Analysts: Is it better to have technical or social skills?

Being an equity analyst is an interesting job. On the one hand, you need a lot of technical skills in modelling the financials of a company and making forecasts for earnings and other factors. And then there is the human side to it. The numbers aren’t always telling the whole story, so you have to be able to ask the right questions from the CEO, the CFO, and other people. And if that isn’t hard enough, you also have to get them to answer these questions and not evade them.

The ideal analyst thus has good technical skills and good social skills. But let’s admit it. That ideal analyst is hard to find. Most analysts I have met in my life have a strong side and a weak side. Some are more sociable, some are more technically oriented (that would be me). 

But who does better as an analyst?

A trio of researchers has put analysts to the test. They looked at the LinkedIn profiles of 2,280 analysts and counted how many endorsements each analyst received for his or her technical skills and how many connections each analyst had on LinkedIn as a measure of their sociability. Admittedly, both measures are crude indirect measures for technical skills and social skills, but the results are still interesting.

First, they showed that analysts with high technical skills were better than average at forecasting earnings and identifying stocks that perform well. On average, the forecasting error for earnings per share of analysts with equity valuation or financial modelling as their dominant technical skill endorsed on LinkedIn is about 0.9% smaller than the forecasting error of the average analyst. More importantly, the performance of their stock recommendations is about 0.8% higher in the three months after the recommendation was given than the performance of the recommendation of an average analyst. That is a substantial outperformance that can quickly add up to several percentage points performance difference over a year.

In comparison, analysts that had better social skills and more than 400 LinkedIn connections also had lower forecast errors than the average analyst, but their recommendations did not outperform the recommendations of the average analyst. Or rather, not over a three-month horizon. On the day when analysts with high social skills and a broad network issued their recommendations, the stock price was more likely to jump in reaction to this recommendation, but the effect dissipated quickly.

Meanwhile, on earnings calls of companies, analysts with higher social skills were voted all-star analysts more frequently and were more likely to be hired away from their jobs by high prestige firms for more money. In other words, being more sociable as an analyst is good for your career and your personal income but not for investors. Meanwhile, technically skilled analysts keep sitting on their desks, make good forecasts that make their clients’ money and get ignored when it comes to promotions and awards.