Wall Street Analysts Win By Often Being Wrong

Ted Williams, who some consider baseball’s greatest hitter, was the last player to bat over .400 during a single season (1941).  That means Williams got a hit during 40 percent of his at-bats.   Surprisingly, the best Wall Street analysts “fail” at their jobs almost as much as the best baseball players succeed.

According to a survey published in the November issue of Bloomberg Markets magazine, Goldman Sachs Group Inc. (NYSE: GS) analysts made 30 accurate calls on the 79 financial stocks they followed between January 2008 to July 2010.   Second place winner Keefe, Bruyette & Woods Inc. made 27 correct calls on 78 stocks.   By Bloomberg’s reckoning,  Goldman got it right 38 percent of the time while KBW’s accuracy rate was 35 percent.  By comparison, Texas Rangers slugger Josh Hamilton had a batting average of .359, meaning he got a hit during 36 percent of his at bats.

Granted, picking financial stocks may be as difficult at times as hitting a baseball thrown at more than 90 miles per hour from a major league pitcher.  During the past few years, huge changes have come to the financial services sector.  Few people would have imagined before the economic meltdown that legendary Wall Street firms such as Lehman Brothers would implode one day or the government would become a large — albeit temporary — shareholder in many titans of finance. The same unpredictability can be found in baseball where the pre-season predictions of many experts are notoriously inaccurate.

Baseball players and Wall Street analysts are rewarded handsomely for their work though obviously the athletes do better.  Their performance can be scrutinized in an infinite number of ways.  In theory, that keeps them honest.  A poorly performing major leaguer gets benched or shipped down to the minors.   Analysts who blow a call on a stock get chewed out by their clients and may wind up getting fired.  Little wonder that analysts change jobs about as often as a journeyman baseball player.

What gets lost in the media hoopla surrounding analysts’ stock ratings is how little sophisticated investors care about them.   These money managers consider whether an analyst thinks a stock is a “buy,” “sell” or “hold”  to be irrelevant.  The reasoning behind a rating may interest them some, but even that is not a given since many investment funds pride themselves on doing their own research.

“It’s unusual to see original thinking in these reports, even though that’s what’s most valuable to me,”  says  Jason Brady, a managing director at Thornburg Investment Management, in an interview with the magazine. “The ones who are different aren’t always right, but they’re frequently the most interesting and thoughtful.”

Goldman and KBW deserve kudos for making the correct call more than others during a time of unprecedented upheaval in the financial services sector.  Investors, though, need to remember that just because an analyst hit a “home run” once is no guarantee that it will happen again. Many people fail to realize that the adage that baseball is a game of failure also applies to the stock market.

–Jonathan Berr