At StockViz, one of the ways in which we help investors is through maintaining “theme” based portfolios, categorized by risk, style, etc. This way, investors can browse through different model portfolios, inspect their historical returns and choose the style that they are comfortable with. This is diametrically opposite of the prevalent practice of “tips”, “calls” and “multi-baggers.” Michael Harris over at Price Action Lab has an interesting post up about market calls made by analysts that resonated:
Anyone who relies on selective calls made by analysts, no matter how well-known they are or successful they have been, may never profit in the longer-term, since by virtue of the law of large numbers the success rate of those calls will approach asymptotically 50% on the average.
I agree with him. Most “analysts” only have a surface knowledge about what they are talking about. And this is made worse by a lack of process.
Trading the markets and investing in financial assets for profit should rely on well-defined, reproducible models that have a proven edge. Unless an analyst can prove that he uses a well-defined procedure to generate market calls, he may be instead generating noise based on subjective criteria and possibly cognitive biases.
Unfortunately, for most investors, it is extremely difficult to separate out the signal from noise. But you know what they say: nothing worth doing is easy
Source: The Net Value of All Market Calls is Exactly Zero