Beware of consensus!
-
- 0
- 894
- 0
If you invest in the stock market, you have no doubt at some time consulted the consensus to find out what the "professionals of the sector" opinions are on an asset. Several players give their opinions on the financial markets:
- The banks' consensus: These financial institutions pay analysts to issue an opinion on the various securities. These are the indications: "Sell, Underperform, Hold, Outperform, or Buy".
- The consensus of the specialized media: These are journalists who publish recommendations in newspapers or make television programs.
All these opinions form a consensus, a kind of general opinion on each company, on each sector of activity, on each market. This allows the market temperature to be taken before investing on the stock market. It is a widely used tool by many investors. When I talk about investors, I am talking about individuals, professionals in the sector do not rely on consensus.
It should be noted that companies pay to be rated by banks' financial analysts. Analysts are then said to be "sell side" (on the seller's side). Financial analysts generally update their recommendation after the results of published or if a significant event has occurred in the company’s life.
The same applies to rating agencies. It should not be assumed that these structures are independent, it is the one who pays (the company) that is in control.
The conflict of interest between the analyst and the financial institution is then quickly understood.
On the one hand, analysts must be as impartial as possible, but on the other, they must satisfy their clients (the companies) so that they do not move to their competitors. It's a rather complex balancing act. Nor can the bank make a recommendation which is in total conflict with reality. The two parties must somehow come to an agreement.
If the recommendation is deemed good by the company, it's all good for the bank. It will continue to pay for future analyses and that encourages customer loyalty within the bank. Everyone wins.
A company may even refuse to publish a recommendation, but must show a clean bill of health to its shareholders. If a big company doesn't have any recommendations from a bank, it's suspicious! The company is therefore obliged to accept its rating or recommendation even if it had hoped for better.
A friend of mine has a Bloomberg subscription at work. When entering the name of a company, it is possible to consult the various recommendations published by various banks’ financial analysts in their own name. These analyses are not intended for the general public, they are said to be “buy side” (on the side of the buyer). In this case, the analysts don’t work for a company but for the bank itself. These analyses are used by the institution's portfolio managers and traders.
And the surprise! We note that the analyses have nothing to do with the recommendations intended for the general public! In many cases, they are even completely opposite to the "official consensus". These are the analyses used by the pros.
If you follow the financial magazines a little, you will probably one day come across an analysis that tells you that you cannot miss this or that asset "Buy without hesitation". The journalist's main argument for buying is often that everyone is buying it. You'd be stupid not to do it too.
When a newspaper or any media tells you to buy or sell, it's already too late! The price has often already gone too far. For a newspaper to make the headlines on an asset, it is because it has already exploded upwards, the remaining upside potential is then very often limited. You missed the train and shouldn’t try to catch it on the move. Before the 2008 crisis, all the newspapers were headlining that there was still time to buy. That the market was bullish and that it was not about to stop. For so-called "professionals of the sector", I wonder about offering them a possible retraining!
In the financial world, it is often said that when individuals start to buy an asset, it is the moment when professionals decide to sell! It is for this reason that in many cases the opposite scenario to that announced by the media occurs.
We can cite an obvious example with the Wall Street Journal which, on 6 occasions, showed headlines entitled "Buy gold". In the following 6 months, the price lost at least 10% of its value each time.
Basically, when the media tells you to buy, it's that the asset is already largely overvalued, that the trend phenomenon is coming to an end.
No one wants to risk going against consensus
The reason is simple and can be summed up with a diction "Better to be wrong with others than be right alone". If the media misses the share of the moment, it is considered incompetent by the general public. If it goes against the consensus and has the misfortune to make a mistake, it finds himself discredited. The media therefore prefers to adopt sheep-like behaviour which limits risk. If the recommendation is bad, the media can always say that no one had seen it coming and that everyone was advising the same thing. Their reputation is safe.
If you are cautious about the financial markets, you bore the general public. Individuals do not expect "professionals" to say that things will not change in the medium/long term, that they have no opinion on the issue. A bank or media analyst has an obligation to commit to a direction. If you remain neutral, you discredit yourself with the general public, you lose all credibility. An analyst is not allowed to be too prudent.
