Sell-Side Analysts
A sell-side analyst “works for a brokerage or firm that manages individual accounts and makes recommendations to the clients of the firm.” Investopedia. Every time a stock is upgraded or downgraded, one of these analysts are at work.
Their obligation is to the firm they work for, not to individual investors. Depending on the firm they work for, their objective could be to: increase trading, please a company by issuing a favorable recommendation, increase client satisfaction, or to avoid any number of other normal pressures a person faces at work.
During the internet bubble, some sell-side analysts developed quite a following. So much so that we still remember their names to this very day: Meeker, Blodget, Grubman to name a few.
After the internet bubble popped, these idolized analysts’ names were dragged through the mud. I’m not saying they didn’t do anything wrong, but a lot of them did what their job required of them. If they could explain away the irrational exuberance during the time, if they could convince themselves and the world that they knew the secret to the new economy, they could make a killing. And they did.
They made their clients happy by producing eye-popping returns (at least until the bubble popped); they made their companies happy by bringing in more assets and investment banking business; and they made themselves very wealthy. The good analysts knew the bubble couldn’t last but it was fun while it lasted.
At least in today’s more rational market, these abuses don’t happen. Analysts are there to tell you how they really feel about an investment. They are not there to make money for themselves or their firm. They have an undying to devotion to the well-being of the individual investor. Or so I thought…(Okay, I never really did.)
Sell-side analysts are, after all, trying to sell you something. In that spirit, most of the stocks a company covers are ranked as a “buy”. After all, who wants to buy a “hold” or a “sell?” In fact, Jefferies & Co. has 10 buys for every one sell; A.G. Edwards has 15 buys for every sell. (WSJ Online; Subscription Req’d.) It’s so bad that most investors recognize a “hold” for what it is — a “sell” with connections.
If you thought the game has changed, it hasn’t. Just the timing has — there is no crash so the losses aren’t as visible. If you decide to use the “expertise” of a broker’s firm, make sure you know what percent of the firm’s recommendations are “sells” and how their recommendations have performed over time compared to an index. Assuming that they aren’t playing games with the numbers, chances are that after fees their recommendations will have underperformed and you would be much better served in a boring, yet lucrative, index fund.
