Stock Gurus: The Credible vs The Dubious

This past week a reader asked a question that all investors should ponder:

“What exactly are the qualifications to become an analyst? Are people appointed by their companies? Do they need experience in an industry (as you have)?”

Financial advice is ubiquitous on the internet. But the quality certainly varies. It pays to ask questions of those dispensing financial advice.

Analysts covering companies for the major brokerages will generally have a degree in an economic field, and they would have worked under someone. So they have training, and are gradually given more challenging assignments.

For example, I can go into the FactSet data provider right now and see that there are 39 analysts covering Intel (NSDQ: INTC). Companies with analysts assigned to cover Intel include Wells Fargo (NYSE: WFC), Raymond James, BMO Capital Markets, and Oppenheimer. These analysts are trained to evaluate financial metrics and to have a deep understanding of the business and outlook of a company. They provide the highest level of analysis, and I pay attention to what they say.

However, there is a real potential for analysts to follow the crowd. I have seen this in some companies that I knew very well. One analyst would make an assessment, and then others would just repeat that assessment without doing enough independent due diligence. I always ask, “Is this just an echo chamber here?” It’s also why I don’t simply rely on consensus ratings from analysts, even though they are a consideration in my own analyses.

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Then there are newsletter writers, many of who refer to themselves as analysts. There are really no qualifications for this, other than an ability to write, and hopefully some track record of making good calls. But the quality on this may vary greatly.

Some newsletters may hire novice investors who are good writers, and they may dispense questionable advice. It really pays to understand the resume of the analyst before taking the advice being dispensed.

Dig deeper…

You always have to dig into the track record of newsletter writers who make grandiose claims. Many tout their successes and hide their failures. For example, I know analysts that will tout a 70% win rate on their trades. What they may not tell you is that their wins are small, but the losses on the other 30% can be massive.

You have to dig in and understand the wins and the losses. (Note: It’s quite easy to rack up a 70% win rate by selling options that are far out of the money, but you can indeed see some large losses on the other 30%.)

Finally, there are registered investment advisers (RIA), which are firms that provide personal financial advice about securities. These firms employ Investment Adviser Representatives (IARs), which provide financial advice and investment management for a fee.

You can think of these as personal analysts who had to pass certain exams to receive their qualifications. They are required to act as a fiduciary, which is a person who holds a legal or ethical relationship of trust regarding your investments.

In any case, you should always ask such questions before taking financial advice.

Editor’s Note: As seasoned analyst Robert Rapier just explained, you need to research the qualifications behind anyone who offers you financial advice. There’s one analyst we know whose credentials are impeccable: our colleague Jim Fink.

A member of the Investing Daily stable of analysts, Jim Fink holds a bachelor’s degree from Yale University, a master’s degree from Harvard’s Kennedy School of Government, a law degree from Columbia University, and an MBA from the University of Virginia’s Darden School of Business. Jim also has been a member of the Illinois and D.C. legal bars.

So yeah, when Jim speaks, the rest of the Investing Daily team listens. You should, too.

As chief investment strategist of our premium publication Velocity Trader, Jim Fink doesn’t trade stocks. He trades velocity. Jim has developed proprietary stock “filters” that provide advanced knowledge of when an equity’s price is about to rapidly accelerate. Based on this knowledge, Jim constructs trades that have consistently reaped windfalls for his followers.

Want to learn about Jim’s next trades? Click here now.