Every time you read about a company releasing its quarterly financial results, 90 percent of the time you'll read something like "
Amazon.com had earnings of 45 cents per diluted share, missing
analysts expectations of 55 cents per diluted share," or "
Handspring posted earnings of 83 cents per diluted share, beating analyst expectations."
What does this mean? The typical reaction is "Poor Amazon, the economy is really hurting these companies" or "All right Handspring!" And you say that because they performed better than some guy from Merrill Lynch or Morgan Stanley Dean Witter thought they would.
But that's not the point! The point is, those analysts screwed up! They were supposed to predict earnings of 45 cents for Amazon. Your investments in their mutual funds aren't performing the way they could be because the goddamn analysts are way off all the time!
Not only is this true, but often the companies' predictions for the next quarter are drastically more accurate than a jack-of-all-trades-master-of-none analyst. Case in point: Apple Computer posts a First Quarter loss of 247 million. This was perfectly in line with their announced prediction several months earlier of a loss of 225 to 250 million. However, despite being informed of the severity of Apple's unusual quarterly loss, analysts still predicted much higher earnings, and the headlines on news resources like CNNfn read "Apple Misses Earnings Estimates."
And not to mention the whole Merrill Lynch bribery scandal, where Dateline NBC uncovered that beleagured dot-coms were paying Merrill Lynch analysts to go on national television and talk about how the nearly-bankrupt companies were "strong buys" and had "tremendous growth potential."
If these analysts are to be getting our hard-earned pay, they should do their job.