What Macbeth teaches you about stock analysts

published 16 November 2018

Written by Shakespeare in 1606, Macbeth is based on real-life incidents from Scottish history. After receiving a prophecy that he will become Scotland's ruler, Macbeth, a Scottish general (played by Michael Fassbender, pictured, in a 2015 film version), murders King Duncan. In order to consolidate his position, Macbeth then kills Banquo, a rival. Macbeth is racked with guilt, while his wife, who had encouraged him, goes insane. Macbeth finally dies in battle.

The key moment

Macbeth and Banquo meet three witches. They tell Macbeth that he will be made Thane of Cawdor and then king. Next, they tell Banquo that while he won't becomeking, his children will. Finally, they accurately predict the manner of Macbeth's demise, albeit obliquely. The prediction about Banquo is supposedto be a reference to KingJames (descended from thereal Banquo).

Lessons for investors

Stockmarket analysts attempt to predict what will happen in the future. They often focus on corporate profits, although they can make predictions on everything from commodities to the direction of equity indices. However, unlike the witches, research analysts have a mediocre record. For example, J Randall Woolridge of Pennsylvania State University found that between 1993-2002 the average performance of all stocks tipped by the largest 15 American brokers was 0.6% lower than the overall market's. Similarly, Amy Hutton of Boston College suggests that analyst forecasts of future earnings are no better than predictions from companies' managements.

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Other uses

Even if their specific predictions are unhelpful, analysts can provide a useful overview of a company, including how it makes its money, its strategy and any key forthcoming events. The importance of analysts in providing information for investors been demonstrated by the fact that recent regulations have forced banks to "unbundle" research from other services. As a result, they have sharply cut back coverage of smaller firms. This has had the knock-on effect of making those shares much more thinly traded, and much less liquid, increasing transaction costsfor investors.

Matthew graduated from the University of Durham in 2004; he then gained an MSc, followed by a PhD at the London School of Economics.

He has previously written for a wide range of publications, including the Guardian and the Economist, and also helped to run a newsletter on terrorism. He has spent time at Lehman Brothers, Citigroup and the consultancy Lombard Street Research.

Matthew is the author of Superinvestors: Lessons from the greatest investors in history, published by Harriman House, which has been translated into several languages. His second book, Investing Explained: The Accessible Guide to Building an Investment Portfolio, is published by Kogan Page.

As senior writer, he writes the shares and politics & economics pages, as well as weekly Blowing It and Great Frauds in History columns He also writes a fortnightly reviews page and trading tips, as well as regular cover stories and multi-page investment focus features.

Follow Matthew on Twitter: @DrMatthewPartri