A new era in financial analysis is dawning

The story of amateur out-performance has been getting more attention lately and that’s a good thing. Success emboldens more amateurs to try their hand at financial analysis. Transparency of methods and data demystifies a practice that is not as complex, and a skill that is not as hard to obtain, as it’s often assumed.

While, quarter after quarter, the gap between the two cohorts is calibrated, what we haven’t heard much of is a defense from the professionals.

That’s a bit strange given the negative impact some of the attention must be having on their reputations. This is why I was glad to see that Adam Satariano’s well-written piece finally got some reactions from the professionals.

Professional analysts tend to be more conservative. That’s partly because they’re closely monitored and regulated, said Shaw Wu, an Apple analyst at Kaufman Brothers LP in San Francisco. He and his colleagues must pass a series of tests administered by the Financial Industry Regulatory Authority before becoming certified.

“I have to be careful of everything that I do because it’s scrutinized,” said Wu, who has recommended buying Apple shares since joining Kaufman in 2008.

Alexander Peterc, an analyst for Exane-BNP, said professionals are “very wary” of putting out aggressive estimates because of institutional memory of past technology booms and potential backlash from clients if they’re wrong.

“They got it right on the way up, but we’ll see what happens after that,” Peterc said. “Often bloggers and amateur investors are very good in bull markets, but get lost in bear markets. If some of these guys call the moment at which Apple’s fortunes begin to turn I will be impressed.”

via Apple’s `Underdog’ Analysts Outperform Wall Street From Helsinki, Caracas – Bloomberg.

However, neither answer satisfies.

Wu cites regulation and scrutiny but that does not prevent one from being intellectually honest. What matters is not avoidance of conservatism or exuberance. What matters is rigor; being impartial to everything but the data. One must keep one’s convictions in proportion to one’s valid evidence not to regulatory oversight (which is there to prevent abuse, not balance).

Peterc cites pressure from clients (hence the obligations of employment). That implies that professionals are under pressure to say something other than what they believe, which is a sinister form of self-censorship. Not only is that less valuable as an opinion, but it’s likely to be less accurate as well.

But more fundamentally, the issue for the pros is that the institution of analysis risks becoming de-professionalized. In the same way many jobs that took specialized skills became commoditized by the use of new tools or access to information, the era of DIY financial analysis is dawning.

The difference between professionalism and amateurism isn’t whether one is well paid or not or whether one is anointed with credentials. It’s whether one is consistently out-performing randomness (note emphasis on the consistency).

Amateurs can get lucky and pros can get unlucky. But in the end it’s about hitting that home run over and over again.

So the question remains why, in bull markets or bear markets, the professionals are consistently wrong on Apple. The evidence has always been anecdotal and data was fragmented, but now the data is being diligently compiled and it will serve as testament to a shift that I think will be permanent.

Stay tuned.

  • bump

    Whether one is closely monitored or not should not change one's conclusions based on the data analyzed in my opinion. Both of those explanations reek of excuses.

  • Good questions! I do think the 'memory' of the institution enforces a conservatism on the professional investing class. Of course, being well paid to talk up buying and selling stocks, day after day, by these same institutions also has its effect on what the analyst says and does.

    With respect to being wrong on Apple, I believe it's because these people continue to believe we live in a PC-centric world, when in fact, we live in a mobile computing world. Apple is lead dog. This is not about Windows vs Mac anymore. That was the 20th century. Analysts don't seem to be able to reconcile this.

  • Steven Noyes

    All I have to say is thanks Horace. I have been able to learn more and, more importantly, learn to think in new ways, simply by reading your blog. I do not always understand the gist of your analysis, but I am getting better.

    Keep up the great work.

  • Splashman

    Jobs was exactly right with his "PCs are trucks" analogy. If more analysts (professional and amateur) believed that, their analysis of Apple, Microsoft, etc. would be more accurate.

    And I don't see why an overly conservative forecast should be less problematic to a client than an overly optimistic forecast. Either way, money is lost.

    • Marc in Chicago

      Investors are more sensitive to downside risk caused by an overly optimistic estimate than they are sensitive to upside risk caused by an overly conservative one. This is likely because investors lose real investment value ($) on the downside but lose only opportunity on the upside.

