Wednesday, August 20, 2008

Analyst Earnings Forecasts More Misleading Than Ever

Anyone who follows the corporate earnings forecasts by so-called professional analysts know that they are systematically too optimistic about the future, constantly forecasting at least 15% or so annual earnings growth. From a time to time that actually happens, but since anything near that is unsustainable in the long run, they usually end up being lower. Now Bloomberg reports that their forecasts have been more wrong than ever:

"The CHART OF THE DAY shows analysts correctly predicted results for 6.7 percent of the companies in the Standard & Poor's 500 Index that released second-quarter earnings, the fewest since Bloomberg began tracking the data in 1992...

....At the start of the year, profits at banks, brokers and insurance companies were projected to rise 22 percent in 2008, according to the average estimate of analysts surveyed by Bloomberg. They're now expected to decline 48 percent. Analysts forecast an 11 percent gain in retailer earnings when 2008 began, compared with an 11 percent drop now, according to data compiled by Bloomberg."

It should be again noted that although the divergence was unusually large this year, we've seen similar misses most quarters and years. The big question is, why does anyone trust these guys? Who hires them? It would be a lot cheaper for the banks to simply have a computer program that randomly chose earnings growth forecasts between 10 and 20% for selected industries. That would likely give about the same forecasts that we receive today.


Blogger Aragon said...

Couldn't agree more... Here is an interesting quote from famous value investor Chris Browne's book "Little book on value investing." (Wiley 2007), pages 29-30:

When it comes to projecting earnings... the track record of Wall Street analysts is spotty at best and highly inaccurate at worst. When noted investor David Dreman looked at analyst estimates from 1973 to 1993, a period containing 78,695 separate quarterly estimates, he found that there was only 1 in 170 chance that the analyst projections would fall within plus or minus 5 percent of the actual number.

1 in 170... And remember that the same kind of "specialists" have been predicting "death of commodities" for the last five years. After the latest similar hysterical headlines I almost instantly thought of visiting the nearest commodity dealer and buying some more Krugerrands :)

6:39 AM  

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