If an analyst has nothing to say, individuals will use other, more committed analysts, whether they are right or wrong. If the stock or market has already risen significantly, individuals prefer to listen to analysts who are committed to the short term rather than an analyst who is cautious about the medium/long term.
An analyst must always have an opinion.
The purpose of a financial analyst is normally to determine the value of a security from a fundamental perspective. If the price is below this level, they issue a buy recommendation, if it is below, they recommend selling. Therefore, the rationality of the asset’s price must be determined.
In reality, that is not how it happens. Analysts are now trying to say whether investor irrationality is about to stop or not. Even if they feel that the price is already overvalued, they will advise the purchase in the face of pressure from their customers (the evaluated companies). Analysts invent arguments in favour of the movement continuing rather than recommending caution.
If analysts go against the consensus, their opinion is not taken into account by the general public. Only those who have succeeded in building a solid reputation in the past (having been the only one to be right, before the others) succeed in being listened to. For the others (i.e. the majority), they have no credibility.
The purpose of the media is to sell papers, and to sell them you need to have an opinion about everything, even if it means writing the opposite later. This practice is found in all media, including those that are not specialized in financial markets.
Financial analyst is a profession. Individuals therefore feel that they must always be able to decide on a value, otherwise it appears that they do not know their trade.
You can't say to the general public "I don't know" or "I don't have an opinion on this".
Either you carry out your own analyses or you entrust the management of your stock market portfolio entirely to a third party. But you should never base your investment decisions on consensus. The consensus is totally distorted and does not reflect factual reality. It only meets the expectations of companies (for banks) or the general public (for the media).
I'm not telling you that all external analysts are to be ignored, it remains a good way to give you investment ideas. But it is advisable to always complete these analyses with your own. Do not follow a recommendation or a blind signal. Copying a trader is not a viable solution. This principle also applies to Centralcharts, the social technical analysis is there to give trading ideas and compare the views of different members, not to provide you with real-time trading signals.
- The banks' consensus: These financial institutions pay analysts to issue an opinion on the various securities. These are the indications: "Sell, Underperform, Hold, Outperform, or Buy".
- The consensus of the specialized media: These are journalists who publish recommendations in newspapers or make television programs.
All these opinions form a consensus, a kind of general opinion on each company, on each sector of activity, on each market. This allows the market temperature to be taken before investing on the stock market. It is a widely used tool by many investors. When I talk about investors, I am talking about individuals, professionals in the sector do not rely on consensus.
The banks' consensus: A great farce!
It should be noted that companies pay to be rated by banks' financial analysts. Analysts are then said to be "sell side" (on the seller's side). Financial analysts generally update their recommendation after the results of published or if a significant event has occurred in the company’s life.
The same applies to rating agencies. It should not be assumed that these structures are independent, it is the one who pays (the company) that is in control.
The conflict of interest between the analyst and the financial institution is then quickly understood.
On the one hand, analysts must be as impartial as possible, but on the other, they must satisfy their clients (the companies) so that they do not move to their competitors. It's a rather complex balancing act. Nor can the bank make a recommendation which is in total conflict with reality. The two parties must somehow come to an agreement.
If the recommendation is deemed good by the company, it's all good for the bank. It will continue to pay for future analyses and that encourages customer loyalty within the bank. Everyone wins.
A company may even refuse to publish a recommendation, but must show a clean bill of health to its shareholders. If a big company doesn't have any recommendations from a bank, it's suspicious! The company is therefore obliged to accept its rating or recommendation even if it had hoped for better.
A friend of mine has a Bloomberg subscription at work. When entering the name of a company, it is possible to consult the various recommendations published by various banks’ financial analysts in their own name. These analyses are not intended for the general public, they are said to be “buy side” (on the side of the buyer). In this case, the analysts don’t work for a company but for the bank itself. These analyses are used by the institution's portfolio managers and traders.
And the surprise! We note that the analyses have nothing to do with the recommendations intended for the general public! In many cases, they are even completely opposite to the "official consensus". These are the analyses used by the pros.
The consensus of the specialized media: The sheep
If you follow the financial magazines a little, you will probably one day come across an analysis that tells you that you cannot miss this or that asset "Buy without hesitation". The journalist's main argument for buying is often that everyone is buying it. You'd be stupid not to do it too.
When a newspaper or any media tells you to buy or sell, it's already too late! The price has often already gone too far. For a newspaper to make the headlines on an asset, it is because it has already exploded upwards, the remaining upside potential is then very often limited. You missed the train and shouldn’t try to catch it on the move. Before the 2008 crisis, all the newspapers were headlining that there was still time to buy. That the market was bullish and that it was not about to stop. For so-called "professionals of the sector", I wonder about offering them a possible retraining!
In the financial world, it is often said that when individuals start to buy an asset, it is the moment when professionals decide to sell! It is for this reason that in many cases the opposite scenario to that announced by the media occurs.
We can cite an obvious example with the Wall Street Journal which, on 6 occasions, showed headlines entitled "Buy gold". In the following 6 months, the price lost at least 10% of its value each time.
Basically, when the media tells you to buy, it's that the asset is already largely overvalued, that the trend phenomenon is coming to an end.
Why is consensus distorted?
No one wants to risk going against consensus
The reason is simple and can be summed up with a diction "Better to be wrong with others than be right alone". If the media misses the share of the moment, it is considered incompetent by the general public. If it goes against the consensus and has the misfortune to make a mistake, it finds himself discredited. The media therefore prefers to adopt sheep-like behaviour which limits risk. If the recommendation is bad, the media can always say that no one had seen it coming and that everyone was advising the same thing. Their reputation is safe.
To be careful is to discredit oneself
If you are cautious about the financial markets, you bore the general public. Individuals do not expect "professionals" to say that things will not change in the medium/long term, that they have no opinion on the issue. A bank or media analyst has an obligation to commit to a direction. If you remain neutral, you discredit yourself with the general public, you lose all credibility. An analyst is not allowed to be too prudent.
If an analyst has nothing to say, individuals will use other, more committed analysts, whether they are right or wrong. If the stock or market has already risen significantly, individuals prefer to listen to analysts who are committed to the short term rather than an analyst who is cautious about the medium/long term.
An analyst must always have an opinion.
Analysts must explain the irrational
The purpose of a financial analyst is normally to determine the value of a security from a fundamental perspective. If the price is below this level, they issue a buy recommendation, if it is below, they recommend selling. Therefore, the rationality of the asset’s price must be determined.
In reality, that is not how it happens. Analysts are now trying to say whether investor irrationality is about to stop or not. Even if they feel that the price is already overvalued, they will advise the purchase in the face of pressure from their customers (the evaluated companies). Analysts invent arguments in favour of the movement continuing rather than recommending caution.
A question of credibility
If analysts go against the consensus, their opinion is not taken into account by the general public. Only those who have succeeded in building a solid reputation in the past (having been the only one to be right, before the others) succeed in being listened to. For the others (i.e. the majority), they have no credibility.
Have an opinion on everything
The purpose of the media is to sell papers, and to sell them you need to have an opinion about everything, even if it means writing the opposite later. This practice is found in all media, including those that are not specialized in financial markets.
Financial analyst is a profession. Individuals therefore feel that they must always be able to decide on a value, otherwise it appears that they do not know their trade.
You can't say to the general public "I don't know" or "I don't have an opinion on this".
Conclusion
Either you carry out your own analyses or you entrust the management of your stock market portfolio entirely to a third party. But you should never base your investment decisions on consensus. The consensus is totally distorted and does not reflect factual reality. It only meets the expectations of companies (for banks) or the general public (for the media).
I'm not telling you that all external analysts are to be ignored, it remains a good way to give you investment ideas. But it is advisable to always complete these analyses with your own. Do not follow a recommendation or a blind signal. Copying a trader is not a viable solution. This principle also applies to Centralcharts, the social technical analysis is there to give trading ideas and compare the views of different members, not to provide you with real-time trading signals.
