"The results show that analysts suffer representativeness twice over. Firstly, companies that have seen high growth in the previous 5 years are forecast to continue to see very high earnings growth in the next 5 years. Analysts are effectively looking at the company’s past performance and saying ‘this company has been great, and hence it will continue to be great’, or ‘this company is a dog and it will always be a dog’.
Secondly, analysts fail to understand that earnings growth is a highly mean-reverting process over a 5-year time period. The base rate for mean reversion is very high. The low-growth portfolio generates nearly as much long-term earnings growth as the high-growth portfolio. Effectively, analysts judge companies by how they appear, rather than how likely they are to sustain their competitive edge with a growing earnings base."
Analysts suffer representativeness twice over!
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