Why consensus tells you little about a company

There are a few things that waste an investor's time. We have looked at media talking heads who have no more predictive ability than you or I, they just happen to be on TV.

We have looked at the unnecessary and valueless urgency injected by so many industry operatives, and we have looked at the folly of allowing human emotions to become part of the investment process.

Then there was the failure of powerpoint presentations that insult the listener by presenting written text in slide form, and then the necessary corporate bias of many Australian strategists and economists and the time wasted discussing macro issues instead of the one thing that does matter, stock picking.

And here are two final things that waste your time.

Consensus estimates

If you don't already know there are two spreadsheets going around the Australian sharemarket and the international markets. One is from Thomson Reuters and the other one is from Bloomberg.

The spreadsheets contain all available company forecasts which have been provided to Thomson Reuters and Bloomberg by broker analysts.

Those forecasts are made available to the customers of these institutions as a value add and these forecasts then reappear in a thousand data dependent research and software products.

The only difference between many of these data-based online products, all of which slave off the core providers, is how much money has been spent on their website presentation.

Some are very flash, some are very basic, but the core value add is exactly the same, a regurgitation of consensus forecasts.

But what you need to understand is that these forecasts are already "in the market", in other words they are already discounted by the share prices.

Net result, you can use this data to search, sort and filter for companies to invest in, you can use these forecasts to put yourself above the few people who don't have access to the consensus forecasts, but all you are really doing is re-sorting information that is already in the price, which means that you will not gain an edge or make money out of widely disseminated information like this.

If you consider that if BHP hits its consensus earnings forecast exactly, the share price will not move.

The thing that moves the share price is when the unexpected happens, because the expected is already priced in.

On that basis, to make money out of shares you have to work out what's going to happen that is unexpected.

That insight could come from many sources but it will not come from a spreadsheet of consensus estimates, and it will not come from a $1500 subscription to a fancy product that re-presents the information in those spreadsheets even if it is encased in beautiful graphics.

We should all have a subscription to one of these products, they provide access to what the market already expects. It is essential information, because only then can we work out what the market doesn't expect.

The only way to make money in shares is to work out what the market doesn't expect before the market expects it. But the point remains, if you think you are going to gain an advantage, by knowing what everyone else knows, you are wasting your time.

Forums

About the only thing that does pay off, when it comes to predicting share price movements, is an insight, into a company, an industry, a theme. To something that the market doesn't know.

When it comes to identifying insight one of the obvious places you would go is to some sort of sharemarket forum.

They provide the platform for the individual to have their say, a privilege otherwise reserved for media heads, many of whom are fund managers who use the media platform (TV, radio and conferences) to promote the stocks they already hold. Nothing wrong with that, it's a universal game.

On that basis credible forums, run by credible organisations, offer value. But unfortunately the bulk of other, anonymous forums tend to be very short term, very dense in their information and are lacking in integrity because of the anonymity.

It's a pity because somewhere in there, there is doubtless some insight, insight that is being drowned out by self-interested spruiking and shareholder bias.

In the end it is hard in these dense short-term forums to derive any value. To help with that some of them have developed effective search engines that get you to the insight quickly, but the problem still remains, anonymous unaccountable posters can misdirect you at will, and in so doing, waste your time.

That's about it for things that waste your time. Hopefully this series of articles didn't waste your time and knowing what you know now, will save you some time.

Marcus Padley is the author of the daily stock market newsletter Marcus Today. For a free trial of the Marcus Today newsletter please go to www.marcustoday.com.au.

The story Why consensus tells you little about a company first appeared on The Sydney Morning Herald.

Smartphone
Tablet - Narrow
Tablet - Wide
Desktop