      Also, behavioral economists are learning that the human brain is designed to be more sensitive to the risk of downside loss as opposed to opportunity costs.

      • davel


      • arjun_

        I do not disagree with that at all. However, if this is the basis for the analysts' position, then as Horace points out they must confess to the fact that they are deliberately stating something other than what they think is true.

        Append: It is akin to sandbagging a schedule in program management. There's a prudent level of slack and then there's blatant sandbagging.

        In this particular case the claim is being made that they are too far off. I think there's something to talk about there.

      • Completely agree that what's going on. Pros give somewhat dishonest analysis because they've decided its easier to keep their clients happy that way. It's hardly uncommon any professional services. Another way to think of it is that their clients are paying a premium to have their psychological bias accommodated, i.e. paying a premium to lessen the experience of downside loss.

      • Rick

        You don't need a behavioral economist to point out that the sell side analyst will tend to be conservative.
        Customers complain when they lose money and blame the research analyst for not being right. And the company. That can cost you your job.
        There is one defense for the analyst — all the other guys were wong too.
        What is amazing, however, is the deer-in-the-headlights reponse of competitors to the iPad and the scant commentary by the "pros" on the so far anemic response by Apple's competitors. Says a lot about the quality of managemnt at places like HP and Microsoft not to mention the quality of professional analysts.

      • Philip

        The iPad is the culmination of a process that started when Jobs founded Next 25 years ago. Even with hindsight, it would take huge commitment and at least 5 years for those companies to respond. But they can't even start because they are too invested in the old MS dominated industry structure.

  • ziggurism

    Does this only happen with analysts predicting AAPL? If it's an industry-wide phenomenon, I could believe the field might become "de-professionalized". But if it's just AAPL, then maybe it's just a testament to the devotion the company inspires among the base.

  • Argosy

    What you said:
    '…And I don't see why an overly conservative forecast should be less problematic to a client than an overly optimistic forecast. Either way, money is lost….'

    Exactly! The pro analysts making certain they under estimate does their clients as much a disservice as trying to be 'right on' with the potential of over estimating. All I'll add is a restatement of your last comment: either way money or opportunity is lost. If you never aim to win you most certainly will not.


    I've been following Gruber for many years and have just recently added your sight to my bookmarks bar (why did I wait so long???) I'm glad I'm a reading here regularly now! Nice job!

    • bbb

      As bad as the Pros are Apples guidance is even worse. Is there a correlation?

      • dchu220

        Every company gives conservative guidances for the same reason. If you hit your targets, your stock will go up a bit, but if you miss your guidance you stock will go down a lot.

      • philip

        "Guidance" does not mean "forecast", and to defend against retrospective litigation and competitor insight, no company will explain precisely how it calculates guidance. But you can assume that a consistent model and algorithm are being used to generate guidance numbers. For Apple, guidance seems to be more of an "in the bag" forecast to which must be added the risk component of sales determined by factors outside Apple's control. Apple sells consumer products, and almost every sale is a choice made by an individual, and is subject to fashion, bad publicity and consumer confidence far more than the PC or the cellphone business where the real customer is usually an institution, or carrier, which plans purchasing months ahead.

      • asymco

        Precisely. Management is obligated to make a judgement to the best of their abilities without misrepresenting risk. Analysis is an obligation to discover and describe what is hidden.

  • davel

    what is the difference between and amateur and professional stock analyst?

    if you have the same rigor and can back up your conclusions with viewpoint and numbers what is the difference?

    the analysts cover more than just apple and so they are judged on the body of their work and the ability to make the audience comfortable that they know what they are talking about.

    however it is pretty obvious that most analysts at these companies that follow apple really have no clue what this company is about. and i am not just saying they miss on whether apple sells 9 million or 10 million phones.

    apple is really a non traditional company. its founder is non traditional. even tho at the quarterlies the company answers the questions and says where they are going and why. and jobs clearly states why you want to buy his product and how he is positioning the company it seems as if they are not listening.

    • dchu220

      You hit it on the head. A lot of analysts have to spend their time following a bunch of companies, while many amateur analysts spend all their time getting immersed in a few companies.

