Sunday, July 15, 2007

Analysts and numbers

I've never been a Herb Greenberg fan since I simply find his general tone offensive and holier-than-thou, but he did make a good point at the end of his latest column entitled "Nautilus muscles out analyst - Commentary: Says company hasn't talked him since he issued sell rating" about an analyst who was "cut off" from access to management after he issued a "sell" recommendation and was still able to make a good call on the company:

In looking back, the lack of access forced Wold to rely only on publicly disclosed numbers and outside resources for his analysis, and in doing so he got it right. Maybe that is the moral of this story: Let the numbers do the talking, not the company.

Well, duh, yeah! I've always believed this. The fact that it is some kind of revelation to Greenberg boggles the mind.

It has been quite a number of years since I "followed" any so-called sell-side analysts. Sure, back shortly before the heyday of "The Boom" there was some value for analysts able to pick out up and coming companies from all of the chaff, but even that "stock picking" had its limits. I personally haven't read a single stock research report in the past five years.

Since I've never had a bearish, short-selling mentality, I've never been interested in so-called "sell" recommendations either. Truth be told, most analyst "recommendations" are usually self-serving. Although there is in theory a "wall" between "research" and the investment banking side of the business there is no such wall between research and so-called "execution services" and access to high-value "clients." So, whether an analyst initiates coverage, terminates coverage, issues a "Strong Buy" or issues a "Strong Sell", none of these so-called "recommendations" means much at all to the normal, average individual investor, but can help inspire changes in short-term trading patterns that can boost profits from transactions handled by the "execution services" side of the house which can include facilitating trades by hedge funds and other high-value clients. This is true at all investment banks and brokerage firms, but especially true at "boutique" firms such as Greenberg mentioned. Their web site says that the company "provides investment research, capital markets services, corporate and venture services, investment banking, asset management and primary research" and are "focused on providing a full range of specialized and integrated services to institutional investors and corporate clients." Hmmm... "integrated"... so much for the idea of a wall between research and non-research operations. Oh, and "to institutional investors and corporate clients" makes it clear that normal, average, individual investors are unlikely to benefit from the firm's research. Sigh.

At its core, the very idea that normal, average, individual investors will have a net benefit from most of this so-called "research" is a myth which should simply no longer be tolerated. Much better to simply judge companies by their numbers. That is still no guarantee of success, but at least investors will know that they need to use their own wits to achieve success.

-- Jack Krupansky

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