How to Win Capital and Influence Markets: Analysts Point To Profits (Even When They’re Wrong)

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Lately, we’ve been looking at data-driven investing through the lens of “money manager capitalism:” the huge amounts of managed money chasing investment trends tends to exaggerate news-driven momentum in the market.

Meanwhile, we’ve noted the “end of disco” for money managers: the personality driven-funds of old are being driven out by more passive investment vehicles (whether that’s broad index mutual funds like Vanguard or highly-specific ETF’s).

Finally, we’ve highlighted how the surge of managed money, clumping together under a relatively small set of passive strategies, is creating a paradoxical dynamic in the market: capital flows chasing emerging new trends are so large that the “trend-setter” can find generate huge profits even when they’re fundamentally incorrect about the logic underlying the trend.

Today’s blog will focus on one final twist to this analysis: influential stock analysts benefit from almost precisely the same dynamic. No matter how important passively managed funds become, it seems intuitive that the most influential analyst opinions will still drive real changes in market sentiment. After all, a higher overall portion of money playing “follow the leader” doesn’t mean there aren’t leaders. In fact, trend-setting analysts will exert even more weight in a more passive market!

The trick, as you may have guessed, if figuring out which analysts to listen to. We need a method for evaluating these analysts. And in deciding what criteria we want to employ, we need to keep in mind that same paradoxical “trend-setter” dynamic.

Consider two imaginary analysts.

The first is wrong about almost every recommendation he makes. But he has a silver tongue, a knack for PowerPoint, and a regular talking head slot on CNBC. Over the long-term, his predictions are almost always wrong. But his opinions are so persuasive that they always manage to move markets for a week or so.

The second analyst is almost always right, but flies under the radar. His fundamentals-based predictions are almost always sound over a 1-year time frame. But his predictions never seem to rattle headlines.

For a buy-and-hold investor, the first analyst is useless—even dangerous. Passive investors rely on finding Analyst #2.

But for data-driven investors with a method for analyzing stock market trends, that first analyst can be just as profitable—even more so.

Of course, most analysts don’t fit into these neat baskets. And the analysts who are right most of the time are also likely to be highly influential—but that reality only magnifies the potential profits available to data-driven investors.

Here’s how it works.

The News Quantified platform tracks changes made to stock ratings by a variety of public financial analysis groups (many of them based out of large investing institutions). These changes, which we call Analyst Actions, are attached to an additional piece of data compared to our standard news event: whether the analyst upgraded or downgraded the stock in question.

Next, we can see how the analyst’s past ratings of that stock affected prices. Crucially, users can see this information over various hold times. Do an analyst’s recommendations peak after 5-days or persist for months?  Is there any point buying after initial the price surge or fall? These vital questions can be answered with a few simple clicks.

Finally, Analyst Actions are fully sort-able: if you’re not interested in checking up on particular analyst group, filters make it simple to find the thinkers who exert the most influence (on both the market and individual stocks).

Looking for that rare analyst who “gets it right” every time is a tall order. If these figures truly exist, it seems likely that they’re employed by someone like Berkshire Hathaway, not the public analyst group at a bank or brokerage. But analysts don’t have to get it right every time to generate valuable momentum in markets. Investors simply need a toolkit for measuring and predicting this momentum as new analyst recommendations emerge in real time.

As with our other data streams (regular news events and earnings releases), “news-based investing” isn’t just about timing a few headlines. It’s about understanding competitive dynamics that lie at the heart of the modern stock markets. Through understanding how analysts move markets, we can profit from their opinions—even the faulty ones.

Analyst actions are one of several professional-grade data streams integrated into our platform. If you’d like to learn more about data-driven, news-based investing, we’re still conducting a series of live virtual training seminars. They’re totally free, and don’t come with any hard-sell—just an up-close look at a trend-sensitive trading strategy that’s been a hedge fund cash cow for decades. You can claim a spot in our next session using the button below.

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