Leah Zitter

Leah Zitter

Wall Street Analysts are More Biased Than You Think

Effizient Link (Investing Consultancy) | November 19th, 2018 | https://www.effizientlink.com/stock_markets

Back in 2008, a pioneering crypto-enthusiast succinctly told me what he thought of crypto analysts: “A bunch of f-ing morons who tell you that they’re gurus to make themselves rich.”

Media outlets like Fortune and CNBC unanimously agree that Wall Street’s Wise share the same description.

In all fairness, not all investment analysts are shoddy.

Analysts fall into two buckets: Buy-side and sell-side experts. Buy-side analysts research stocks for money management firms, like hedge funds, mutual fund companies, or boutique investment advisers. They’re objective, so I’d consider their opinions. Sell-side analysts, also called Wall Street analysts, work for brokerage firms or investment banks that handle their clients’ initial public offerings (IPO) or take cuts from the stocks they sell. Naturally, sell-side analysts want to retain their jobs, which forces them to provide

projections that please their employers. It’s the sell-side analyst, mind you, who presents the “convincing” sophisticated models and data. Most analysts I know waffle between honesty and bringing in new banking business. They're not willfully corrupt, but the reward incentive is too great. They get higher commissions, attractive pay, bonuses, leverage, and promotions when they bring in more money, namely when they sell their employer’s stock.

Case in point?

In 2009, Mike Mayo, analyst at Credit Suisse First Boston audaciously downgraded the entire banking industry, thereby threatening CSFB’s contacts. The investment banking division fired him.

Let’s check the logic. If analysts tell you to “hold or “buy” a stock that means they’re indicating you may benefit from potential price appreciation over time. Which type of stocks are they boosting? The hot ones with large trading volume - which means, everyone is buying that stock, thereby leveraging its cost. Defeats the point, uh?

In a remarkable piece of research, website Equity-Research found that 78 percent of the stocks Wall Street investors told clients to “buy” or “strong buy” in 2007, dorked. Which stocks profited? Those the analysts downgraded, like Sears Holdings and Ford Motor, that doubled and quadrupled in 2008. Similarly, analysts urged retails investors to “buy” Bank of America and Citigroup in 2007. Both institutions cratered the following year.

“So,” the market research service concluded, “When your broker calls to offer you his analysts’ ‘top picks’, maybe you’d be better off asking him which stocks his analyst hates. Or you could just let the phone ring.”

The Securities and Exchange Commission (SEC) routinely warns against conflicts of interest, but no amount of regulations can eliminate analyst's bias.

In short, the Chinese wall that supposedly exists between employers and their analysts is as solid as a rice cake.

No wonder Wall Street plans to replace humans with robots.