Home > Articles > Business & Management > Finance & Investing

This chapter is from the book

Wall Street Analysts Are Bad at Stock Picking

It might be shocking but stock picking is not the analyst’s job. Until recently, brokerage firms did not even track the accuracy of their analysts’ opinions. It is just not an important part of the analyst’s job description. Wall Street analysts are supposed to pursue information about the companies and industries they cover, evaluate and gain insight on the future prospect of those companies, assess their investment value, and form opinions on the outlook for their stocks. We are required to assign investment ratings such as “Buy” or “Sell” to indicate a net overall evaluation. And that is where the real issues start to surface. Professional qualifications, incentive compensation, and the main audience—institutional investors—do not stress this function of stock picking.

It is not just opinion upgrades, or Buys, that are unreliable; downgrades, or Sells, are also frequently unavailing. In December 2007, a major brokerage firm lowered its Buy rating on Countrywide Financial, a company in the crosshairs of the subprime mortgage debacle, to Neutral after the price had already plummeted from $40 to $9.80. Another high-profile firm underscored its $110 price objective for Bear Sterns while the shares were trading in the $50s, three days before the stock plummeted to under $3 in a JPMorgan Chase bailout. In May 2008, the high-profile oil analysts at a leading firm forecast the price of oil to reach $200 in the ensuing two years. By September the revised forecast was $148 after the price had sunk to $80, and in October the estimate was cut to $86, always following several steps behind the plummeting oil prices. (Oil had cratered to $40 by December.) There were several Buys on Fannie Mae the day it capitulated to $1 a share. Thank you very little! Such calls are all too typical.

An Institutional Investor magazine survey in the fall of 2008 asked the buyside institutions—mutual funds, banks, pension funds, and hedge funds that buy and sell stocks through the brokerage firms—to indicate the most important attributes they sought in sell-side (brokerage) Street analysts. Of 12 factors ranked in order of priority, stock selection placed dead last. Industry knowledge was the key quality that institutions wanted in analysts.

The best analysts, as ranked in the October 2008 Institutional Investor (II) magazine poll, offered some of the worst recommendations over the past year: A leader in covering brokers and asset managers recommended Bear Sterns in January at $77. Eight weeks later it was selling at $2. The number one—ranked insurance industry analyst reconfirmed his long-standing Buy opinion on AIG in August and retained his favorable view until the federal seizure at $3 a share in mid-September. The top-rated analyst in consumer finance pounded the table, enthusiastically endorsing Fannie Mae and Freddie Mac right up until their government takeover below $1 a share.

When stocks have several Sell recommendations, there is nowhere else for that stock to go but up. When the fourth or fifth Sell opinion is issued on a stock, it is probably ready to recover. Analysts are usually late and are also copycats. For years, The Wall Street Journal published a quarterly dartboard contest. The expert stock selections made by analysts and portfolio managers did no better than those picked randomly. A website featuring a newsletter called the “Paradox Investor” assessed the performance of all Sell- and Hold-rated stocks on the Street for a two-year period ending in the fall of 2003. This portfolio of negatively viewed stocks gained 53.5%, more than 75 percentage points better than the market.

Mutual fund money managers are no great shakes either. In the 2007 Barron’s Roundtable, which brings together 11 leading Street stock experts, only four had more than half of their top choices outperform the market. Daunting. In 2008, some 56% of the 72 total picks outperformed, though only 32% showed a gain in absolute terms, and half of those were currencies, commodities, and other nonstocks. More than one-third of the selections collapsed by at least 50%. Quite a statement on the ability of Wall Street to pick stocks.

If that is not enough proof, Charles Schwab rates stocks A to F. From May 2002 to October 2003, its F-rated names, those deemed to have the poorest prospects, performed the best of any category, ahead 30%. In another survey, The Wall Street Journal reported that Investars.com ranked Street research firms by how each one’s stock picks performed compared to the S&P 500 over a one-year span ending in May 2005. You have probably never heard of four of the top five: Weiss Ratings, Columbine Capital, Ford Equity Research, and Channel Trend. The major brokerage Buy-rated stock results were strewn farther down the list. Pretty much the same pattern held true when performance was evaluated over a four-year term. The Street pushes analysts to emphasize institutional hand-holding and marketing, not research and stock recommendations. No wonder the record stinks.

