Should Stock Analysts Own Their Picks?

Publish date:

Paul Kedrosky sparked a heated debate when he suggested we shouldn't trust analysts who don't own the stocks they rate as "buys" or short their "sells." Evan Newmark at DealJournal chimed in with a similar thought: "A better way to instill investor confidence in analyst picks would be for them to bet their own money, either pro or con." Felix Salmon bucks the trend today by arguing that (1) analysts are irrelevant because institutional investors ignore analysts' buy/sell recommendations, (2) owning or being short the stocks would introduce bias into analysis and (3) analysts aren't any good at picking stocks, so encouraging them to own their picks wouldn't improve things.
We're still outside observers in this debate but we notice that Felix's first and last points might be ameliorated by analysts buying and selling in accordance with their picks. Institutional investors might be more inclined to follow stock picks of analysts if they knew the analysts were incentivized to pick correctly because they had skin in the came. And analysts might get better if they stood to gain and lose based on the quality of their picks.
The guy who started all this, Kedrosky, has a much longer response here.