Watch Out for "Analysts"

Making Money vs Being Right

In financial markets, some make money by taking risk, and some by telling people what risk others should take. The incentive structures for both parties are typically at odds.

1. Analysts need to seem clever, and Portfolio Managers need to make money.

   1. Bulls versus Bears

      1. Analysts tend to be Bears. The Bear argument always sounds more intelligent than the Bull case. However, the G.O.A.T, Stanley Druckenmiller, stated in an interview that he would want to avoid looking at his Profit and Loss on his short trades.

         1. Test any trend system. Longs make a lot of money, and shorts might earn 1% CAGR.

         2. This doesn't mean that a Portfolio Manager shouldn't short assets. Portfolio Managers think about risk and reward payouts, and adding shorts (spreading/relative value) can improve the return distributions and expectancy of a particular trade. Analysts believe in being right, which will lose you money.

2. Analysts need a high win rate, and Portfolio Managers must manage risk versus reward.

   1. Thesis/Idea Management

      1. The Analyst only thinks about what should happen, and when an idea goes against them, you will see them tweet those famous words, "This doesn't make sense" or "This isn't how markets are supposed to work." Once you see those statements, those analysts are fades. Take the other side of all their trades once you see them complain about their thesis not working.

      2. Analysts need a high win rate, so most of their trades are "contrarian" or, as I would say, negative skew trades. They will suggest selling naked puts or calls, buying a stock that has been down 5 years in a row, or trying to fade public sentiment. When you add up all their market calls, they will be right 80% of the time. But the joke is on you because the return distribution will be so negatively skewed your account will be blown up. When you see an analyst boast about his hit rate, run the other way as fast as possible.

      3. Portfolio Managers think in terms of:

         1. What to trade

         2. Trading Tactics and Techniques

         3. Risk Management and Contingency Planning

   2. Analysts get paid by selling their ideas. Portfolio Managers get paid by their PnL.

      1. Follow the people who have to eat what they kill.

      2. Even better, be independent, keep good notes, and learn from your mistakes.

3. Focus on making money which takes sound idea generation (Analyst's role), trading tactics, sizing tactics, risk management, correlation management…

   1. There are many more essential tasks to being profitable than being correct on your thesis. You can be right and still lose money!

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