Insightful research analysis has little bearing on the accuracy of Buy or Sell recommendations. Brokerage analysts are usually good at providing thorough, informative company and industry research. But their investment-rating track record is mediocre. The system encourages this by compensating analysts for profile, status, clout, and industry/company knowledge rather than for their investment opinion accuracy. The extreme influence and impact of analysts can result in great damage when investors are misled. Jack Grubman is the poster boy example here. As a telecommunications analyst with more experience than most of the green Internet analysts, he should have known better than to engage in overt cheerleading of his banking clients. Apparently he did not, as evidenced by his statement in a BusinessWeek quote about his actions: “What used to be conflict is now a synergy.” He shunned his fiduciary duty to be relatively unbiased as an analyst. Grubman’s incestuous investment banking behavior destroyed his research credibility. Several of his top recommendations were advocated almost all the way into Chapter 11—Global Crossing, MCI WorldCom, and others. He is now permanently barred from the business.

Analysts’ compensation, often more than one million dollars annually, is unrelated to the performance of their stock recommendations. A portfolio manager’s investment record can be tracked daily in the mutual fund listings. But analysts are not paid for the accuracy of their stock opinions. Their income depends on institutional client polls, overall eminence and influence, institutional sales and trading evaluations, aid in doing investment banking deals (there is still involvement here), and overall subjective judgment by research management.

  • + Share This
  • 🔖 Save To Your Account

InformIT Promotional Mailings & Special Offers

I would like to receive exclusive offers and hear about products from InformIT and its family of brands. I can unsubscribe at any time.

Overview


Pearson Education, Inc., 221 River Street, Hoboken, New Jersey 07030, (Pearson) presents this site to provide information about products and services that can be purchased through this site.

This privacy notice provides an overview of our commitment to privacy and describes how we collect, protect, use and share personal information collected through this site. Please note that other Pearson websites and online products and services have their own separate privacy policies.

Collection and Use of Information


To conduct business and deliver products and services, Pearson collects and uses personal information in several ways in connection with this site, including:

Questions and Inquiries

For inquiries and questions, we collect the inquiry or question, together with name, contact details (email address, phone number and mailing address) and any other additional information voluntarily submitted to us through a Contact Us form or an email. We use this information to address the inquiry and respond to the question.

Online Store

For orders and purchases placed through our online store on this site, we collect order details, name, institution name and address (if applicable), email address, phone number, shipping and billing addresses, credit/debit card information, shipping options and any instructions. We use this information to complete transactions, fulfill orders, communicate with individuals placing orders or visiting the online store, and for related purposes.

Surveys

Pearson may offer opportunities to provide feedback or participate in surveys, including surveys evaluating Pearson products, services or sites. Participation is voluntary. Pearson collects information requested in the survey questions and uses the information to evaluate, support, maintain and improve products, services or sites, develop new products and services, conduct educational research and for other purposes specified in the survey.

Contests and Drawings

Occasionally, we may sponsor a contest or drawing. Participation is optional. Pearson collects name, contact information and other information specified on the entry form for the contest or drawing to conduct the contest or drawing. Pearson may collect additional personal information from the winners of a contest or drawing in order to award the prize and for tax reporting purposes, as required by law.

Newsletters

If you have elected to receive email newsletters or promotional mailings and special offers but want to unsubscribe, simply email information@informit.com.

Service Announcements

On rare occasions it is necessary to send out a strictly service related announcement. For instance, if our service is temporarily suspended for maintenance we might send users an email. Generally, users may not opt-out of these communications, though they can deactivate their account information. However, these communications are not promotional in nature.

