Who are the experts? How should you take their advise? And who should you be ignoring.
What’s in this tutorial?
In this tutorial we explain who the stock market experts are, what their motivations are, and how you can use their expertise to be a better investor.
Table of contents
There are 5 parts to this tutorial
- Who are the experts
- The brokers
- The investors
- The “talking heads”
- What can you learn from them
Part 1. Who are the experts
With over 40,000 stocks globally, and 8,000 in the US alone, there is no one who is a true expert in the stock market. There is just to much data for any one person.
However, there are hundreds of thousands of finance professionals whose livelihood depends on their expertise. So what is there expertise?
We can divide the professionals into two broad groups:
- Specialists, who know a lot about a very narrow area
- Generalists, who know a little about a wide range of issues
Remember, everyone has an angle. This is their job. They aren’t sharing their opinion, just to be nice. They want to make money.
Part 2. The brokers
Let’s start with the stockbrokers and investment bankers.
So what is their motivation?
- More trading equals more profits for a bank or broker
- More volatility equals more trading. So more profits
- All the research, commentary and noise they make, is designed to get them publicity that leads to trading
Though, these experts do produce some really valuable research pieces. They talk to
- the CEOs
- the competition
- the regulators
- anyone with an intelligent view
- run market research
And they condense this research into a recommendation. Buy, Sell, Hold, with detailed analysis and scenarios.
Biased as they might be, they have a view. And they share it.
Part 3. The investors
What is the motivation of the investors?
- These experts are paid to perform, to outperform their benchmark
- They know that the price of a stock is influenced by both the fundamentals of the business and by investor sentiment towards the stock
- So if they can influence the sentiment, it may be to their advantage
Therefore, when you hear an investor talking about his portfolio or strategy, you have to ask yourself two questions:
- Is he trying to get me to buy the shares, because he already owns them?
- Is he trying to get me to sell my shares, because he’s dumped them already?
Part 4. The talking-heads
Lastly think of the TV guys, CNBC, Bloomberg TV. What’s the motivation here?
- The bigger the audience the bigger the advertising revenues
- So they have to entertain
It is critical to remember that TV is entertainment, not research or actionable advise. To entertain, the talking heads have to be
- Predict the short-term
- Appear knowledgeable and definitive in their views. Even when anyone’s guess is as good as everyone else’s
The talk-heads are of limited use.
Part 5. Learning from the experts?
Let’s look at the three groups. Though before we take any experts writ as law, we need to remember they all have an angle and that there is no data on the future. So anything they say, is a prediction that could go wrong. Or pure luck!
Learning from the brokers
Starting with the brokers, there research is some of the most detailed and insightful analysis of any company. It’s a great way to research a company, should you be able to get your hands on any broker research.
Furthermore, the views of the brokers are a key driver of sentiment. Markets sometimes react to their recommendations in big ways.
But it is just their view. And it’s biased. So you can’t blanket take what they say. You must do your own research.
Learning from the investors
The investors are an equally valuable source of expertise. These folks are actually doing the investing, not just talking about it, like the brokers.
However, actions speak louder than words. So take any commentary as that, and focus on the actual trades they make.
Fortunately, most professional investors are obliged to publish the list of stocks they own, the top 10 holdings, in particular. So if you like an investor, there strategy, then:
- Look at his top 10 holdings
- If there are names you don’t recognise, investigate them
- If there are ones you like, do your own research on them
- And in some cases, you’ll be able to get their investor newsletter, which could give you further insight into their logic and strategy
Learning from the talking heads
When it comes to the talking heads, watching TV is a great way to lose time and money. Listening to the “entertainment” you could be tempted to trade, when in fact the correct action, would have been inaction.
The news channels don’t get the inside story on anything:
- They tell you when your stock has tanked, not when it’s about to tank
- They tell you when a stock has become hot, not when its about to get hot
Though, they have one saving grace, which is the occasional interview with a legendary investor or CEO. These segments can be gold. If so, this content will have a very long shelf life. So no need to watch it live. There’s always YouTube!
Part 5. Conclusion
For the brokers, think of them as a way to judge the sentiment of the market. For the investors, think of them as a source of ideas. But neither are a replacement for you doing your own homework. And fortunately, that’s what Stockflare is here to help you with.