Voter Polls and Analyst Bias
Thursday, November 1, 2012
Charles Rotblut, CFA
AAII Journal Editor

AAII Resources

AAII Stocks Screens: Risk and Reward
Risk-adjusted return figures for all of our screens.

Earnings Estimates and Stock Prices
Expectations play a key role in influencing prices.

Taking the Spin out of Earnings
Suggestions for analyzing earnings without bias.

AAII Discussion Boards
How do you avoid making biased investment decisions?

Most Popular AAII Articles

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  3. “Best Practices for Portfolio Rebalancing”

Sentiment Survey

This week’s AAII Sentiment Survey results:
  Bullish: 35.7%, up 6.5 points
  Neutral: 23.3%, down 4.4 points
  Bearish: 41.0%, down 2.1 points

Long-term averages:
  Bullish: 39%
  Neutral: 31%
  Bearish: 30%

Take the AAII Sentiment Survey »

As the election nears, I find myself reading Nate Silver’s FiveThirtyEight blog daily. For those of you unfamiliar with Nate, he is a statistician who tracks the various voter polls. In addition to calculating the consensus of who is favored, he also provides insight about the various polls.

I’m mentioning FiveThirtyEight because in a post yesterday, Nate discussed two statistical concepts that not only apply to presidential elections, but to investing as well. Specifically, he wrote about the difference between bias and accuracy.

Nate posted, “Bias, in a statistical sense, means missing consistently in one direction—for example, overrating the Republican’s performance across a number of different examples, or the Democrat’s. It is to be distinguished from the term accuracy, which refers to how close you come to the outcome in either direction. If our forecasts miss high on Mr. Obama’s vote share by 10 percentage points in Nevada, but miss low on it by 10 percentage points in Iowa, our forecasts won’t have been very accurate, but they also won’t have been biased since the misses were in opposite directions (they’ll just have been bad).”

When it comes to investing, a strong argument could be made for analysts’ recommendations and earnings estimates being far more biased than inaccurate, especially when it comes to short-term forecasts. According to information from, the number of stocks recommended as a “buy” or better outnumber those recommended as a “sell” or worse by a margin of nearly 30-to-1. Thomson Reuters says 63% of companies have topped third-quarter earnings expectations. (The number is based on the 272 S&P 500 companies that have reported through last Friday; a more current number has not been released yet.) This earnings “beat rate” is higher than the long-term average of 62%, but lower than the average over the past four quarters of 67%.

Note the skew of the numbers. If the analysts were simply inaccurate, we would see more sell ratings and a larger number of negative earnings surprises (only 25.4% of reported companies have missed profit forecasts). Instead, there are a disproportionate number of buy ratings and a disproportionate number of earnings beats—a clear sign of bias.

It’s easy to attack the analysts, and I’m certainly not the first person—nor will I be the last person—to point out their biases. But if you know a bias exists, you can look for ways to work around it. For instance, when we rank the performance of the AAII stock screens by risk-adjusted performance, two of the five best strategies require upward revisions to earnings estimates (Estimate Revisions: Up 5% and P/E Relative Screen). On the other hand, two of the five screens with the worst risk-adjusted returns look for negative earnings estimates revisions (Estimate Revisions: Down 5% and Estimate Revisions: Lowest 30 Down). In other words, even though analysts are too conservative with their ratings and shorter-term profit forecasts, there is a benefit to paying attention to whether and how the profit forecasts are being revised.

Thus, while there will always be lies, darn lies and statistics, there are still ways to benefit from them if you are able to determine if, and how, the numbers are biased or if they are simply inaccurate.

As far as Nate Silver’s election forecast, he blogged yesterday, “It is a close race. [President Obama’s] chances of holding onto his Electoral College lead and converting it into another term are equivalent to the chances of an NFL team winning when it leads by a field goal with three minutes left to play in the fourth quarter. There are plenty of things that could go wrong, and sometimes they will. But it turns out that an NFL team that leads by a field goal with three minutes left to go winds up winning the game 79% of the time.”

More on

The Week Ahead

The elections will be held on Tuesday.

Approximately 60 members of the S&P 500 will report earnings next week. Only one Dow component is included in this group, The Walt Disney Company (DIS). Disney will report on Thursday.

The week’s first economic report will be the ISM’s October non-manufacturing survey, which is scheduled for release on Monday. Thursday will feature September international trade data. The preliminary University of Michigan consumer confidence survey, October import and export prices and September wholesale trade data will be published on Friday.

The Treasury Department will auction $32 billion of three-year notes on Tuesday, $24 billion of 10-year notes on Wednesday and $16 billion of 30-year bonds on Thursday.

