Imagine you get a letter in the mail predicting who will win the weekend’s football game—and, it turns out to be correct. Before next weekend, another letter arrives and it too predicts the outcome of the weekend’s game. This amazing streak repeats for eight weeks in a row and at this point you’re absolutely amazed at the sender’s ability to correctly predict the outcome of these events—and that’s when the ask comes. That’s when the letter writer requests something of you in trade for his amazing predictions. Eight in a row sounds like a pretty good bet; so there’s little to lose, but, of course, it’s a scam.
It’s remarkably easy, after all. Our letter writer has prepared multiple letters split between predictions of which team will win. The next round of letters is sent only to those who received the correct letters in the previous week. You are simply the lucky recipient of a series of correct letters; but many, many others stopped receiving letters much sooner.
It’s virtually the same scam, perpetrated every day, by financial analysts. Take, for example, this New York Times article.
Last September, Apple shares hit a record $705. And to the overwhelming majority of Wall Street analysts, that meant one thing: buy.
By November, with Apple stock in the midst of a precipitous decline, they were still bullish. Fifty of 57 analysts rated it a buy or strong buy; only two rated it a sell. Apple shares continued their plunge, and this week were trading at just over $450, down 36 percent from their peak.
How could professional analysts have gotten it so wrong?
It may be no coincidence that the only analyst who even came close to calling the peak in Apple’s stock runs his own firm and is compensated based on the accuracy of his calls. Carlo R. Besenius, founder and chief executive of Creative Global Investments, downgraded Apple to sell last Oct. 3, with shares trading at $685. In December, he lowered his price target to $420, and this week he told me he may drop it even further, to $320.
Is Mr. Besenius really the only genius who called Apple’s retraction? Mr. Besinius certainly thinks so. “I’m paid based on performance,” he said. “I have to go to my clients and explain why they should pay for my research when they can get it for nothing from the firms where they pay their trading commissions.”
Really, though, Mr. Besenius is just writing letters and he makes it into the news when he gets a series of them correct. The other letters, the ones he falsely predicted, simply get ignored. And that’s what will happen to this one. Apple, for example, has climbed for a week from 440 to 480, and that’s after paying out a dividend. Surely someone called that too.