After my review of the CFA (which has relatively smoothly), I worked on the completion of my memory and it is that explains the lack of anything for a tip. I'm almost finished and the deposit should be by the end of the month. Since I really learned something interesting during the creation of this memory, I thought I would share with you some relevant information.
Analysts Are Pay?
is the question at $ 100. Is it possible to rely on analysts' recommendations to make money? Can we, by simply reading a report, transact in markets and be a winner. The answer to this question ... ... ... ... ... Theoretically, yes!
I already see many doubters. First, why only in theory? Because we must deal quickly (explained below) and a simple client like you and me did not have access to the findings of analysts quickly. Consider an analyst who files his report at noon. All major clients (institutions, mutual funds, managers, ...) are invited to a conference call to discuss its conclusion at noon. But his report could be available for small investors between closing and opening tonight for tomorrow (for reasons of compliance and quality of language among others). I therefore said that analysts are paid in theory, because small investors lack access to conclusions pretty quickly. And even if you were given such access ... you should be available anytime to receive this information, which is unrealistic.
I can still hear the world tell me they doubt whether even paying for big investors. Well, I must tell you that Analysts, on average, however, are actually paying. Notice I said average, some recommendations will be losers, while others will benefit.
What that analyst recommendations are paying?
The answer to this question is very simple ... what are the updates recommendation. It is known that analysts are biased. It is not in their nature to recommend the sale of a security. However, what matters is not the recommendation as it is (buy, neutral, sales ...), but rather the change. In other words, it must monitor whether the title has just been upgraded or downgraded. That is charges. And when you think about it logically. We are not supposed to do returns with information already known. However, if an analyst with a buy recommendation for 5 years on the title, I think his position is known to the market. Although it decreases this recommendation, it is a new information and research on the subject shows that the price adjustment is not instantaneous.
Today, there is performance to the period of one month following the update recommendation. And if the recommendation is supported by forecasts of earnings (that is to say that in the event of an upgrade, the analyst also increased its profit forecasts and vice versa), then the performance achieved is even greater.
performance may be achievable within one month after the update, but most of it takes place in the first 48 hours. Compromise after 48 hours without interest after the transaction fees paid.
What does this mean for ordinary investor?
For us, the conclusion is simple: do not blindly follow the recommendations of analysts. Even if the recommendation is less old and he is repeating an old recommendation. For the small investor, the interest of an analyst's report from the analysis on the inside, not small conclusions on the first page.
Implement a strategy to recoup the recommendations of analysts is to buy ALL the upgrades and sell short ALL downgrades. According to the results of my memory, it means having about 300 holdings, and deal 40-50 per day. I do not need to explain why, net of transaction costs, such a strategy is not really profitable. Even if we reduced the sample investable is always ± 15% of the sample which is traded at each day. Net of fees, such a portfolio will never be really interesting.
Do not come to the conclusion that the analysts are therefore useless. I told you that on average they are paying, but it should settle quickly if transaction costs prevent us to enjoy. It means rather that financial markets are efficient enough to recognize that the opinion of an analyst to value and prices adjust quickly to the market. To the point where net cost is no more money to be made. The only people who truly benefit from a recommendation from analyst are those who hold the title before the publication of these findings. It why the rules against front-running are important.
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