Wednesday, August 13, 2008

How (not) to Do Stock Price Forecasting- Credit Suisse Edition

First you memorize Graham & Dodd. When you break the rules, it's good to know which rule you're breaking. Then you read this 1976 interview with Benjamin Graham, from Financial Analysts Journal, and learn that he became an indexer late in life:

...What is your view of the financial community as a whole?
Most of the stockbrokers, financial analysts, investment advisers, etc., are above average in intelligence, business honesty and sincerity. But they lack adequate experience with all types of security markets and an overall understanding of common stocks--of what I call "the nature of the beast." They tend to take the market and themselves too seriously. They spend a large part of their time trying, valiantly and ineffectively, to do things they can't do well.
What sort of things, for example?
To forecast short- and long-term changes in the economy, and in the price level of common stocks, to select the most promising industry groups and individual issues--generally for the near-term future.
Can the average manager of institutional funds obtain better results than the Dow Jones Industrial Average or the Standard & Poor's Index over the years?
No. In effect, that would mean that the stock market experts as a whole could beat themselves--a logical contradiction.
Do you think, therefore, that the average institutional client should be content with the DJIA results or the equivalent?
Yes. Not only that, but I think they should require approximately such results over, say, a moving five-year average period as a condition for paying standard management fees to advisors and the like.

The point is, fundamental analysis will help you avoid disaster but it doesn't forecast prices.
Thirty days ago Daniel McKenzie, airline analyst at Credit Suisse, cut his outperform ratings on Continental and American Airlines to neutral, after they had declined from $37.79 to $6.74 and $51.60 to $3.43 respectively.

The next day they bottomed out and are up 160% and 270% in the last thirty days.
So working at a big firm doesn't really help.

Here's a post with a couple links you might want to check out, "Ahem... US Airways and UAL are Up... (LCC; UAUA)". I had posted a different opinion. Here are the charts:

Let's see how timely this fellow's call is, charts via BigCharts: