NY Times Article on analysts
December 31, 2000
How Did So Many Get It So Wrong?
By GRETCHEN MORGENSON
Of all the rude awakenings that the bear market in stocks has brought to investors, perhaps the most jarring has been the realization of how woefully wrong Wall Street's research analysts have been this year on the stocks they follow. While the market sank to its worst performance in more than a decade, many of those analysts kept right on smiling and saying "buy."
How can so many who are paid so much to scrutinize companies have blown it so spectacularly for their investor customers?
The answer lies in a subtle but significant change in the way Wall Street analysts do their work — and how they are rewarded for it. That shift, which has brought riches and stardom to many securities analysts, has cost investors billions of dollars in losses.
The fact is, although brokerage firm stock gurus are still called analysts, their day-to- day pursuits involve much less analysis and much more salesmanship than ever before.
"The competition for investing banking business is so keen that analysts' sell recommendations on stocks of banking clients or potential banking clients are very rare," said Arthur Levitt, the chairman of the Securities and Exchange Commission. "Whether this is an actual or perceived conflict, clearly, in the minds of many institutional buyers, brokerage firm analysis has diminished credibility." Robert A. Olstein, a mutual fund manager with 32 years of experience analyzing companies' financial results, agrees. He said analysts today are more like racetrack touts than sharp- penciled researchers.
"What passes for research on Wall Street today is shocking to me," Mr. Olstein said. "Instead of providing investors with the kind of analysis that would have kept them from marching over the cliff, analysts prodded them forward by inventing new valuation criteria for stocks that had no basis in reality and no standards of good practice." (Internet analysts, for example, have cited visits to a Web site as a reason for optimism. But, Mr. Olstein said, "Investors can't take page views to the bank.")
No one, of course, can predict what stocks will do tomorrow, much less next year; but Wall Street's analysts are supposed to help investors judge the attractiveness of companies' shares. Investors look to analysts to advise them on whether to buy or sell a stock at its current price, given its near- term business prospects.
Until the mid-1990's, that is how most analysts approached their work. Today, there is virtually no such thing as a sell recommendation from Wall Street analysts. Of the 8,000 recommendations made by analysts covering the companies in the Standard & Poor's 500-stock index, only 29 now are sells, according to Zacks Investment Research in Chicago. That's less than one- half of 1 percent. On the other hand, "strong buy" recommendations number 214.
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