An Analysis of the Analysts from the Raging Bull Website.....FYI
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<<Sell-Side Securities Analysts and the Cult of Expertise
By Steve Kimian
- Chat with Steve on his message board.
Securities analysts are to the stock market what ‘70s plaid golf pants are to the game of golf -- both would be fine without them, but things would be a bit duller in their absence. Unlike gaudy green and purple trousers, which don't normally cause the markets headaches, understanding what makes analysts tick is crucial to investors: It's hardly fair, often not rational, and probably not good, but analysts can make or break investors.
First off, though, a few definitions. Sell-side research analysts (that is, those who work for brokerage houses -- as opposed to buy-side analysts, who work for hedge funds and mutual funds) are also called research analysts, equity analysts, or securities analysts.
They are usually responsible for covering a group of traded companies in a particular industry, or sub sector of an industry. There are fertilizer stock analysts, auto part analysts, Internet stock analysts, restaurant analysts, and the like -- for pretty much every little niche of the market you'd never want to know about.
Research analysts are responsible for, one way or another, making money for their employer -- be it by getting clients to trade with the bank, or by winning an investment banking clients, or by making trading recommendations for proprietary trades. In an information-driven industry, research analysts make money by selling their expertise, and brokerage houses in turn sell the expertise of their analysts.
So, most research analysts spend most of their time talking with companies, kicking the tires of new products, crunching through company financials, and the other activities central to developing and maintaining a solid, broad, and deep expertise in their chosen industry, right? Well, no.
Analysts need to sound like that's what they spend their time doing. More to the point, though, they instead focus on what's (to them) really important:
•Market, market, market! to become an "expert". Analysts market to salespeople, brokerage clients, potential investment banking clients, existing investment banking clients, the media, other brokerage houses, potential employers, industry insiders… and anyone else who will listen. What's the good of being the world's foremost widget stock expert, if you don't tell everyone that you're the world's foremost widget stock expert?
A widget "expert" isn't an expert necessarily because he has worked in the widget industry for years, or because he lives, breaths and excretes widget, or because he blows his nose with widgets, or because he knows more about widgets than anyone else -- but, rather, because he's been able to convince everyone that he is the widget expert. Once the analyst gets a few key parties to believe that he is, indeed, the best widget analyst anywhere, it all snowballs -- and, bingo, before he knows it, the analyst starts to believe his own press.
Expertise is often just a self-fulfilling prophecy -- you believe you're an expert, you act like you're an expert, and hey-ho, others will start to believe you, and start to treat you like an expert.
•Network, here, there and everywhere. Marketing and networking are often different colors of the same shade. A key component of the cult of expertise that analysts try to develop -- and the reason anyone would want to talk to them in the first place -- is that the analyst knows something that others (that is, the market) don't.
No amount of marketing or well-delivered schlock can disguise a basic complete lack of substance (not for long, at least). Someone or something needs to be behind the multitude of stock phrases coined by analysts, such as "conversations with management", "our industry sources", "guidance from the CEO", and the like. At some point the analyst actually has to meet people who know what they're talking about -- after all, where else is the analyst going to get his ideas from?
•Publish -- as much as possible, and as often as possible -- or perish. Marketing yourself as an expert (see above) is much easier if you publish and liberally distribute lots of big and heavy research reports with your name plastered all over. Paper (and its electronic analogues) is the currency of accomplishment in the brokerage research industry.
The more you publish, the easier it is to convince others that you must know what you're talking about. Also, producing paper is one of the few concrete accomplishment analysts can point to. The whole brokerage business is fuzzy, involving shuffling around money and swapping ideas -- but not really making anything. So pumping out paper is often a short-term answer to real results.
For the most part, style (that is, the impression of expertise) is far more important in brokerage house research than substance (or, simply put, actually knowing what you're talking about). Look at it this way: The most successful retail stockbrokers aren't usually those intelligent few who actually understand finance and the workings of the market, and who try to help their clients make money through it; rather, it's those who can spin a pretty story, and create the impression of expertise. There isn't always an overlapping of brokerage analysts who sound like they know what they're talking about, and analysts who actually do know what they're talking about.
So, what about research? Often, analysts are too busy building a cottage industry of their own expertise to keep up with what they're supposed to be experts on. Instead, they market, network, and take credit for the work done by their junior analysts. The staff, meanwhile, is crunching the numbers, running down leads, following up with companies, making earnings projections, and doing the dirty work to really understand an industry, its component companies, and where it's all headed.
For better or for worse, though, research analysts are here to stay. Naturally, many of them -- probably most of them -- aren't quite as single-mindedly substance-free as painted above. Some are, though, including many of those most highly regarded in the industry. >> |
