News flash: Analysts exist to generate investment banking business and trading commissions; they are not here to assist you in making stock buys or sells.
That is the conclusion of a recent study, but let’s be blunt: If you have been paying attention, you probably already knew this.
At this point in the evolution of Wall Street, analyst conflicts and priorities should not come as any surprise to investors. Most learned this from getting burned by various frauds of the late 90s and early 2000s.
Following the many analyst scandals that have plagued investing, from the dotcom underwriting to corrupted analyst coverage to outright hostility to shortsellers who uncovered many of the accounting frauds, it was apparent that something was rotten in the state of Denmark. Now we have statistical proof from academia to prove what you suspected all along.
Here are John Reeves and Ilan Moscovitz:
“Countless studies have shown that the forecasts and stock recommendations of sell-side analysts are of questionable value to investors. As it turns out, Wall Street sell-side analysts aren’t primarily interested in making accurate stock picks and earnings forecasts. Despite the attention lavished on their forecasts and recommendations, predictive accuracy just isn’t their main job.”
The ongoing rise of indexing — Vanguard was the only firm that garnered fresh assets during most of the past few years — suggests that Mom & Pop won’t be so quick to follow analysts again.
Time has a way of making people forget, but I suspect perhaps their memories might be better this time.
McKinsey: Equity Analysts Are Still Too Bullish (June 2nd, 2010)
Inside the ‘Black Box’ of Sell-Side Financial Analysts
Lawrence Brown (Temple University), Andrew Call (Arizona State University), Michael Clement (University of Texas), and Nathan Sharp (Texas A&M)
SSRN, March 1, 2013
The Shocking Truth About Wall Street Stock Recommendations
John Reeves and Ilan Moscovitz
Motley Fool June 3, 2013