- What Is a Wall Street Securities Analyst?
- Wall Street Analysts Are Bad at Stock Picking
- Opinion Rating Systems Are Misleading
- Research Never Contains an Analyst's Complete Viewpoint
- Wall Street Has a Congenitally Favorable Bias
- Downgrades Are Anguishing, Arduous, and Rare
- Most Downgrades Are Late; the Stock Price Has Already Fallen
- Buy and Sell Opinions Are Usually Overstated
- Wall Street Has a Big Company Bias
- Brokerage Emphasis Lists Are Not Credible
- Stock Price Targets Are Specious
- The Street Orientation Is Extremely Short-Term
- Analysts Miss Titanic Secular Shifts
- Street Research Is Unoriginal; Opinions Conform
- Analyst Research Is Valuable for Background Understanding
- A Lone Wolf Analyst with a Unique Opinion Is Enlightening
- The Best Research Is Done by Individuals or Small Teams
- Overconfident Analysts Exhibiting Too Much Flair Are All Show
This chapter is from the book
This chapter is from the book
This chapter is from the book
The Street Orientation Is Extremely Short-Term
The modern era of research transformed security analysis and invest-ing—all of Wall Street, really—to a shorter, briefer length for everything. Investors can exploit this tyranny of the short-term and enhance portfolio performance by thinking long-term and being more patient and value-focused. Institutions are trapped on the treadmill of quarterly performance evaluations. Their investment time horizon has shrunk drastically. If a 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, and the subject of intense analyst emphasis. Annual earnings estimates are highlighted by expectations for the existing quarter. And it is this shortsightedness that gives the individual investor an opening. As an individual, you can invest and hold stocks for at least two or three years to improve performance results, because you are not being judged on a quarterly basis like the Street.
Wall Street analysts are supposed to be investment analysts doing investment research. This means that their conclusions, findings, views, and recommendations should be investment-oriented, looking ahead 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 goes for the key intermediaries that analysts deal with constantly, institutional sales teams and the brokerage firms’ trading desks. Mutual fund performance is tracked daily and 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 institutional clients, traders, and research management for a recommendation to prove out in a period of just days or weeks, months at the longest. And this influence pushes analysts’ research to be oriented myopically on immediate results. Analysts cater to a market of traders rather than a market of investors, so they put out 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 time frame. In reality, opinions are based on how analysts think the stock might do over the next one to five months, at the maximum. If analysts do not believe that the stock will take off within the next couple of 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. Do not ever think any recommendation is based on how the stock will perform over the next year or two. We analysts get criticized if our stock recommendation stagnates for even two or three months. 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.
Wall Street’s short-term time frame necessitates speed. Analysts are compelled to stress quickness over quality or thoughtfulness. The qualitative side of a company’s business is more difficult to evaluate. Quality security analysis is scant since it takes too long, and analysts are normally in a reactive, hurry-up mode. Immediate interpretation of news or events is demanded. After it’s 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.