Here are the reasons why most equity research analysts make the wrong calls or just fail to do a proper job.
1. Cover too many stocks or fail to effectively manage inbound information flow, which reduces the likelihood of identifying the unique insights required to generate alpha.
2. Fail to understand the critical factors likely to drive a stock, which leads to spending too much time on factors that won’t move a stock and too little time on those that will.
3. Don’t develop the unique industry contacts and information sources required to make differentiated stock calls.
4. Don’t understand how to interview a management team or industry contacts in a manner that extracts unique insights.
5. Fail to understand how companies and the media can deceive through numbers, thus missing opportunities to avoid “the blow-ups”.
6. Generate financial forecasts with no basis other than an inexperienced gut feeling or company management guidance, leading to earnings and cash flow forecasts well above realistic levels.
7. Apply premiums or discounts to valuation multiples on an arbitrary basis.
8. Communicate stock messages ineffectively, either by being too verbose or failing to identify how the analyst’s work differs from consensus.
9. Make poor ethical decisions due to a lack of understanding of how to spot and defuse conflicts of interest.