- Oct 19, 2007
- What is a Wall Street Securities Analyst?
- Wall Street Analysts Are Bad at Stock Picking
- Opinion Rating Systems Are Misleading
- When an Opinion Is Lowered from the Peak Rating It Means Sell
- Research Reports Do Not Contain an Analysts Complete Viewpoint
- The Entire Stock Market Is Biased in Favor of Buy Ratings
- Buy and Sell Opinions Are Usually Overstated
- Wall Street Has a Big Company Bias
- Brokerage Emphasis Lists Are Frivolous
- Stock Price Targets Are Specious
- The Street Is Extremely Short-Term in Its Orientation
- Analysts Miss Titanic Secular Shifts
- Street Research Unoriginal, Opinions Similar
- Analyst Research Is Valuable for Background Understanding
- A Lone Wolf Analyst with a Unique Opinion Is Enlightening
- The Best Research Is by Individuals or Small Teams
- Overconfident Analysts Who Exhibit too Much Flair Are All Show
The Street Is Extremely Short-Term in Its Orientation
The modern era of research transformed security analysis and investing, all of Wall Street really, to a shorter, briefer length for everything. Investors can exploit this tendency and enhance portfolio performance by being longer-term oriented, and more patient and value focused. Institutions are entrapped by a quarterly treadmill of performance evaluation. Their investment time horizon has shrunk drastically. If any stock recommendation lacks upside potential in the current quarter, a professional portfolio manager’s eyes glaze over. Analysts have succumbed to this same frenzy of near-term expectations and demands. Attention spans are telescoped, so research reports are shriveled in size. Corporations are subsumed by the same trend. Quarterly earnings results are the paramount milestone, a critical influence, the subject of intense analyst emphasis. Annual earnings estimates are dwarfed by expectations for the existing quarter. And it is this short sightedness that gives the individual investor an opening. An individual can really invest and hold stocks for at least two or three years to improve performance results, because they are not being judged on a quarterly basis like the Street.
Wall Street analysts are supposed to be investment analysts doing investment research. That means their conclusions, findings, views, and recommendations are to be investment oriented, having a time horizon of at least a year or two. Yet most institutional clients, particularly the biggest commission producers like hedge funds, are short-term trading oriented. The same for key intermediaries, institutional sales, and the brokerage firms’ trading desks that analysts deal with constantly. Mutual fund performance is tracked daily and is measured against the competitors every quarter. Analysts are torn between two conflicting goals. Earnings estimates, price targets, and other prognostications on the companies that analysts cover extend a year or more into the future. But intense pressures mount from clients, traders, and research management for a recommendation to prove out in a period of just days or weeks, months at the longest. This causes Street research to be focused myopically on immediate influences. Analysts are catering to a market of traders rather than a market of investors, and so what they undertake is really trading research. Most Street research is unsuitable for the true, long-term investor.
Research reports and brokerage stock rating systems indicate a one-year investment timeframe. In reality, opinions are based on analyst thinking of how the stock may do over the next one to five months, at the maximum. This stems from the exceedingly short-term trading mentality on Wall Street. If analysts do not believe the stock will take off within the next couple months, there will be no opinion upgrade. The key institutional investor audience seeks instant gratification and is impatient, like the rest of Wall Street. A question I constantly heard was: “What is the catalyst that will move the stock?” When raising an opinion, the Street always stresses the immediate expected development that will drive the price higher. Don’t ever think any recommendation is based on how the stock will perform over the next year or two. We get hounded or criticized if our stock recommendation stagnates for even two or three months. Wall Street is not focused on the long-term. Patient investors can outmaneuver Street insiders by a willingness to buy early and hold for a couple years and not be whipsawed by temporary influences.
The short timeframe that defines Wall Street necessitates speed. Analysts are compelled to stress quickness over quality or thoughtfulness. Immediate interpretation of news or events is demanded. Once put forth, the inclination is to stick with that stance, even if later evidence or assessment indicates a different conclusion. Erroneous instant reactions have a way of manifesting over time. Research reports contain mostly reported facts rather than unique, original analysis and inferences. Analysts also love PC-generated earnings models and gravitate toward quantitative aspects. Far more telling is the esoteric, qualitative side to a company’s business that is more difficult to evaluate. Such quality security analysis is scant since it takes too long, and analysts are normally in a reactive, hurry up mode.