AAII Sentiment Survey

Bullish sentiment rose to a five-week high as neutral sentiment fell to its lowest level in over a year in the latest AAII Sentiment Survey.

Bullish sentiment, expectations that stock prices will rise over the next six months, jumped 6.5 percentage points to 35.7%. This is the highest level of optimism registered by our survey since September 27, 2012. Even with the improvement, bullish sentiment remained below its historical average of 39% for the 10th consecutive week and the 30th out of the last 31 weeks.

Neutral sentiment, expectations that stock prices will stay essentially unchanged over the next six months, fell 4.4 percentage points to 23.3%. The last time neutral sentiment was lower was October 6, 2011. The historical average is 31%.

Bearish sentiment, expectations that stock prices will fall over the next six months, declined 2.1 percentage points to 41.0%. This is the third consecutive week that pessimism has topped 40%. It is also the 10th consecutive week and the 26th out of the last 30 weeks that bearish sentiment has been above its historical average of 30%.

Even with the recent decline, bearish sentiment remains at unusually, but not extraordinarily, high levels. The recent downside volatility and lackluster third-quarter earnings season has dampened the moods of those investors who were already concerned about the pace of economic growth, Europe’s sovereign debt problems and the possibility of the fiscal cliff occurring. It is also possible that nervousness about the outcome of the election is having some impact on the results.

The improvement in bullish sentiment, however, shows that some investors are more encouraged about the short-term outlook for stock prices. Continued signs of a growing economy and earnings that are exceeding reduced forecasts are playing a role. Hurricane Sandy may have also inadvertently played a role by crowding out negative financial news headlines.

This week’s special question asked AAII members for their opinion of third-quarter earnings. The majority of respondents had a negative view of profits, describing them as sluggish, soft, awful or generally not good. Some said that profits are indicative of an economy that is slowing. A small number of respondents described earnings as being roughly in line with their expectations or mixed. A few respondents said corporate profits exceeded their expectations.

Here is a sampling of the responses:

  • “Shows continued weakness as the economy declines.”
  • “Revenue is shrinking despite the relative preservation of earnings.”
  • “Awful, as I expected. It’s shocking that they are not worse.”
  • “They do not look very good so far.”
  • “They are lower than I expected, but still okay and consistent with a slow growth economy.”
  • “Mixed, but not as bad as I expected.”

» Take the sentiment survey

AAII Asset Allocation Survey

September Asset Allocation Survey

Stocks/Stock Funds:
    59.9%, down 0.2 points
Bonds/Bond Funds:
    21.3%, down 0.6 points
    18.8%, up 0.8 points

Asset Allocation details:
    31.3%, up 1.1% points
Stock Funds:
    28.6%, down 1.3 points
    4.6%, down 0.7 points
Bond Funds:
    16.7%, up 0.1 points

Take the survey »

Both equity and fixed-asset allocations declined slightly in the October AAII Asset Allocation Survey.

Stock and stock fund allocations slipped 0.2 percentage points to 59.9%. This is the first time equity allocations have been below 60% since July 2012. Even with the decline, however, stock and stock fund allocations remain close to their historical average of 60%.

Bond and bond fund allocations declined 0.6 percentage points to 21.3%. Though this is a three-month low, it is also the 40th consecutive month that fixed-income allocations are above their historical average of 16%.

Cash allocations rose 0.8 percentage points to 18.8%, a three-month high. Even with the increase, cash allocations are below their historical average of 24% for the 11th consecutive month.

Unusually high levels of pessimism about the short-term outlook for stocks did not cause individual investors to alter their portfolio allocations much. Many of our members follow long-term allocation strategies. Plus, low yields remain a source of frustration for income-seeking investors. The increase in cash may be a move by some to increase reserves in case stock prices should pull back in the short term.

This month's special question asked AAII members what, if any, changes they will make to their portfolios because of the uncertainty over 2013 taxes. The overwhelming majority of respondents said they would not make any changes. Some said there is too much uncertainty to make any decision. A small proportion of respondents said they will take capital gains this calendar year or otherwise raise cash.

Here is a sampling of the responses:

  • “No one knows how this will play out, so steady as she goes.”
  • “Probably none. My stock mutual funds are in a 401(k) account and my stocks are in an IRA.”
  • “None. A very high percentage of my portfolio is in tax-deferred accounts.”
  • “None, until our illustrious political leaders make some kind of decision about those rates.”
  • “I will be harvesting more capital gains this year to avoid the upcoming tax increases.”
  • “None. Pray that sanity prevails.”

» Take the Asset Allocation Survey

Wishing you prosperity,

Charles Rotblut, CFA
AAII Journal Editor