Managing a Portfolio I - Stop Wasting Time, Start Adding Value, Part V

Andrew Stotz, PhD, CFA
Andrew Stotz, PhD, CFA[8K] Award-Winning Analyst | Investing in Asia Expert | Valuation Expert | Company Profitability Expert | Public Speaker
STOP
Wasting Time
START
Adding Value2014-05-27
Target Prices Destroys Value
WARNING: Analysts are
Mainly Wrong
Part V: Managing a Portfolio I
Pick stocks
Managing
a portfolio
Forecasting
Value drivers
Five factors of return
Risk matters more
Stop targets
Reduce action
Every day is new 27 May 2014 2
In six parts Andrew Stotz will teach how to
Stop Wasting Time and Start Adding Value
in stock picking and portfolio management.
In Part V & VI the focus will be on portfolio
management.
Source: A. Stotz Investment Research
RISK MATTERS
Risk management
matters more than
maximizing return
Markets rebound
- stocks not always
27 May 2014 3Source: A. Stotz Investment Research
STOP TARGETS
AVOID
target prices
They
destroy
value
27 May 2014 4Source: A. Stotz Investment Research
CAN AN INVESTOR RELY ON
TARGET PRICES TO MAKE MONEY?
Source: A. Stotz Investment Research
Started with 16,500 stocks in Asia ex-
Japan from year-end 2003 to 2013
Removed 9,000 stocks that were small, had
low trading volume or were inactive during
any of the years
Then removed the 2,200 China A-shares stocks,
leaving 5,300 available stocks
Our tested universe had 1,200 stocks which, over the
10 years, were covered by at least three analysts and
had target prices
27 May 2014 6
CAN AN INVESTOR RELY ON
TARGET PRICES TO MAKE MONEY?
Source: A. Stotz Investment Research
27 May 2014 7
Methodology
Identify the 12-month expected return based on analyst
consensus target price
Compare this to the actual return over that period and look at
the difference. We repeat this every month to consider
analysts’ adjustments over the year
Average the results that we get across the period
Make a histogram of intervals of consensus accuracy
CAN AN INVESTOR RELY ON
TARGET PRICES TO MAKE MONEY?
Source: A. Stotz Investment Research
ANALYSTS ARE OVERLY OPTIMISTIC
27 May 2014 8Source: A. Stotz Investment Research
WHAT DOES ACCURATE
MEAN TO YOU?
27 May 2014 9Source: A. Stotz Investment Research
This is our definition of
an accurate target
“Right” 18% of the stocks
“Right” 35% of the stocks
ANALYSTS IN ASIA WERE
OVERLY OPTIMISTIC
27 May 2014 10Sources: A. Stotz Investment Research, FactSet
ANALYSTS
CAN’T PREDICT
TURNING POINTS
27 May 2014 11Source: A. Stotz Investment Research
ANALYSTS CAN’T PREDICT
TURNING POINTS
27 May 2014 12Sources: A. Stotz Investment Research, FactSet
 In Asia, only 18% of the time were analysts’ targets
accurate
 On about half of all stocks the average analyst
missed his target by more than 30% - WOW!
 Analysts can’t predict turning points
 Abandon any reliance on target prices, maybe even
stop making them
27 May 2014 13
WHAT WE HAVE LEARNED
Source: A. Stotz Investment Research
Share this with your friends
www.andrewstotz.com
Follow
me on:
1 of 14

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Managing a Portfolio I - Stop Wasting Time, Start Adding Value, Part V

  • 1. STOP Wasting Time START Adding Value2014-05-27 Target Prices Destroys Value WARNING: Analysts are Mainly Wrong Part V: Managing a Portfolio I
  • 2. Pick stocks Managing a portfolio Forecasting Value drivers Five factors of return Risk matters more Stop targets Reduce action Every day is new 27 May 2014 2 In six parts Andrew Stotz will teach how to Stop Wasting Time and Start Adding Value in stock picking and portfolio management. In Part V & VI the focus will be on portfolio management. Source: A. Stotz Investment Research
  • 3. RISK MATTERS Risk management matters more than maximizing return Markets rebound - stocks not always 27 May 2014 3Source: A. Stotz Investment Research
  • 4. STOP TARGETS AVOID target prices They destroy value 27 May 2014 4Source: A. Stotz Investment Research
  • 5. CAN AN INVESTOR RELY ON TARGET PRICES TO MAKE MONEY? Source: A. Stotz Investment Research
  • 6. Started with 16,500 stocks in Asia ex- Japan from year-end 2003 to 2013 Removed 9,000 stocks that were small, had low trading volume or were inactive during any of the years Then removed the 2,200 China A-shares stocks, leaving 5,300 available stocks Our tested universe had 1,200 stocks which, over the 10 years, were covered by at least three analysts and had target prices 27 May 2014 6 CAN AN INVESTOR RELY ON TARGET PRICES TO MAKE MONEY? Source: A. Stotz Investment Research
  • 7. 27 May 2014 7 Methodology Identify the 12-month expected return based on analyst consensus target price Compare this to the actual return over that period and look at the difference. We repeat this every month to consider analysts’ adjustments over the year Average the results that we get across the period Make a histogram of intervals of consensus accuracy CAN AN INVESTOR RELY ON TARGET PRICES TO MAKE MONEY? Source: A. Stotz Investment Research
  • 8. ANALYSTS ARE OVERLY OPTIMISTIC 27 May 2014 8Source: A. Stotz Investment Research
  • 9. WHAT DOES ACCURATE MEAN TO YOU? 27 May 2014 9Source: A. Stotz Investment Research This is our definition of an accurate target
  • 10. “Right” 18% of the stocks “Right” 35% of the stocks ANALYSTS IN ASIA WERE OVERLY OPTIMISTIC 27 May 2014 10Sources: A. Stotz Investment Research, FactSet
  • 11. ANALYSTS CAN’T PREDICT TURNING POINTS 27 May 2014 11Source: A. Stotz Investment Research
  • 12. ANALYSTS CAN’T PREDICT TURNING POINTS 27 May 2014 12Sources: A. Stotz Investment Research, FactSet
  • 13.  In Asia, only 18% of the time were analysts’ targets accurate  On about half of all stocks the average analyst missed his target by more than 30% - WOW!  Analysts can’t predict turning points  Abandon any reliance on target prices, maybe even stop making them 27 May 2014 13 WHAT WE HAVE LEARNED Source: A. Stotz Investment Research
  • 14. Share this with your friends www.andrewstotz.com Follow me on: