Are Stock Predictions Really That Accurate?

Remember those 33 Chilean miners from last fall? As they endured 69 days underground, the whole world followed their harrowing rescue.

So what ever happened to those guys? I heard that one of them ran in the New York Marathon. Good for him! Beyond that, no news.

Stock market coverage is like that – in your face today, gone tomorrow. Especially around the new year, hundreds of talking heads offer thousands of “sure-fire” predictions on what’s hot and what’s not for your next big investment move. Buy Acme Inc.! Sell Beta Corp.! Large-caps are where it’s at!

But I challenge you to track what happens to those predictions a year, or even a quarter, later. A recent Wall Street Journal article checked to see how the stock market predictions of top analysts actually performed. It tracked the performance of the 10 stocks that stock analysts rated most highly, as well as the 10 they most loathed, for each of the past three years, 2008–2010. These years encompassed the worst of the Great Recession and the recovery that followed.

The results, please:

Analyst Stock Picks* and the S&P 500

Annualized Returns

Analysts Say “BUY” Analysts Say “AVOID” S&P 500 Index
2010 Up 24% Up 32% Up 13%
2009 Up 22% Up 70% Up 26%
2008 Down 48% Down 51% Down 39%

* Stock pick data are subject to survivorship bias, which means stocks that disappeared completely during the period were not included in these returns.

The market average, the S&P 500 Index, beat the picks of the top analysts in two out of three years. And if you had bet against the analysts, you would have been ahead in two out of three years.

The moral of the story? I’m not suggesting you go out and buy the opposite of whatever the analysts are recommending. I’m just saying the analysts’ picks and pans simply aren’t useful. I think it’s best to avoid the stock-picking game entirely by recognizing these talking heads for what they are — entertainment. Nothing more. Certainly not useful for investment advice.

About the author

Tom Posey, CFP®, J.D., AAMS

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