      I think that's what's disruptive. You are de-centralizing analysis from the big investment banks to people sitting in their den at night who read every bit of info and news about a company.

  • newtonrj

    What is interesting on the linked texts is the lack of response from the pros to get it right going forward. They are still locked into tried and un-true paradigms for forecasting. -RJ

  • analyzer

    Hope this helps explain a few of the reasons why publishing sell-side analysts regularly underestimate Apple's performance and 'under-perform' estimates by non-pros. Probably the biggest reason is that downside to Apple's stock if it misses published estimates is asymmetric to upside from beating estimates. So, if you are bullish on Apple (which most sell-side analysts are) and your customers are bullish on Apple (which most major commission payers on Wall Street are), you have significant incentive to establish low estimates that you believe Apple will beat. This may make you less accurate, but it makes your customers happy, and they pay the bills. Interestingly, you see the opposite sometimes, where analysts set a high bar that they hope the company will miss.
    Another is related to company access. Apple is actually good about this, but many companies will favor analysts that stick closely to their guidance (in both subtle and not-so-subtle ways). Since executive input can be a valuable information source, analysts have incentive to stick closely to guidance (which is always low in Apple's case) so they don't cut off an information source. As i said, Apple does not employ this tactic, but the practice is pervasive and likely affects analysts behavior toward Apple estimates.
    A third reason is that, contrary to what some perceive, there is much more to being a sell-side analyst than publishing accurate estimates. Many analysts will talk to numbers that they believe are accurate (hence the term 'whisper number'), rather than publishing a note. This is done either to create an air of exclusivity which can be valuable, or to save time which can also be very valuable given the rigors of the job.
    I agree with Horace that many of the skills required to make accurate estimates are very achievable to the average person, and i highly encourage all that are interested in investing to spend the time and do the work yourself. But, good pro analysts spend significant time and energy doing creative, unique and valuable research that gives them tremendous insight into Apple's finances and shouldn't be discounted because their published estimates aren't accurate. I'd bet, that if they were fully incented to be accurate in printed estimates, most of them would smoke the non-pros (well, maybe not most, there are definitely some hacks).

    • davel

      you make a lot of good points.

      analysts employed by large financial corporations have many clients – internal and external. there are many reasons why they do what they do. during the dot com era some very prominent professionals were putting out buy recommendations the day before a company goes bankrupt.

      jim cramer was doing the same 2 years ago with bear sterns a week before it went under.

      so the short answer i guess is a professional analyst is not always putting forth his best effort publicly for a variety of reasons that we the public are not aware of.

    • asymco

      Thanks for the insight. I am struck by the implication you make that the incentives in the system are designed to create inaccurate estimates. It's indeed perverse that an inaccurate (i.e. false) number is worth more than an accurate (true) number.

  • Paul

    When confronted with a community of people who are paid very well to do highly competitive jobs, if you see behavior that seems counter to your expectations, it might not mean that they're bad at their jobs, it might mean that there's a lot more to understand about what their jobs really entail and why they do the things they do. It's foolish and narrow to decide "obviously the bloggers must be better analysts."

    I think that this line of thinking assumes that the amateurs and the pros publish estimates for the same reasons, and that their published estimates receive the same type of scrutiny and similar emphasis by their audiences. Some of the pros have a much, much better understanding of the business than the average Apple finance blogger, some have fantastic data, and they often don't publish it because it's guarded and shared only with high-value customers. If the most valuable stuff is in a PDF that goes to every trading desk indiscriminately, how do you get paid for your research and analysis?

    And for the pros, it gets even murkier, because they are embedded in a business that provides a variety of services for which they are paid very indirectly (trading commissions). Accurate, published EPS numbers are not typically a priority for clients. In fact, some of the analysts that are best rewarded by large institutional clients have terrible EPS estimates, but their clients simply don't care, because that's not what they're paying for.

    And to the bloggers, how many publish estimates for any companies other than Apple? Most of the pros that cover Apple cover IBM, HP, EMC, NetApp, Lexmark, Dell, etc… If the bloggers are the better analyst talents, how are they faring with their estimates for the other large cap technology businesses?

