Which analysts add value?

Treść źródłowa

Analysts (and strategists and economists) are trying to bring order into the chaos of financial markets. But not all analysts are truly adding value. Some of them just reinforce the existing consensus, while others are shifting the consensus in such a way that the consensus view is getting better and more accurate than without that input, which brings us to the question of whether analysts really add value and, if so, who does and who doesn’t.A commonly held belief among many investors is that sell-side analysts don’t add value and that their recommendations and insights do not create outperformance. But as I have previously discussed, this seems to be the case in the US stock market, but not elsewhere.One of the problems that every investor has is which analyst to trust when it comes to specific stocks or markets. Plus, if this analyst disagrees with the consensus, how much weight should you give to the analyst vs the consensus?Naman Kumar from Carnegie Mellon University developed an interesting approach to tackle these questions. He was inspired by the Shapley Value used in machine learning and other applications. In essence, the Shapley Value measures how much a specific input improves the accuracy of the output. In machine learning, the job is to remove input variables with low Shapley Value to get to a halfway tractable model.And in a way, the job is similar for investors. They must figure out which analysts are adding value and which ones can be cut out of the consensus or the inputs to the investment process of managing a portfolio.Of course, this is in practice most…