The newspaper analyst: a cautionary tale

From InsuranceNEWS:

“Don’t believe everything you read in the newspapers” is true enough. So is the comment by the British poet Alexander Pope in his Essay on Criticism: “A little knowledge is a dangerous thing.”

The opinions of financial analysts usually carry more weight than the articles of business journalists. People invest on the strength of what an analyst says, and presume the depth of knowledge he or she has when they state their opinions.

The articles of business journalists in the mainstream media don’t carry the gravitas of the analysts’ words of wisdom, and that’s fair enough. The journalists have a relatively wide range of industries to cover, and supplement their lack of in-depth knowledge by shaping their articles around the opinions of executives and experts.

( journalists, while possessing in-depth knowledge of the insurance industry, tend to stick to the premise that participants’ opinions are usually more useful to readers than their own.)

Listed companies spend considerable amounts of time and money keeping analysts abreast of their operating environments, plans and expectations. They know potential investors and possibly even their own shareholders will consider analysts’ opinions carefully. The more analysts know, the better they can judge companies’ chances of success.

But while leading analysts concentrate their research on only one or two industries and deserve to be listened to, others are, for want of a better term, generalists.

How does an investor differentiate between the “expert” and the generalist? And should the opinion of an analyst writing for a newspaper somehow carry more weight than that of a journalist? There’s a danger in listening too much to investment generalists who nevertheless state their opinions with all the holy conviction of a parish priest. Buy! Sell! Hold!

Late last month Austbrokers discovered that not all analysts are equal. An article in the Fairfax Media business pages, written by an analyst working for a sharemarket advice company, brought together scraps of information from unnamed sources and used them to create an opinion that Austbrokers is on the ropes and is a business investors should avoid.

According to this oracle, “Warren Buffett wants to put the company out of business”.

Berkshire Hathaway, he says, “intends to use its established position and substantial resources to sell commercial insurance online with a new initiative called Berkshire Hathaway Direct, cutting out brokers once and for all. Berkshire will focus on small to mid-size businesses – Austbrokers’ bread and butter.”

Berkshire Hathaway has no intention of starting a direct commercial or personal lines operation in Australia. knows this because we did what good journalists are supposed to do: we asked Berkshire Hathaway, which pointed with some annoyance to the no-compete agreement it has just tied together with IAG.

It’s a classic case of taking stray information from a US business journal and coming to your own erroneous conclusions. What happens elsewhere often does not necessarily translate to the Australian insurance industry.

Our analyst then mishmashes some figures and obvious but irrelevant facts to conclude that when his “likely” assumptions come to pass, Austbrokers’ “current business model is toast”.

He warns his audience that “insurance brokers like Austbrokers are best avoided”.

Presumably by “others” he means Steadfast.

Apart from the flawed assumptions that led to this conclusion, there’s no mention of the extensive diversification of services being undertaken by Austbrokers and Steadfast, despite the many hours they’ve spent briefing analysts on their strategies.

Only last week Austbrokers announced a new equity partnership with Allied Health Australia, a leading occupational health and safety rehabilitation provider. The move is part of the company’s strategy to broaden its revenue base and become the “leading insurance and risk management partner to businesses in Australia and New Zealand”.

Do investors realise that much of this Fairfax article is based on inaccurate assumptions or just plain wrong information? Apparently not. Austbrokers MD and CEO Mark Searles says articles such as this are usually impossible to correct.

“What makes things even more frustrating is that pieces such as this get ‘syndicated’ by news organisations without anyone checking that the information is accurate and without requesting input from the parties highlighted in the report,” he told

He’s right. counted 79 Google entries for the article, with the publishers ranging from other newspapers across Australia to overseas online content thieves. How many investors have had their views coloured by that one article is impossible to estimate.

All business changes, and the pace of that change is increasingly rapid. The work being done by Austbrokers to diversify from a broking operation to a broad-based services company is worth examination, and analysts have a serious role to play in assessing the causes and possible effects of such activities.

Companies should be able to rely on analysts’ opinions being responsible and informed. At the very least, analysts should be on top of their subject before they commit to publishing a damaging newspaper article that some people will regard as the untainted truth.

Originally published by InsuranceNEWS: