because if they are wrong, they will be laid off.

But if they are really making stuff up, how long could they possibly last? At the very least, they have to add value a decent amount of the time, otherwise, institutional investors, who are probably a bit more sophisticated than in your scenario, would stop buying on this analysts recommendations, and eventually he would just make bad calls and lose his job.

Also, don't analysts have strict controls about what and when they can trade when working at a bank?

I think more often then not an analyst's buy recommendation has an extremely negligible effect on a stocks price, becoming increasingly negligible as time passes.

And in the rare instances that an analyst can move a large liquid stock for a significant amount of time, they would most certainly have to have earned that ability to move markets from past performance and actually good recommendations and research.

I think you are focusing too much on a single aspect of the analysts job --issuing buy/sell recommendations. I think the bulk of the value they deliver is in their research into the fundamentals of a business/industry and ability to communicate to clients the essential elements so they do not have to start from scratch. HF managers wouldn't be paid handsomely to just follow their broker's research department. But that doesn't mean a good analyst at a bank can't provide them with research that serves as a starting point for future investment theses or in any other way contributes to their in-house valuations.

If you decided to actively invest in an emerging market where you cannot read the language you would find your prime broker's research department a very helpful starting point.

 

[Tsotne]

Less well-known analyst almost always mimic the actions of more powerful analysts

Do you say that free-riders' actions always lead to the stock price being appreciated? What if that "well-known" analyst is wrong and stock price comes down regardless of some investors purchasing it? (or as you mentioned:deliberately says a bul...it). Would you trust him another time? So once your story succeeds, I mean all the investors rush to the stock and cause it to increase in price temporarily when that "well-known" analyst unloads shares-his reputation is destroyed from that moment. But till they became well known and influential, they probably hadn't been engaging in such practices.

 

[Andy Nguyen]

I have to disagree with this one: a well-known analyst has an incentive to take an investment position and then write a public report concerning their holding.

I did point out Henry Blodget for a reason. And the little disclaimer at the end of each report has it purpose. How many people pay attention to it?
My previous post is more to "facts" than "conflict of interest". That is you can't make up facts about a firm/sector you cover. You can't misstate the earning (or any quantitative items) on purpose.

If this is your first job, you are most likely doing mundane things for senior analysts whose name appear on the report. You will have plenty of time to find out if you like it.

 

[Tsotne]

But if they are really making stuff up, how long could they possibly last? At the very least, they have to add value a decent amount of the time, otherwise, institutional investors, who are probably a bit more sophisticated than in your scenario, would stop buying on this analysts recommendations, and eventually he would just make bad calls and lose his job.

Ezra, I completely agree with you. That's exactly what I've forgotten to write above. If the influential man wants to cause investors bye or sell those shares (generally cause investors to follow actions that benefits him), then one million dollar question becomes: Who are the target investors??? I'd divide them into 2 groups

1) As Ezra mentioned: Institutional investors or corporations who are such sophisticated that its simply excluded case (just impossible) to make them buy shares on the basis of raw information emerging from one "analyst". No matter how clever or influential he is. Everyone has to do his own research. OF course corporations have mobilized staff who take care of such matters and are specialized on investing. PhD research teams do their own research to choose shares to invest.

2) American public who are a bit small investors. Let's take for example an American doctor who earns more than he consumes and he has decided to invest the remaining amount in stock market. He would probably go to the stock consultant and obtain the figured view on the prospects and then he makes and investment or he becomes a free-rider and follows someone's lead. That "someone" unfortunately becomes the kind of analyst you painted. How do you think, how could such investors push up price taking into consideration the number of them?

 

[JJH]

Do you say that free-riders' actions always lead to the stock price being appreciated? What if that "well-known" analyst is wrong and stock price comes down regardless of some investors purchasing it? (or as you mentioned:deliberately says a bul...it). Would you trust him another time? So once your story succeeds, I mean all the investors rush to the stock and cause it to increase in price temporarily when that "well-known" analyst unloads shares-his reputation is destroyed from that moment. But till they became well known and influential, they probably hadn't been engaging in such practices.

No analyst is right 100% of the time. Actually, in my first post to this thread I was wondering if anyone knows any surveys or research reports. I think I've seen a report somewhere that shows that even the best analysts are right only like 60% of the time. I personally know an analyst by the name Coi N. Flip, who has a record of being right 50% of the time.

If an analyst really would possess divine powers and predict the future, at least partially. Say there is an person who can "predict" the future direction of a currency rate or a stock price correctly 60-70% of the time. By making a few dozen speculative investments over a few years, he can multiply his wealth to rediculous amounts and never have to work another day...

 

[Tsotne]

I think I've seen a report somewhere that shows that even the best analysts are right only like 60% of the time. I personally know an analyst by the name Coi N. Flip, who has a record of being right 50% of the time.

One small question to make it clear: Do you mean these analysts are correct 50-60% of the time deliberately ( I mean pursuing their fraud practices) or honestly?

 

[JJH]

One small question to make it clear: Do you mean these analysts are correct 50-60% of the time deliberately ( I mean pursuing their fraud practices) or honestly?

By asking that, I think you have not understood the inner nature of the position and influence of an analyst.

A well-known analyst who can influence the markets is right more often than an analyst who has no effect on the investors' behavior.

Example:
Well-known analyst says "Buy company A's stock, it's rediculously underpriced"
-> some people believe him, some don't. If he has loyal followers, they will buy the stock and thus make its price go up -> analyst gets positive feedback and is seen having been right. As always, there are a hundred other factors affecting the price, so quite often too, the stock price wil go down. However, the odds are in the analyst's favor.

Unknown analyst says "Sell company C's stock, it's overpriced"
-> some people believe him, some don't. He has no loyal followers, and thus his chance of affecting the market price is small. He has about 50% chance being right.

 

[Andy Nguyen]

Say there is an person who can "predict" the future direction of a currency rate or a stock price correctly 60-70% of the time. By making a few dozen speculative investments over a few years, he can multiply his wealth to rediculous amounts and never have to work another day...

Someone in the compliance dept want to talk to you immediately.
You obviously don't have first hand experience the industry. You have to declare all your investment, holding. Your personal trading will have to be approved by compliance dept, and they have to go through approved dealers. You have to file quarterly reports. You can't trade stocks on a restricted list, or options. You have to declare account of your spouse.

Imagine that you have a position on the company you make recommendation on?

There are obvious rules put in place to prevent abuse but you keep saying like analysts are out there to scam investors. I'm sure there are bad bad people out there but YOU don't have to be like them.

I would suggestion books on this list for some more perspective.
Master reading list for quants, MFE students

 

[JJH]

Andy, after you have stated that, let me ask you a very important question:
Why would anyone, with the ability of predicting the future, want to work as an analyst if they are forbidden to trade?

 

[Tsotne]

That's what I'm saying I understood your point. Still, it's hard to believe that investors who are simply relying on an analysts' opinions make up the minority of the variables having effect on the stock price. Why are you so strongly supporting the idea of "influential analyst". I don't believe that these influences really drives investors to make an investment decision. Or at least the considerable amount of investment that really has effect on the stock price. However I understand this part

If he has loyal followers...

By that you mean that if at least small amount of investors follow his advice they'll affect the stock and the analyst is being considered as having made a good prediction.

Now consider the following situation and I hope I'll change your mind:

Possibility 1-Stock is going to behave in contrast of the analyst's suggestions to the public.
Then the corporations and institutional investors(as we called sophisticated ones in previous comments) are more likely to guess that path and make a correct decision. And those kind of investors are at a leading position in influencing the stock price since they play with huge amount of money. The basis here is that we have agreed upon that these investors do not simply trust the analyst's point of view.

Possibility 2- Stock is going to behave as analyst says. Then the same kind of investors( institutional ones) are going to make a bet on it. So the stock will appreciate regardless of what the analyst's followers are gonna do.

I'm pushing the argument that the followers do not have enough power to effect the stock since the institutional investors play with overwhelming amount. So they just swallow the small player's effects. So it comes out that the analyst himself is chasing what the investors are doing and not vise versa. Because the those folks who are his followers have no such effect on the stock price are are staying in the shadow of the large corporations regardless of what course of action they take.

 

[Andy Nguyen]

Andy, after you have stated that, let me ask you a very important question:
Why would anyone, with the ability of predicting the future, want to work as an analyst if they are forbidden to trade?

You seem troubled by your belief that analysts i.e stock pickers are right 50%-60% of the time. I do not know where you got that number and the validity of such study.
If people want to follow stock pick by any analyst, good for them. I'm not in that business.

You asked the wrong question. Who even cares about a job if you can predict the next mega lotto number. Who has the ability to predict future? No one. That's why most of us needs to get a job.

The question you should be asking is: do I like this line of work and do I have the ability to be a top analyst?

You ought to talk more to people who work as research analyst. Ask them what their day to day routine is like.