    (Nevermind that there's a whole 'nother thread to pull here where the same crowd that cries about how our collective quarter-to-quarter, short-term emphasis is detrimental and a terrible waste of energy, is now fussing over who has the best quarterly forecast…)

    Let's all keep our egos in check, and in our quest to learn more about Apple, its competitors, and the financial markets, take a more expansive and nuanced view of what's really going on.

    For what it's worth, I think Horace's analysis is excellent – I'm not criticizing his body of work, I just bristle at this knee-jerk line of thinking that says the pros must be bad analysts.

    • asymco

      I've always assumed that the pros are brilliant people and clearly no reputable firm would hire anyone without impeccable credentials. However, you touch upon the point that these professionals are stretched thin and have complex incentives.

      That exactly why there is opportunity.

      The asymmetry of focus and clarity is what makes the profession prone to disruption. The amateur can focus on one company. She can create enormous value and get peer reviewed (as we are doing now). Another analyst can focus on the long term or on the product analysis. There is something fundamentally powerful about crowd-sourcing this work.

      There is no reason clients won't turn to this class of research once the proof of performance is digested.

  • tleafs

    The answer is obvious, the professional has no real world experience, they don’t have a skin in the game and don’t bother to do the real homework. The bloggers actually cares and do the homework as they have skin in the game. That said it is still laughable that these so call professionals are still clueless after years of following aapl.

    • Horace the Grump

      Boy oh boy… you just set a new low for idiotic comments on the blog….

      Three points:

      The absolutely have 'skin in the game' because they are paid largely in bonuses driven by how good they are at their jobs… analysts get rewarded by institutional clients at a personal level, so if an analyst isn't doing a good job the clients will so tell the analysts employer and more likely than not the analyst will be fired. However, if they are doing a good job their incomes will go up – its very very competitive.

      Read Analyzer comments above and make sure you understand what is being said… an analysts reputation is everything… so to under pitch the forecast is in effect to deliver an upside surprise to the client – and everyone likes to over deliver because clients (in any business) like that… The are heavily incentivised to be just about right, not actually right… the amateurs have more freedom to speculate because they have limited downside from getting it wrong – after all who is going to fire Horace Dideu?? His mother?

      Analysts do far more than just publish estimates… those are the public features of a job… they are likely doing as much work as Horace et al are doing, but you never get to see it because you aren't an institutional client… its like the tip of an iceberg…

      These guys know a frightening about about Apple… you're just never in a position to ask them about what they know or more importantly what they think…

      • dchu220

        Nice reply.

        When you think of it in disruptive theory, the decisions a company makes internally are driven by their primary business models. It's why Intel couldn't succeed copying ARM's business model. Why so many M&As turn out to be a disaster.

        The point is that you are not the Investment Bank's customer. Their customers are the large pension funds that park their money at the bank. They are not paid to be right. They are paid to not be wrong.

    • asymco

      I'm convinced that if the professionals were given free rein to solve the puzzle they would do a fine job. The failure is not in the individual. It's in the business model within which he's forced to work. But the rub is that the model finances their lifestyle. The burden of the paycheck weighs heavily on the free mind.

  • justinfadams

    I do believe the next 5 years in this arena will be like the music companies in the late 1990's, or the publishing industry today. Long-standing business models like sell-side research on blue chip companies will become commoditized.

    With that in mind, some of this behavior can be explained by the reaction of the market to small misses in earnings reports. When a company misses by a penny, the stock often gets punished brutally (short-term). Guidance, another facet, is hyper-sensitive to any small amount of downside.

    So, if I were an analyst, I might feel like I need to do what they're doing, which is setting a high long-term value, and set modest quarterly numbers so that if the stock just misses the street, and that analyst is on the low-side of that group that sets the mean, that analyst will seem precient in terms of providing useful guidance.

    The upside for being super aggressive, if all you're doing is providing information for others, simply isn't there.

  • capablanca

    Horace, I find myself largely in disagreement. Yes, the amateurs have been better than the pros at estimates. I won't repeat arguments made in the excellent comments by Analyzer and Paul, but as they imply, the context, the audience, and the objectives of the two groups are vastly different.

