By the way, for those who are considering waiting on the sidelines hoping to purchase the next Microsoft or Intel at a bargain price, consider the fact that IBM once owned 40% of Microsoft and 10% of Intel, but subsequently sold these stakes. Had IBM stuck with buy-and-hold, the favorable financial consequences for IBM would have been staggering. And yet, IBM had far more knowledge about the internal workings and future prospects of these companies than most investors have about any company.
An extremely powerful point, one that merits additional comment. It isn't just the individual investor's knowledge that should be subject to question. Insiders buying shares can have terrible timing, not to mention that some companies have special mechanisms to facilitate such purchasing. Mutual fund managers and other money managers can be made part of the cult of personality, yet they can and do make significant errors; following them or getting "support" from their views is asking for the introduction or entrenchment of selection bias.
There are two things that stick out in my own experience that have led me to be very skeptical of the opinions of financial analysts. The first was weighing the knowledge and analysis of same in areas where I had (and have) an industry insider's view (which is also subject to error). I found them so poor that even given the error I knew must be present in my own analyses, I could no longer even consider their's.
The second was getting to watch from an inside position as one of the top underwriters took a company public. Subsequently "research" reports were released. Throughout both, it was apparent that either the "analysts" did not understand the business or were something worse. Note, the problems I perceived did not have anything to do with the conflicting demands of selling and informing.
Some might be inclined to pass off what Porc wrote, after all, wasn't Big Blue a doddering fool? It is a mistake to think that way; a huge organization has multitudes of people, some good, some bad, and even the best make mistakes. But even the best can't see the future, and IBM, you can be sure, had lawyers and engineers and marketing people going over the potentials for those investments - a support crew that simply will never be available to the individual investor.
It behooves us to recognize that our own knowledge and understanding is very imperfect at best, and to always insist on a margin of safety to compensate.
Axel
PS. Porc - an excellent edition.
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