Mailbag: Why the Wisdom of the Crowd Beats Analyst Expectations

Q: Why do investors get spooked by companies not meeting or exceeding analyst expectations? Who died and made analysts kings?

A: This is “a game within a game within a game” stuff. It can get as complex as you want. But, I warn you, if you go down this rabbit hole, you may never find your way back.

Let’s begin with a simple question…

If not analysts, who are you going to listen to about how much companies should be making?

You? Fine, all the more power to you. But not many people with full-time jobs and lives to lead can find the time to make these projections.

Me? Well, that’s more like it. If you have an expert you trust who can see through all the corporate tricks, who knows how company metrics work and who can reach their own conclusions (that may or may not agree with those of the analysts)… then you’re in pretty good shape.

I’ve been on dozens of quarterly earnings calls. They’re pretty predictable.

A company will tell you that every quarter is a battle won with problems conquered, new markets and opportunities discovered, and old growth drivers replenished with new ones. To the extent a company admits headwinds, it’ll tell you it’s dealing with them in ways that are far more effective than the competition, and that if growth slows, it’s not its fault.

The analysts then ask questions, all of them predictable. And the CEO, CFO or COO has canned answers to all of them. None of the questions are, “Why didn’t you do as well as I predicted a quarter ago?” or “Why did you do a lot better than I predicted a quarter ago?”

Because that would be admitting forecasts are not all about facts and hard metrics. It’s just as much about interpreting the facts and metrics. Is the company being overly optimistic or overly pessimistic? Usually it’s the former. But not always.

One tactic executives might employ is this: If they expect a bumpy road in the months ahead, they make the already disappointing numbers even lower and put the company in a position to outperform them. That just might boost share prices (or at least slow the price decrease).

It’s up to the analysts to sniff this tactic out. It’s not easy. Perhaps the company is putting out slightly negative news but is actually expecting things to get far worse than it’s admitting. Why would it do this? So a downturn in fortunes would be less of a shock to investors and, hopefully, make a future sell-off less severe.

We’re now in “a game within a game within a game” territory. I’ve seen this dance result in all kinds of share price movements. I’ve seen companies with great numbers that don’t meet analysts’ expectations do well and do poorly. I’ve seen companies with poor numbers that beat analysts’ expectations do well and do poorly.

It can be very confusing, as complex systems usually are. Here’s a quote from a University of Chicago report on “How Complex Systems Fail”:

 Complex systems run as broken systems. The system continues to function because it contains so many redundancies and because people can make it function, despite the presence of many flaws.

And that brings us to your question…

Who made analysts kings? Wouldn’t we be better off just getting the quarterly scoop directly from the top company executives? After all, they’re the ones who know their own company the best. Using analysts as our filter seems only to muddy the waters.

I don’t want to put thousands of analysts out of work. But I’m a big believer in the wisdom of the crowd concept. Some believe that the bigger the crowd, the easier it is to fool them. It’s just the opposite, though. The bigger the crowd… the more sets of eyes on a particular issue or company… and the harder it is to fool them.

Give me 20,000 people following a company with, say, 10% (2,000 people) taking it very seriously. You’re going to get much closer to the truth than a dozen analysts following a company and relaying their incredibly subjective opinions (as gospel) to you.

Let companies play their little tricks. The crowd will figure out who the straight talkers are and who the manipulators are.

+ Early Investing Co-Founder Andy Gordon

Q: How does one sell cryptocurrency and get cash? I am on three exchanges and do not know how to get cash out of any of them.

A: The most common way to sell cryptocurrency for cash in the U.S. is through a regulated exchange like Coinbase.

To sell, log in to your account. Then go to the “Sell” page and enter a sell order. The proceeds of the sale, in dollars, can either go back into your Coinbase account or be transferred to an external bank account. You’ll need to verify your identity (usually by providing a driver’s license or passport). Regulated exchanges are required by law to verify your identity.

There will be limits on how much you can withdraw. Most people will be able to sell up to $25,000 per day, according to an August 2018 blog post from Coinbase.

Not all crypto exchanges offer fiat trading. It is very difficult to obtain the required licenses, and there are only a few operating in the U.S. Though I expect this to improve dramatically over the next few years.

If your coins are on a non-fiat exchange, you’ll need to send them to one that does offer fiat trading to cash out.

If you’re looking to sell larger amounts of bitcoin, many people choose to work with an OTC (over-the-counter) broker. They can help match you up with a buyer and process the transaction.

Another option to sell bitcoin for fiat is LocalBitcoins. This site matches up traders on a local basis. LocalBitcoins holds the funds in escrow and allows buyers and sellers to develop transaction ratings, so people can feel confident dealing with each other.

Alternatively, you can use bitcoin to settle personal transactions. If you owe somebody $50, ask if they want bitcoin or your preferred crypto. Most people will say no. But some will go for it, and crypto will pick up a few new adopters.

+ Early Investing Co-Founder Adam Sharp