    I also think you are a bit tough on Peterc. Think of it this way. Each analyst mentally draws himself a bell-curve of the probabilities; the blogger publishes his mean; the pro publishes his minus-one Sigma. Is that "say[ing] something they don't believe" or is it just being conservative. And regarding his point on bull vs. bear, remember that the context here is just AAPL, which from a results standpoint has been in bull mode since Steve's return. We don't have data on how the amateurs did predicting Apple results in the 1990s.

    Having said this, I am admiring of the work that you, Deagol, Turley, Andy, and others have been doing. The value you provide is appreciated by at least hundreds, if not thousands of investors.


    • asymco

      I empathize with the professional analyst. I understand even that "there, but for the grace of God, go I".

      My accusations are aimed entirely at the business model of analysis which creates perverse incentives where accuracy is neither valued nor consumed.

      • capablanca

        OK. That is a horse of a different color.

        Of course the model extends far beyond Apple. Moreover it exists and is worthy of criticism independently of any amateur achievements, or indeed independent of the even the existence of we amateurs.

      • Jerry

        One does need to be a bit careful about the value of "accuracy". A fact I learned from a meteorologist many years ago illustrates the point. I will publish weather forecasts, using a very simple technique: My forecast of temperature, precipitation, wind speed, and cloud cover for each day will be the average of those values for the same day at the same location over the last 100 years (or whatever data set is available). In most places, this will be "more accurate" than the best official forecasts. The problem is … it will also be useless. It will never predict a storm; it'll never predict the day in April when there's a cold front that moves in at mid-day and you really should have taken your coat.

        The analogue for the market would be predicting the unexpected – whether on a small scale, where there are always ups and downs, or at the scale of outright market disruption. I've seen little evidence that the professional forecasters are actually any better than anyone else at predicting the unexpected. As you note, there are strong institutional pressures pushing professionals (a) toward the mean of all the other professionals; (b) toward conservative, "safe" estimates – so over all I agree with your skeptical view.

        Of course, it's also true that if you're deciding how much insulation a house needs, knowing about the odd cold snap here and there isn't nearly as important as long-term averages and ranges. One might argue that institutional investors, who manage huge funds, can't by their nature move very fast. So the value of more accurate short-term information is limited for them.

        Information has a value (and a cost), but that value – like the value of anything else in the market – is relative to an individual purchaser….

        — Jerry

  • Rob Scott

    First – Congrats Horace for holding on the No 1 spot, good stuff. There is a nice profile of Horace here :
    The reason Professional Analysts are often wrong is that most believe that Apple's best days are over. If that is you key assumption everything else from then on will be done to confirm that assumption. They also have companies they are shilling that are not as great as Apple, so to make them appear to be as great an opportunity as Apple they must underestimate their Apple's forecast numbers. The amateurs on the other hand are mostly Apple fans and most follow only Apple. This makes them more partial if a little too bullish. I think amateurs will continue to out-perform professionals purely because Apple is just starting!

    • Mapper

      But there is no "Baltic Strait".

  • Congratulations on being featured on Bloomberg. I have read the article myself, and I tend to agree with you. When was the last time did the earnings of the company meet the estimates? It's a joke. Even a broken clock is right twice a day. Most of these analysts aren't right twice a year! And they are paid the big money. They have tools at their fingertips much better than any individual investor, how come they don't come up with right numbers?

    I have to say that for most of the stocks I was trading though, the S&P recommendations were somehow accurate (AAPL, BAC, C). I remember in particular they recommended AAPL as a strong buy in June of 2006, and their target price was $320, which was almost exactly the price AAPL closed at on December 31, 2010.

