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.”
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.