Learn the stock market in 7 easy steps. Get spreadsheets & eBook with your free subscription!

WHY MOST “STOCK ANALYSIS” IS GARBAGE

The next time that you watch, listen to or read a stock analysis, chances are it’s garbage. It won’t help you towards making a profit. It’s probably useless to you.

This isn’t your fault. It’s not necessarily the fault of that person analyzing for you. But it’s a sad truth, and it’s due to the way the human brain works.

You see, the brain is naturally attracted to things that are entertaining. If you had to pick between entertainment or information, your brain will automatically pick entertainment. Even if you are consciously seeking information.

The most popular stock analysis shows are great entertainment. They are masters at drawing an audience, and keeping them interested.

They fool you into thinking you’ve learned a great stock tip or strategy, but you didn’t learn a thing.

How does this happen?

Well stock analysts, especially in mainstream media, love to recap how the stock market has done. They do this in sports too, and in news.

STOCK ANALYSIS MACRO TALK

“Oh the Dow is down 50 points today, but it was all because of fears in the Eurozone”

Or… “The market rallied on encouraging housing data”

Or… “The market rallied on encouraging ____(fill-in-the-blank)_____ data”

Or…”The market ___(went up or down)____ due to ____(random fact/headline)_____”

Really “stock expert”, really? So all of the millions of decisions all around the world to buy or sell on a particular day were due to one single event?

Stock analysis people LOVE to talk like this. Oh but that’s not all, they have to make a vague prediction to show how smart they are.

“Stocks are primed to continue this bull run until the Fed decides to raise interest rates”

Duh.

Or this one… “I like the way stocks have performed lately but I see a little bit of a pull back in the near future because of political uncertainty”

Really? How did you determine that? From your crystal ball?

Seriously. The sheer amount of garbage like this that is spewed out everyday is overwhelming. It’s exhausting me just to write about it.

Macro talk like this doesn’t help an investor like you. Don’t get me wrong, I like to talk about it. I sometimes do talk about it. It’s what the public wants.

There’s nothing wrong with consuming stock analysis garbage. There really isn’t.

The problem comes WHEN YOU THINK THAT THIS IS ENOUGH TO INVEST ON. It’s not, it really isn’t. The little speck of knowledge you will glean from a stock analysis like this helps you in no way to find a solid business.

And it’s sad. Because people really do lose their life savings out there. People do commit suicide over these kinds of things.

THE BITCOIN CRAZE

Take for example, the hottest new story, Bitcoin (MTGOXUSD).

Bitcoin has been a great example of a story that was blown up like crazy. It shot up to $1200 seemingly overnight. Stories were getting passed along left and right.

Like the guy whose fiancé threw away $7 million of his Bitcoin in the trash because she didn’t like his old electronics. Or the guy in Newport Beach who bought a Tesla in Bitcoin.

TWO HOT STORIES COMBINED INTO ONE ?!? (Tesla + Bitcoin) POPULAR CULTURE IS #SALIVATING.

But how much of this speculation do you think was based on hard facts? Hmm?

I’d easily say close to none. Why?

Well a smart investment is one that receives cash flow while also having the chance to gain in value. This usually means buying a part of a business, but can also meaning owning a piece of real estate.

You invest your money– take a risk– and as a reward you get a part of the profits. In companies that means dividends, and in real estate we call that rent.

So geniuses, how much future cash flow can you expect from a piece of Bitcoin? Will it pay me cash in exchange for my risk, whether the price goes up or down? A good investment would do this.

Bitcoin is a currency (a hopeful one at that), and so it doesn’t pay you cash. That isn’t investing people, that’s gambling. You’re hoping the price keeps going up.

If you exchange some of your dollars for pesos, would you call that an investment? Of course you wouldn’t, yet people do it for Bitcoin.

Because they are seduced by the story.

How will the Bitcoin story end? Nobody knows, but as of now the price has crashed back down to the $500 range.

This has resulted on the most calls for suicide watch right now being related to Bitcoin. All because people want to invest on stories.

It doesn’t end with faux currencies, though. People do this with stocks. OVER and OVER and OVER and OVER again. It’s like everyone has amnesia in the brain.

Here’s another way so-called stock analysis gets me so fired up. Listen to the experts talk about companies, and its the same old thing.

STOCK ANALYSIS MICRO TALK

“Well Apple’s (AAPL) products aren’t innovating anymore, so I’m avoiding the stock”

Or… “Amazon (AMZN) is having great holiday sales, even old people are using the service”

Or… “Netflix (NFLX) is challenging the status quo, and their CEO is a really great looking guy”

Or… “Walmart (WMT) isn’t appealing low-middle class families anymore, they are all going to Dollar Tree (DLTR)”

Or… “I saw a lot of customers inside Nordstrom (JWN), they’re doing great things”

WHAT?!? ARE YOU KIDDING ME?!? YOU CALL THIS ANALYSIS?!? I DON’T CARE TO HEAR ABOUT YOUR FEELINGS OR OBSCURE METHODS OF RESEARCH!

Seriously guys, wake up. Listen real hard next time you hear a talking-head talking. It’s honestly a joke. And I pity the fool who thinks they’re doing good research by consuming this.

REAL STOCK ANALYSIS

Real stock analysis is based on facts. Numbers. That’s it.

Because when you start investing based on feelings, you get creamed. I’m sorry to say, but your little view of the world is microscopic compared to the whole world view.

What one story is doing in your community has almost zero impact on the rest of the corporation. There are hundreds of stores. Billions of dollars in revenue. Just in that one corporation alone. You have to look past feelings and emotions.

Why am I so emphatic about this?

Well because if you want any chance at becoming a successful long-term investor, you need to be able to replicate your decisions.

The only, ONLY way to do this is by using numbers.

You can’t expect that your magical intuition will be able to help you spot a hot stock before it happens. You can’t expect that you will hear a hot stock tip just in time to make a ton of money, year after year after year.

You need a method that can be tested, and is repeatable. That means it’s based off looking at the numbers. That’s it.

The great thing is that when you can learn how to properly find value, you won’t need all the baloney. You’ll be laughing along with me at all this stock analysis garbage.

So seriously, heed my warning with this.

The next time you watch, listen to or read that stock analysis article, take a step back. Be objective.

Think for a minute, “does this guy really care about what he is saying? Does he even know what he is saying, or is he repeating the same cliches as everyone else?”

Before I let you go, I know that some of you still aren’t convinced. You’re hard headed, stubborn, and if I’m honest, plain lazy.

That’s ok, I don’t blame you. But hear me out with one more example. I’m sure it will blow your mind.

THE APPLE STORY

Everybody loves a good story, right? 

So let’s talk about Steve Jobs. The guy who took Apple from a $5 stock to a $700 stock. He changed the world with the iPod, the iPhone, the Macbook.

Of course, it all started with brain child Steve Jobs and Steve Wozniak. They dabbled in electronics together in a garage, then built the first Apple computer.

The second version of their computer debuted at a local computer trade show, and well the rest is history.

Stock guys love to think that they always knew in the back of their mind that Apple was going to be such a success. That it was so obvious that the company was going to be a success, with their new, innovative products and new Apple stores.

It makes investing seem all so simple right? The story didn’t fail Apple there, you might say.

Well actually Apple stumbled along the way, even posted a negative quarter late in 2002. The stock would be hated before it broke out, and there were as many skeptics as their were supporters. Don’t forget that Microsoft (MSFT) ruled the world back then.

SPECTACULAR STOCK STORIES

So back to my point. Let’s look at another spectacular story stock. And I won’t go too far back in history for you young whipper snappers.

Back in 1997, 4 guys banded together to raise $35 million to start their technology company. Their goal was to provide computer networking services.

With the dot com boom, any technology company of this sort was looked at favorably. We were in an age like no other, with stocks in the technology space reaching all time highs never seen before.

The company became one of the most profitable investments by a financial institution in 90s. It grew from 150 workers to 14,000 workers in just a couple of years.

A company that grew that fast had to be a great investment right? Wrong. The company would file for bankruptcy in 2002, leaving investors with nothing. Global Crossing (GLBC) was the name.

What about a company that was built during the invention of the telephone? From the company that manufactured the first fire alarm box, switchboards for World War I, phone toll systems and more, meet Nortel (NT).

The company had been around since 1895. To say that people relied on their products and services would be an understatement. The company was a constant presence in communications like Google (GOOG) is today.

When the internet came along the company never broke stride. It started selling fiber optic network gear, and investors loved it. They saw the brightest future for the company.

Fiber optics was the newest technology of the time, and it’s scope was seemingly endless. With the popularization of televisions, computers, and other technology, this was the future.

Investors expected growth above and beyond what had ever been imagined before. All of this new exciting technology bursting into the seams was seemingly sure to change our world forever.

Investors weren’t just confident about it, they were convinced. Nortel became so big that it accounted for more than a third of its whole index in market cap (in the TSX index).

An immaculate story stock if I’ve ever seen one.

Guess what happened next? The company went bankrupt. Bankrupt. The leading technology story of its time, and just a few years later it was thrown into the bankruptcy courts. In 2009 to be exact.

LESSONS FOR INVESTORS

What can we learn about this? Well stories are just that stories. All companies have their own. Some sound much better than others.

But you should never rely on stories to help you with your investing. In the same way that you can twist a story to sound good, you can equally twist it to sound bad.

To think that you can determine if a stock is good or not based on the story is absolutely garbage. It just is.

When you spend enough time reading, listening to, and watching stock analysis, you’ll realize that the “experts” change their script all the time.

They’re always so sure of themselves, after an event has happened. They’ll explain down to the T what they think caused this or that.

These “experts” will seem so sure of themselves when they are predicting something too. That’s because they know that most of their audience is too lazy to check if these actually come true.

They know what the audience wants to hear. And so they give exactly that. “Analysis”, unimportant facts, and “predictions”. Hook, line, sinker.

It doesn’t cease to amaze me, and I’m sure it never will.

So do yourself a favor. Learn how to analyze a stock. Equip yourself with the right knowledge so you won’t ever have to depend on this garbage.

Do these things, and you’ll be better off. Not just today or tomorrow, but for the rest of your life. It’s amazing how clear the world looks when you give yourself the power.

The power of knowledge.