A few months ago, the mainstream business press was all agog that Elon Musk refused to kowtow to financial analysts who asked "bonehead questions," as Musk characterized them. When I posted a column explaining why those questions were boneheaded, a number of financial analyst types tweeted that I didn't know what I was talking about.

Which is truly ironic, as I'll explain in a moment.

Anyway, those angry tweets repeated a meme so widespread that it turned up on Inc.com: that Tesla would be the next Theranos and Elon Musk is the next Elizabeth Holmes. The theory was that Tesla couldn't possibly manufacture the Model 3 in volume and therefore Musk's claims to the contrary must be fraudulent.

Yeah, right.

Then Tesla manufactured 7,000 units in the final week of the quarter, including 5,000 Model 3s, proving the analysts dead wrong. So then the analysts changed their story. According to them, there was no way that Tesla could be making a profit and would therefore go bankrupt.

Yeah, ok, whatever.

Then Tesla's Model 3 became one of the best-selling cars in America and the company announced huge quarterly profits, proving the analysts to be (once again) dead wrong. So the analysts changed their story. The new spiel is that Tesla is doomed as soon as traditional car manufacturers get up-to-speed on all-electric vehicles.

Sigh.

In an earlier column, I explained the specific blind spots that financials analysts (especially in automotive) have around Tesla and Musk. But that column didn't address the deeper problem, which is that financial analysts are never held to account when their predictions prove wildly inaccurate--even if investors lose billions of dollars.

Take, for example, Ed Yardeni. He's widely quoted today as an authority on the stock market, but twenty years ago, he was one of the most reputable Y2K scare-mongers, predicting "Level 8" disruptions on a zero to 10 scale where 10 represents "major worldwide social, economic, and technological disruptions."

Yardeni's endorsement of the Y2K hoax matters (or should matter) because companies spent hundreds of billions of dollars unnecessarily upgrading computer equipment and system. This helped create a high tech revenue bubble that sent the world economy into a recession when it burst in the early 2000s.

Or take erstwhile TV pundit Lawrence Kudlow, who famously over a period of decades has never correctly predicted any economic trend. Even though he's been consistently wrong about everything, Kudlow still maintains sufficient credibility to serve as a top economic advisor to the Trump Administration.

And Kudlow is far from an outlier.

A recent study from Oxford University found that "returns on stocks with the most optimistic analyst long term earnings growth forecasts are substantially lower than those for stocks with the most pessimistic forecasts." In other words, your investment portfolio would be better off if you did the exact opposite of what most Wall Street analysts advise.

Given financial analysts' abysmal track record, why does anybody still listen to them? Answer: journalistic laziness. Most business writers either aren't willing, aren't able, or lack the time to think things through before they write about a company or industry. Instead, they call an analyst or two, get a couple of tasty quotes and, boom, they've got their story.

This shortcut works because analysts are publicity hounds and will always get back to a reporter within an hour or so.  Why? Simple. The more analysts are quoted, the more credibility they accumulate, and therefore the more they get paid... even when their predictions prove to be dead wrong, as is so often the case.

In short, the analysts keep getting Tesla wrong because lazy reporters keep quoting them, even when events repeatedly prove the analysts are clueless. Which, it turns out, is usually the case. Therefore, a good rule of thumb for personal investing is 1) listen to what the financial analysts are saying and then 2) do the exact opposite.

Published on: Oct 29, 2018
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