In Praise Of Conflicted Stock Analysts

Posted by John Carney, Jun 17, 2008, 12:12pm

Many stock analysts are prohibited from owning shares in the companies they cover. The idea is that owning stocks they recommend could be a conflict of interest, making their analysis subject to criticism as stock touting and market manipulation rather than disinterested analysis.

But do we really want "disinterested" analysts? Wouldn't disclosure of positions be enough to allow investors to make informed decisions about whether or not to trust an analysts recommendations? Paul Kedrosky this morning argues that we shouldn't trust anyone who isn't convinced enough of their own position to buy or short the stocks they cover.


I say these people with no conflicts shouldn't be trusted. How am I to take seriously someone in the financial services business who tell people to own a stock, but doesn't own it themselves? They have no skin in the game, and in a business entirely built around wealth creation, self-interest and greed, that makes me suspicious. Granted, I don't want them self-dealing, but I do want to know that their interests are directly aligned with mine.

Should Analysts Who Don't Own Stocks Be Trusted? [Infectious Greed]

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Comments

1

Posted by Anal_yst, Jun 17, 2008 12:28PM

methinks they have a term for analysts who do this, its called "buy-side"

2

Posted by guest, Jun 17, 2008 12:35PM

i usually agree with most of the opinion pieces you post, Carney, but I gotta say this one is assanine

3

Posted by guest, Jun 17, 2008 12:37PM

but then again, i can't spell asinine so what do i know

4

Posted by guest, Jun 17, 2008 12:38PM

That's all fine and good if analysts could just stick buys on everything, buy some shares for their accounts and flog the price higher. However, sometimes they downgrade.

Assuming the price drops on the downgrade, when would be the appropriate time to sell? Ahead/simultaneous to the note - and be accused of frontrunning? Or should they be forced to hold on longer and lose money (while being accused of trading against their rating)? If there was a holding period, wouldn't the analysts be incentivized to make their downgrades less compelling, to allow for their own exit (say, ten days later) before really attacking the stock?

Seems like the current system is the best option we've got.

5

Posted by guest, Jun 17, 2008 12:38PM

That's all fine and good if analysts could just stick buys on everything, buy some shares for their accounts and flog the price higher. However, sometimes they downgrade.

Assuming the price drops on the downgrade, when would be the appropriate time to sell? Ahead/simultaneous to the note - and be accused of frontrunning? Or should they be forced to hold on longer and lose money (while being accused of trading against their rating)? If there was a holding period, wouldn't the analysts be incentivized to make their downgrades less compelling, to allow for their own exit (say, ten days later) before really attacking the stock?

Seems like the current system is the best option we've got.

6

Posted by lowellfield, Jun 17, 2008 1:08PM

Considering how smart Paul Kedrosky clearly believes he is, this is way dumb. Not intriguing or counterintuitive.

7

Posted by cauxion, Jun 17, 2008 1:26PM

I agree 100% with 12:38 pm. The negatives associated with an analyst owning the stocks that they cover FAR outway the so called positives.

Though flawed and in need of some tweaking, I think some variation of the current system should stay in place.

Me personally.... I don't trust any analysis done buy the stock analysts on the street, and I know my views would not change if they were somehow required to hold the stocks they cover. This coming from a former equity analyst (buy side)....

8

Posted by Anal_yst, Jun 17, 2008 1:35PM

You've brought up some good points, but lets delve deeper in the issue. What is it, specifically about sell-side analysis that makes it so useless? Is it the fact that its hardly unique, that due to structural factors of the business estimates cluster around a 'safe' number?

Regardless, I believe, as cauxion points out, that the system can be reformed so that the analysis has more value. Hell, even maybe split research into retail and institutional groups like the rest of the banks.

9

Posted by guest, Jun 17, 2008 2:07PM

Why don't we just dispense with the fiction that experts dispense their wisdom about value and stock movements based on some sort of altruistic desire to help people, and just go whole hog with the assumption that everyone telling you what they think is a scheming bastard trying to line their own pockets by manipulating you into doing something that benefits them more than it does you?

10

Posted by guest, Jun 17, 2008 2:24PM

Wouldn't it just be easier to give the analysts big bonuses when they're right and fire them when they're wrong?

11

Posted by guest, Jun 17, 2008 5:18PM

Kedrosky spelled backwards is asshat.

12

Posted by guest, Jun 17, 2008 7:42PM

Well I have always felt that analysts should get a lump sum in the beginning of the year, a sum that is disclosed on the reports. Second, rating should only be Buy/Sell. Thus, analysts must weight the $$$ equally per stock and decide if they are long/short when they make a call on a stock, with a buy/sell. Then investors can see just how good the said analyst is at picking stock.

Then we can get rid of the pontificating/overpaid "buy-side" analysts that still seem to lose $$$ and never beat their respective index, despite their claims of investment superiority... Yes, good for you, you latched onto "insert activist name here", and you had one good year, yippy for you.

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