Traders make fun of analysts all the time

Tusk Trader is going to be an exciting new blog written by a Bay Street trader with many years of trading experience working for major banks and investment firms in Toronto. While that blog is being set up, Tusk will be guest posting here on WhereDoesAllMyMoneyGo.com. This trader’s viewpoint is honest, direct, educational, and it will help investors to better grasp the often misunderstood and always exciting world of trading. Money, investing and general financial literacy is the elephant in the room for many people. Tusk Trader’s blog will help to change that. Tusk had a front row seat to the twists, turns, and almost collapse of our capital market systems a few years ago. Follow along through the eyes of a trader as the world rebuilds itself.

Take it away Tusk…

Traders make fun of analysts all the time. Analysts make a lot of predictions that are wrong and sometimes they are really wrong. Analysts will send out a buy recommendation and a price target of $40 on a stock that is currently trading at $50. This is logical to them, funny to traders and confusing to investors.

As a trader it pains me to say this, but…..analysts offer a lot of value. They really do.

In the current market, with so many uncertainties, analysts are a bit like a soccer goalie facing a penalty kick. There is only so much you can do when predicting the future. Investors need to learn to filter out what is meaningless and keep the knowledge they gain when listening to analysts. Traders get two major things from analysts.

1. Market sentiment:

A trader doesn’t look at the price prediction an analyst states and say, “ Oh, so that is where the stock is headed”. A trader looks at a group of analyst’s predictions and says, “So that is where, overall, the market thinks the stock is going”. Traders are using analysts to predict buying pressure or selling pressure on a stock. As good or bad news comes out on a stock, the trader can easily look to see whether the market will be surprised or not. A surprised market can create larger moves in a stock price.

2. A Financial Calculator:

An analyst arrives at a price prediction from making a lot of calculations and then some assumptions are added (maybe a few guesses too) to arrive at a conclusion on the stock price. Overall analysts are very good at their calculations. It’s the pile of assumptions that end up being wrong. If I am looking at a company that mines silver, as a trader I don’t care that much where the analyst thinks silver is going or what price target the analyst has on the stock price overall. I care what the relationship between the price of silver and that company is. A good research analyst gets knee deep into the financial workings of a firm and an analyst researching a silver firm would calculate that relationship. Does the company’s profit move in tandem with the price of silver or does that company have economies of scale? If the company has economies of scale, that could mean the company might have problems if the price of silver fall to under $25, but would be rolling in profits if silver hit $50. As a trader, that is what I want to know. I can then generate some trading ideas in that company as I see the price of silver fluctuate on a day-to-day or weekly basis.

So there it is, in black and white. Traders do gain knowledge from analysts and find them useful. Just don’t tell them I said so.

Thanks Tusk. Make sure to follow Tusk Trader on twitter: @tusktrader

 

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