Top Investment Banks Can't Pick "Winners"

If you watch the financial news (which I don't advise), you know much of it is filled with "analysts", "technicians", fund managers, and other self-appointed "gurus" who explain to the rest of us why we should buy a particular stock. The assumption -- for which there is no credible evidence -- is that these people have stock picking expertise.

Since they don't publish their track record, they are rarely held accountable. When they're right, they brag about their insights. When they're wrong, they move on to the next prediction and never look back.

Investors who rely on this charade are left holding the bag.

The track record of top investment banks

Maybe the result of research performed by InterTrader, a firm based in the U.K., will cause you to view these predictions differently.

InterTrader conducted research designed to determine the accuracy of stock picks of sixteen major investment banks, including Goldman Sachs, Cantor Fitzgerald, Barclays Capital, JP Morgan and UBS, for the calendar year 2015. They modeled the approximately 270 stocks picks made by these banks over the course of the year. They assumed holding periods of 30 days, 90 days, 180 days or the full year, starting on the date of the recommendation. Here's what they found:

1. If you followed the stock picks of all of the investment banks and held those stocks for a 30 day period, your total gains would have been only 0.80 percent. Their accuracy rate was 55 percent, which is only modestly better than the flip of a coin.

2. The longer you held these stocks, the worse your results. If you held them for the entire year, you would have had a loss of 4.79 percent. Their accuracy rate for the year plunged to 43 percent. For the same time period, the S&P 500 index had a loss of only 0.69 percent (although that benchmark might not be the most accurate one for comparison purposes).

The accuracy rates of the stock picks by most of the individual investment banks demonstrated no stock picking expertise greater than you would expect from random chance. It many cases, it was much worse. Nomura topped the list with a 60 percent accuracy rate when measured for the entire year. Citibank was at the bottom with an accuracy rate of only 14 percent. JP Morgan had an accuracy rate of 40 percent. Goldman Sachs came in at 33 percent.

The peril of stock picking

In order to be a successful stock picker, you have to do more than just identify mispriced stocks. You also have to know when to sell them. While the media features the "buy" recommendations of pundits that appear on its programs, you rarely see these "gurus" telling you when to sell the stocks they previously told you to buy.

While it's difficult to draw meaningful conclusions from only one year of data, it's sobering to learn the dismal stock picking track record of these prominent investment banks.

If you are relying on your broker to recommend stocks likely to outperform a comparable index fund, you should reconsider your investment strategy.

The views of the author are his alone. He is not affiliated with any broker, fund manager or advisory firm.

Any data, information and content on this blog is for information purposes only and should not be construed as an offer of advisory services.