I do not believe small investors should invest in individual stocks.
Limited capital makes it difficult to diversify portfolios and increases transaction costs.
Smaller investors typically lack the investment expertise, experience, and tools to successfully analyze stocks or time markets.
Stick with low-cost, well-diversified exchange traded and open-ended index mutual funds.
The reality though is that many smaller investors do invest in individual stocks. A high percentage rely on analyst reports to help them select which equities to buy.
This post is for you.
The Financial Post looks at “5 things to watch out for in analyst reports and company statements” . A (rare) good article which you should read.
Analyst reports are not written for individual investors
Use analyst reports to learn about the company and industry. Not to assess whether it will be an investment winner or loser.
“We are cautiously optimistic” and Hold recommendations
A major problem with analyst reports is that you have to read between the lines and understand the underlying meanings for phrases.
A friend tries to set you up on a date. “What’s he/she like?” “Great personality!”. Okay, then. That tells you a lot of other things about the person. Sadly, I do not even have a good personality.
It is what the analyst does not say, or how something is said, that actually tells you the key things. If you intend to rely on analyst reports to invest, spend some time learning the jargon and how to interpret the real meaning from the words.
I understand price targets. Take all the data, put it in the model, generate what you consider to be fair market value. That is the price target.
Price targets are largely based on estimated future price-to-earnings ratios .
The problem is that there are so many possible factors and so many ways to assess the variables, that one small error can completely alter reality.
There is also the issue of efficient markets . A huge number of analysts and investors follow larger companies in major markets. With access to the same data, many come to similar valuations. As a result, future expectations are very quickly factored into the current price. This makes the possibility of obtaining abnormal returns difficult.
“Some orders were delayed, or pushed into the next quarter”
Another example of how reality can differ – even slightly – from forecasts and projections in computer models and analysis. Slight delays, a lost order, a new competitor, a bad snowstorm, etc., all can impact actual results and alter earnings and price multiples.
It is also another good example of needing to read between the lines. Assessing the real meaning of a statement is crucial for your own analysis.
Use analyst reports to gain an understanding of a specific company and the industry.
Do not use analyst reports to select your investments for you.