Don't listen to analysts if you want to make money on the stock market, report finds

Investing in the stocks least favoured by analysts yields five times more than buying the most recommended Credit: Michael Nagle/Bloomberg

Investors keen to make money on the stock market should ignore the advice of analysts, a new report has found.

Research carried out by Nicola Gennaioli and colleagues at Bocconi University in Milan, Italy, found that investing in the stocks least favoured by analysts yielded five times more than buying the most recommended.

They found that over the past 35 years those who invested in the 10pc of stocks US analysts were most optimistic about would have earned an average annual return of 3pc. By comparison, investing in the 10pc of stocks analysts were most pessimistic about would have yielded as much as 15pc a year.

According to one theory, when analysts observe strong earnings growth they think, for example, that the firm may be the next Google.

It is true that "Googles" are more frequent among firms that experience strong growth but the problem is that "Googles" are very rare in absolute terms. As a result, expectations become too optimistic, and future performance disappoints.

Prof Gennaioli said: "In a classical example, we tend to think of Irishmen as redheads because red hair is much more frequent among Irishmen than among the rest of the world. Nevertheless, only 10pc of Irishmen are redheads.

"In our work, we develop models of belief formation that embody this logic and study the implication of this important psychological force in other areas."