Does Analyst Accuracy Correspond With
Justin Rohrlich July 21,
2010 3:35 PM|
academic paper says seasonal affective disorder increases
pessimism during winter months, yet it offsets an overall
tendency toward overenthusiasm.
A study published
in the Journal of Behavioral Finance called “Analysts
Get SAD Too: The Effect of Seasonal Affective Disorder
on Stock Analysts' Earnings Estimates,” by Steven Dolvin
of Butler University
, Mark Pyles of the College of Charleston, and Qun Wu
of SUNY Oneonta, examines “the potential effect of seasonal
affective disorder (SAD), a documented psychological
condition that produces heightened pessimism and risk
aversion during the fall and winter months, on stock
analysts' earnings estimates.”
suggest that analysts are generally optimistic in their
forecasts but significantly less so during SAD months.
Given that estimates generally exhibit an optimistic
bias, our findings suggest that seasonal depression
and its associated pessimism actually offset an existing
positive bias and makes analyst estimates, as a whole,
more accurate. It is well-known that reducing bias generally
improves accuracy, so it is somewhat ironic that the
bias associated with SAD actually makes estimates more,
rather than less, accurate. This, however, results from
the pessimistic bias associated with SAD offsetting
an existing positive bent in overall earnings forecasts.
Thus, there is a net reduction in overall estimate bias,
which, as would be expected, improves forecast accuracy.
these findings as yet another silly exercise among academics
running out of things to study, consider this: Yale
professor Robert Shiller “can’t imagine making investments
without incorporating the wisdom of behavioral finance.”
about playing a game against other people,” he told
Institutional Investor. “How do you ever play a game
without thinking about their psychology?”
a senior fellow at the Cato Institute and one of the
leading minds in US economic policy, tells Minyanville
that “there’s a big field of behavioral economics that
tries to isolate these types of anomalies.”
dozens of funds that try to take advantage of these
sorts of insights to build their investment strategies
for their clients,” he says. “They may be correct, I
don’t know. But there is an appetite for this sort of
information. If the information people are chewing over
is affected by these factors, then you have an advantage
because you are trading on better information than other
trader Sean Udall says simply, “The market IS behavior.”
of the University of Santa Clara concurs.
enough papers now that show risk is not what underlies
outperformance. It is emotion; it is sentiment.”
director of economic research for the Reason Foundation
says, “I do think that seasonal factors can actually
impact a number of things, the way we look at the markets.
There really is no doubting the notion that the field
of economics can suffer from fits of irrational exuberance,”
which we’ve all seen, in addition to fits of irrational
Macke of Macke Asset agrees--with a minor caveat:
to link SAD directly to pessimism but it's certainly
not a reach to suggest seasonal impact on performance
of both analysts and corporations. It’s funny -- I was
just telling Pete [Najarian] that Nokia (NOK) sucks
so much because of its latitude. But I think it's a
much more nuanced problem than "SAD makes people
pessimistic.” Correlation isn't the same as causation.
From where I'm sitting the study is simply a reminder
that performance in any endeavor is impacted by workers'
physical and emotional condition.
Investor further details the increasing adoption of
behavioral economics by fund managers:
past 15 years, there has been a steady increase in the
number of fund managers that are using behavioral finance
concepts to select stocks and construct portfolios.
One estimate is that half of the 200 listed small-cap
value funds use some form of behavioral finance in selecting
their portfolios. Such firms as Fuller & Thaler,
Chicago-based LSV Asset Management and even fund behemoth
J.P. Morgan Asset Management (JPM) have deployed strategies
that use behavioral concepts to select equities for
their portfolios. And all of them are beating their
market benchmarks over the long term.
the behavioral finance strategy appears to be paying
off. Since inception in 2003, the JPMorgan Intrepid
Value Fund has delivered annualized returns of 8.09
percent, compared with 6.74 percent for the Russell
1000 value index. JPMorgan Intrepid Growth has returned
6.79 percent a year since its 2003 inception, beating
the Russell 1000 growth index return of 6.20 percent.
a growing number of investment companies, ranging from
Des Moines, Iowa-based Principal Global Investors, a
division of Principal Financial Group (PFG) to Catalpa
Capital Advisors, a New York hedge fund firm headed
by Joseph McAlinden, a former chief investment officer
for Morgan Stanley (MS), are using behavioral finance
tools to help shape their portfolios, even if they are
not the mainstay of their investment strategy.
The authors of the SAD study do concede that:
are multiple potential explanations for analyst bias.
Some fall into the category of incentive based issues.
Other explanations revolve around the relationship between
analysts and the firms they cover. For example, Degeorge,
Patel, and Zechauser  suggest pessimistic bias
results from firm managers' desire to beat forecasts.
Consistent with this notion, Matsumoto  argues
that firm managers guide analysts toward pessimistic
targets to then beat the target. Chan, Karceski, and
Lakonishok  suggest analysts tend to become pessimistic
over time in order for firms to have positive earnings
As far as
incentive-based issues go, Lynne Collier, an analyst
with Sterne Agee tells Minyanville:
analysts may be more pessimistic or optimistic going
into bonus season, when analysts can become more irritable
and stressed. Think about the general workforce, where
a bonus could make up, say, 5% of a person’s overall
compensation. For an analyst, it could be 50%, 70%.
Bonuses at that level create a lot of concern and anxiety
which may foster pessimism.
managing director, and senior analyst at Wisco Research
is some subconscious behavior that results in a pessimistic
forecast. I don’t think seasonal changes affect how
I forecast or how I model companies, though. When analysts
come back after Labor Day, that’s when we’re trying
to close out the year and earn our bonuses. When you’re
competing for a bonus, there’s a really hard run from
September through January, which might result in a little
Shawn Hackett, founder and president of Hackett Financial
Advisors has a unique take on the SAD study.
We all know
that when you have less sunlight you are more depressed.
If you’re more depressed during those times, you’re
generally less optimistic. Having said that, the market
performs best from late fall to spring, while the period
from late spring to late fall is the worst period for
the market. Historically, over the last 100 years, the
best time to hold stocks has been between the end of
October into the end of March. If everyone is supposedly
bearish because of the weather, it’s a great contrarian
indicator, which is interesting because, going by the
results of this study you would expect the market to
play out in exactly the opposite way.
there are always those, like Warren Buffett, who likes
Coca-Cola (KO) stock because he enjoys Coca-Cola.
what time of year it is.