Salient to Investors:

New research suggests the advice analysts give in bad times seems to be even worse than the boosterism they peddle in good times.

Roger Loh of Singapore Management University and René Stulz of Ohio State found:

  • Analysts’ forecasts of profits and buy/sell recommendations from 1983-2011 were less reliable in falling markets than in rising ones, even after making allowances for increased volatility in such times.
  • Analysts’ forecasts of profits for the next quarter were off by 46% more during periods of financial crisis than at other times.
  • One change in ten in analysts’ stock recommendations moves the price of the share in normal times versus one in seven in falling markets, even though there are more changes during market routs.
  • Investors pay more attention to analysts’ opinions when times are tough, despite them being most likely to be wrong.

Neil Scarth at Frost Consulting said in the most recent crisis analysts budgets were cut by 40%, largely by replacing more experienced analysts with younger, greener ones.

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