GRAND LARCENY
The past 18 months were lousy for many investors and too often, paying attention to the advice of Wall Street analysts didn’t help.
More often than not, listening to an analyst’s recommendations or stockbroker’s hot air simply intensified the pain as share prices crumbled disastrously. Instead of telling investors to “sell,” many analysts continued to put “buy” recommendations on some of the worst performing stocks.
After watching their wallets swell during the 1990s, Wall Street research pros are finding their reputations tarnished and their industry under scrutiny. Congress and the New York attorney general’s office independently have begun examining how analysts operate, and securities industry executives have begun issuing “best practices” guidelines in the wake of escalating concerns about analysts and their inherent conflicts of interest.
Indeed, with analysts’ credibility stained, the Securities Industry Association (SIA) recently put forward a set of best-practices guidelines, to which Wall Street’s largest firms have agreed. They attempt to quash perceptions that analysts often are beholden to the investment-banking side of the business, and they call for brokerage firms to avoid the widespread practice of using murky terms such as “market perform” when they really mean “sell.”
The problem is that most Wall Street firms say they already adhere to the practices. Thus the question: Will there really be change? The SIA says investors should notice a difference by yearend, and if firms really abide by the guidelines, it should take the form of more “sell” ratings. This is ridiculous. It is akin to allowing a child discipline his or herself.
During the mania for initial public offerings of stock and the Internet-inspired stock-market bubble of the late1990s, many analysts turned into cheerleaders, pushing over hyped recommendations on Americans hungry for advice during the bubble bull market.
At the epicenter of the untamed rise of Internet and other technology stocks were often breathless research reports such as a PaineWebber analyst’s notorious claim that Qualcomm Inc. would soar to a non-split-adjusted $1,000 a share, or the equally blustery claim by an SG Cowen analyst that QXL.com would touch that same four-figure price, pre-split. Neither came close.
Overblown predictions such as those found a receptive audience in the media, which legitimized the outlandish calls, and in the explosion of individual investors scoffing at fundamentals for the lure of easy money. That helped for the first time turn analysts, long a faceless crowd, into household names.
Yet instead of counseling caution to investors, the vast majority of analysts more often than not advocated that investors join the revelry. Along the way, many analysts shared in enormous investment-banking profits, and in some instances profited by owning the stocks they touted.
When those very shares plummeted, many analysts remained surprisingly ebullient. As the NASDAQ Stock Market and other markets hit a zenith in spring 2000, nearly 73% of all recommendations were “buy” and “strong buy,” according to Thomson Financial/First Call, a higher than normal percentage. By the end of the year, with the market hemorrhaging, more than 70% of analysts still urged buying.
Would you like an interesting fact?
During the first five months of the year 2000, The Wall Street Journal carried over 3000 articles with the words “analyst” or “analysts”. Many of these players in the big show we like to call Wall Street are bonafide superstars, Henry Blodget, Mary Meeker and Ralph Acampora to name a few. These people have the genuine power to drive stock prices. Their words can move markets quickly and dramatically. What these “analysts” fail to realize in their predictions is number one physics law of the equities markets, efficiency. The stock market is very efficient and companies will eventually trade at what their fair value is. No matter how many appearances an “analyst” makes on CNBC or is quoted in a major publication this basic law of equities will come home to roost. The bottom line is that the business of Wall Street is marred in conflicts of interest. The party that suffers from these improprieties is the individual investor.
There are two different types of analysts, “buyside” and “sellside”. The guys you see on television or read in the papers are “sellside” This means that they work for an investment bank or large brokerage firm, they issue reports in order to tell their brokers/salespeople to do. “Sellside” research is pumped out on a daily basis driving markets in whatever direction they deem fit. “Buyside” analysts work for portfolio managers. The reports by these guys are used to decide which stocks to purchase for their funds or clients.
“Buyside” research is thought to be the most reliable and honest because the portfolio manager is depending on it for his or her own buying decisions. This is different then “sellside” because there is no sale to slick over or deal to be done that drives their work. These reports are not available to the general public.
The reason why the public is subjected to such lousy information is the inherit conflict of interest that exists today. Actually performing the “profession” of doing your homework and researching stocks is fast become left to interns. There is supposed to be a “Chinese wall” keeping the analysts away from the investment banking sharks. This wall was supposed to be there to protect investors to what has happened over the past three years. With the bull market out of control the “wall” was blown up. With so much deal making and money to chase analysts have been drawn into the client chasing game going after new issues and investment banking clients. The bottom line is that these guys act as a public relations firm for their investment banking clients.
The environment today is very corrupt as far as big brokerage firms are concerned. However, lets not forget about our “buyside” people. They have a vested interest in your success as an investor, so motivation is never cloudy. The only way to feel truly comfortable in the equities markets is to work with quality portfolio manager. Until honesty and proper due diligence return to the “sellside” shut your ears and close your paper.