  • Pieter

    I see two reasons:
    It is extremely difficult to analyze the Apple share price because of the disruptive nature of its products and services. Any "professional" financial model will underscore the Apple share price as long as Apple keeps on disrupting the market. An analyst will have to apply a fair amount of gut feeling (intuition) in order to be reasonably accurate with share price predictions. The level of insight by the analyst and his understanding of the power of the Apple business model etc etc, will determine the ultimate accuracy of his share price predictions.
    Professional analysts are not trained to act on intuition and their projections will only reflect what their research and financial models indicate. It is evident from the share prediction results that amateur analysts use a fair amount of gut feeling in their share price analysis.
    (ii)MARKET CAP
    Apple has reached a level of a market capitalization expected of a mature company with much lower growth figures. The expectancy in the market and of analysts is that Apple has reached the apex of its growth. Historically it has never happened that any company has keep growing at this level of market capitalization. This I belief is a psychological barrier in the mind of analysts. This is not only inhibiting the share price predictions, but also lowers the current share price. This may become an even greater factor as Apple keeps growing.
    Thank you Horace for your excellent work!

  • Danthemason

    Words can be interpreted differently by different people and groups. Numbers are cold hard representations. There should be no mystique in a number.

  • desreveR

    Outstanding post and great discussion. One possible explanation that hasn't been proposed yet is that amateurs tend have an intrinsic motivation to analyze and estimate a given stock's performance, whereas professionals are merely paid employees. This may sound like a minor point or even counter-intuitive, but those who are enthusiastic about their work tend to work harder and keep a more open mind than those doing it merely for the paycheck. As such, it shouldn't surprise us that amateurs are actually MORE rigorous in their analysis, effortlessly going the extra mile that most professionals dread. (For those who don't agree with this theory, I recommend you read "Drive: the surprising truth about what motivates us" by Daniel Pink)

  • Fred

    “So the question remains why, in bull markets or bear markets, the professionals are consistently wrong on Apple.”

    Apple’s guidance is typically very conservative.

    Professional analysts modeling EPS growth significantly higher than Apple’s guidance risks analysts’ reputation with internal bureaucrats and disappointed clients if actual EPS and share price come in below the analyst’s model. Forecasting above Apple’s guidance takes guts.

    For professionals, surprise up is better than surprise down.

    In addition, imagining and forecasting revolutionary change and behavior is difficult for humans to do.

  • TomCF

    Given the stock price movement, I'm wondering if anyone who invests in AAPL is listening to the professional analysts. The numbers far exceeded even the most optimistic, and the future guidance given by Apple far exceeded analysts' future expectations. That guidance is historically laughably conservative. So if the future is so much brighter than expected, I wonder if the drop from 348 (pre-earnings announcment) to 332 (as I write this, post Jobs health/earnings announcement) is just selling on the news, or the effect of Jobs' health on the stock or were investors THAT optimistic?

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  • ljp

    It's a little humourous that Shaw Wu says, "I have to be careful of everything that I do because it’s scrutinized". He has issued note after note of misinformation. His track record on Apple calls cover so many possibilities that people actually credit him for being "right" for Apple actually doing one of his dozen scenarios. He used to issue notes about delays of Apple products and now he has thrown RIM into his soothsaying.

    Many analysts have taken on the persona of National Enquirer reporters using the ever popular, "Sources say". And if they are holding back the real numbers for the elite clients, does this mean that they are willfully misleading their "lower value" clients? That doesn't seem appropriate way to treat clients. And if they are knowingly guiding lower why do they make those calls so public? If all these reasons provided in the comments are true for why analyst numbers are off, why do they estimate too high on stocks? Why not lowball every call?

    Analysts are given far too much credence in the marketplace and Apple shows that when a company does not provide accurate guidance, the analyst estimates follow suit.

  • Suddy


    Thanks for the wonderful blog, your thoughts and analysis are very insightful. I recently came across your blog based on an news article read where you were mentioned for forecasting AAPL stocks.

    Relevant to the question of why are analysts wrong consistently wrong on Apple, I believe the answer is in the question itself. As long as a "herd" they are all wrong and "consistently" wrong, any analyst does not have any incentive to go out on a limb and try to get the forecasts right.

    Two references about how the herd behavior works are 1. from Peter Lynch when he references IBM as a fav pick of fund managers and the herding rationale that supports his argument.

    2. Read Raghuram Rajan's "Has Financial Development Made the World Riskier" speech that he gave for Greenspan's farewell . In it he mentions …

    ""….a second form of perverse behavior is the incentive to herd with other investment managers on investment choices because herding provides insurance that the manager will not underperform his peers. " "

    What is true for investment managers is also true for the equity analysts community.