A random Walk Down Wall Street: The Time-Tested Strategy for Successful Investing

3. Errors Made by the Analysts
Themselves
To be perfectly blunt, many security analysts are not
particularly perceptive or critical, and they often make
egregious errors. I found this out early in the game as a young
Wall Street trainee. In attempting to learn the techniques of
the pros, I tried to duplicate some analytic work done by
Louie, a metals specialist. Louie had figured that for each 10¢
increase in the price of copper, a particular copper producer’s
earnings would increase by $1 per share. Because he expected

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a $1 increase in the price of copper, he reasoned that this
particular stock was “an unusually attractive purchase
candidate.”
In redoing the calculation, I found that Louie had
misplaced a decimal point. A 10¢ increase in the price of
copper would increase earnings by 10¢, not by $1. When I
pointed this out to Louie (assuming he would put out a
correction immediately), he simply shrugged his shoulders
and declared, “Well, the recommendation sounds more
convincing if we leave the report as is.” Attention to detail
was not Louie’s forte.
Louie’s lack of attention to detail revealed his lack of
understanding of the industry he was covering. But he was
not unique. In an article written for 
Barron’s
, Dr. Lloyd
Kriezer, a plastic surgeon, examined some reports written by
biotech analysts. Kriezer paid particular attention to
analysts’ coverage of those biotech companies that were
creating artificial skin for use in the treatment of chronic
wounds and burns—a field in which he had considerable
expertise. He found the security analysts’ diagnoses of stocks
far wide of the mark. First, he added the assumptions made of
the market share predicted for competing companies. The

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predicted shares of the five biotech companies competing in
the market for artificial skin added up to well over 100
percent. Moreover, the analysts’ prediction of the absolute
size of the potential market bore little relationship to data on
the number of actual burn victims, even though accurate data
were easily available. Moreover, in examining the various
analyst reports on the companies, Dr. Kriezer concluded,
“They clearly did not understand the industry.” One is
reminded of words attributed to the legendary baseball
manager Casey Stengel: “Can’t anybody here play this
game?”
Many analysts emulate Louie. Generally too lazy to make
their own earnings projections, they prefer to copy the
forecasts of other analysts or to swallow the “guidance”
released by corporate managements without even chewing.
Then it’s very easy to know whom to blame if something
goes wrong. And it’s much easier to be wrong when your
professional colleagues all agreed with you. As Keynes put it,
“Worldly wisdom teaches that it is better for reputation to
fail conventionally than to succeed unconventionally.”
I do not mean to imply that most Wall Street analysts
parrot back what managements tell them. But I do imply that

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the average analyst is just that—a well-paid and usually
highly intelligent person who has an extraordinarily difficult
job and does it in a rather mediocre fashion. Analysts are
often misguided, sometimes sloppy, perhaps self-important,
and at times susceptible to the same pressures as other
people. In short, they are really very human beings.