How investometer works

analysing the analysts...

Given the lack of definition and incompatibility of methods used by analysts, the investometer® delineates a simple and intuitive framework for the classification of financial product recommendations. It also provides an objective benchmark for measuring and calibrating the accuracy of recommendations for a defined universe of investment products over a delimited period of time.

The investometer® assumes that positions in the investment product sample are closed at the end of each delimited period of time and can be used to measure the performance of investment recommendations for a specific portfolio or for a single security over a clearly defined period of time.

 Current Recommendation Systems

Present methods of investment recommendation vary widely across the board in approach and terminology. Investment purchase recommendations,for example, can range from "Buys" to "Long Term Buys" to "Strong Buys" to "Overweight Buys" (to name but a few), but there is no uniform interpretation of these value judgements. One analyst's interpretation of a "Strong Buy" can be (and usually is) significantly different from another analyst in terms of urgency (the importance of time taken to transact a recommendation) and weight (% increase/ decrease expected in the recommended investment's price). Comparison of two "Strong Buys” will typically make for irrelevant and totally misleading interpretations because they cannot be calibrated and therefore cannot be objectively compared for performace analysis.

 The investometer®

The investometer® anchors an analyst's recommendations to a financial product’s fulcrum point (its "Hold" recommendation) and tracks its potential to generate profits along positive (BUY) and negative (SELL) time lines. The system can be likened to a simple see-saw with time lines radiating outwards to both extremities (+10 and -10). These extremities represent "instant buys" and "instant sells" of such urgency and weight that immediate implementation of the recommendations are likely to prevent IMMINENT LOSSES or enable IMMINENT PROFITS to be realised. Thus whilst time is largely immaterial for a "HOLD" recommendation, it is of critical importance in a +10 BUY or a -10 SELL recommendation as shown below. Put another way, the most negatively volatile stock  will be on one end of the scale and the most positively volatile will be on the other. The least volatile stocks will be at the "0" HOLD position which is a neutral position.

The Perfect Model

Whilst the investometer® can easily be understood and interpreted, it also provides a solid infrastructure for more sophisticated and objective studies that current recommendation jargons will not permit. Plotting and comparing analysts’ recommendations against a model set of investometer® recommendations involves setting up a "perfect" model using the same universe of investments over a clearly delimited period of time. The length of time covered must be defined in advance and will depend on the type of financial products being considered.  The conceptual approach that should be used in plotting a model set of investometer® recommendations  and  calibrating analysts' recommendations against this model is shown in the image opposite.

investometer® Definitions

The investometer®converts the industry's largely qualitative investment recommendations into a quantitative standard, a benchmark, so that the accuracy of analysts' forecasts can be compared and calibrated using a universal system of appraisal. investometer® terminology is straightforward.

STRONG SELL (-10 to -7)

STRONG BUY (+10 to +7)

Failure to transact* an investometer®investment recommendation rapidly may mean imminent losses (or the loss of imminent gains). The probability of these losses or gains is in direct proportion to the time taken to transact the particular recommendation. The closer to -10 (or +10), the more imminent the loss (or the gain), the more imperative the divestment  (or investment) and the greater the proportionate potential loss (or gain) in % terms.

* transact = physically buy or sell a financial product, depending on the investometer®recommendation.

SELL (-4 to -7)

 BUY (+4 to +7)

Failure to transact these recommendations in the mid-term may mean mid-term losses (or gains) of a proportionately lesser weight than in a STRONG SELL or STRONG BUY recommendation. The definition of "mid-term" will vary in each case according to the underlying time horizon (or performance cycle) for which the recommendations were  issued in the first place. STRONG SELL and SELL overlap (as do all investometer®recommendations) to reflect, for example, the market's gradual digestion of a stock’s earnings evolution from heavy unexpected losses (-9 STRONG SELL) to heavy losses (-6 SELL) to break even ("0" HOLD). The same  process holds true in the reverse direction as positive events unfold and progressively influence acompany's stock price, for example.

SELECTIVE SELL (-4 to -1)

LONG TERM BUY (+4 to +1)

These recommendations are, similarly to the rest of the investometer® classifications, mirror images. In both cases the investor has time to sell/ buy an investment without unduly affecting his capacity to gain (or lose) from his investment/ divestment. He has much more time to pick and choose the pricing & timing of his investment or divestment.

HOLD (-1 to +1)

A HOLD "0" is a neutral recommendation in that the investor is not expected to gain or lose from investment or divestment in a stock. It is a "wait and see" position. More information needs to filter through to the market so as to tip the scales into a negative or positive HOLD (-1 to +1).

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