Customer Service

We communicate with users on a regular basis to provide requested services and in regard to issues relating to their account we reply via email or phone in accordance with the users' wishes when a user submits their information through our Contact Us form.

Other Collection and Use of Information


Application and System Logs

Pearson automatically collects log data to help ensure the delivery, availability and security of this site. Log data may include technical information about how a user or visitor connected to this site, such as browser type, type of computer/device, operating system, internet service provider and IP address. We use this information for support purposes and to monitor the health of the site, identify problems, improve service, detect unauthorized access and fraudulent activity, prevent and respond to security incidents and appropriately scale computing resources.

Web Analytics

Pearson may use third party web trend analytical services, including Google Analytics, to collect visitor information, such as IP addresses, browser types, referring pages, pages visited and time spent on a particular site. While these analytical services collect and report information on an anonymous basis, they may use cookies to gather web trend information. The information gathered may enable Pearson (but not the third party web trend services) to link information with application and system log data. Pearson uses this information for system administration and to identify problems, improve service, detect unauthorized access and fraudulent activity, prevent and respond to security incidents, appropriately scale computing resources and otherwise support and deliver this site and its services.

Cookies and Related Technologies

This site uses cookies and similar technologies to personalize content, measure traffic patterns, control security, track use and access of information on this site, and provide interest-based messages and advertising. Users can manage and block the use of cookies through their browser. Disabling or blocking certain cookies may limit the functionality of this site.

Do Not Track

This site currently does not respond to Do Not Track signals.

Security


Pearson uses appropriate physical, administrative and technical security measures to protect personal information from unauthorized access, use and disclosure.

Children


This site is not directed to children under the age of 13.

Marketing


Pearson may send or direct marketing communications to users, provided that

  • Pearson will not use personal information collected or processed as a K-12 school service provider for the purpose of directed or targeted advertising.
  • Such marketing is consistent with applicable law and Pearson's legal obligations.
  • Pearson will not knowingly direct or send marketing communications to an individual who has expressed a preference not to receive marketing.
  • Where required by applicable law, express or implied consent to marketing exists and has not been withdrawn.

Pearson may provide personal information to a third party service provider on a restricted basis to provide marketing solely on behalf of Pearson or an affiliate or customer for whom Pearson is a service provider. Marketing preferences may be changed at any time.

Correcting/Updating Personal Information


If a user's personally identifiable information changes (such as your postal address or email address), we provide a way to correct or update that user's personal data provided to us. This can be done on the Account page. If a user no longer desires our service and desires to delete his or her account, please contact us at customer-service@informit.com and we will process the deletion of a user's account.

Choice/Opt-out


Users can always make an informed choice as to whether they should proceed with certain services offered by InformIT. If you choose to remove yourself from our mailing list(s) simply visit the following page and uncheck any communication you no longer want to receive: www.informit.com/u.aspx.

Sale of Personal Information


Pearson does not rent or sell personal information in exchange for any payment of money.

While Pearson does not sell personal information, as defined in Nevada law, Nevada residents may email a request for no sale of their personal information to NevadaDesignatedRequest@pearson.com.

Supplemental Privacy Statement for California Residents


California residents should read our Supplemental privacy statement for California residents in conjunction with this Privacy Notice. The Supplemental privacy statement for California residents explains Pearson's commitment to comply with California law and applies to personal information of California residents collected in connection with this site and the Services.

Sharing and Disclosure


Pearson may disclose personal information, as follows:

  • As required by law.
  • With the consent of the individual (or their parent, if the individual is a minor)
  • In response to a subpoena, court order or legal process, to the extent permitted or required by law
  • To protect the security and safety of individuals, data, assets and systems, consistent with applicable law
  • In connection the sale, joint venture or other transfer of some or all of its company or assets, subject to the provisions of this Privacy Notice
  • To investigate or address actual or suspected fraud or other illegal activities
  • To exercise its legal rights, including enforcement of the Terms of Use for this site or another contract
  • To affiliated Pearson companies and other companies and organizations who perform work for Pearson and are obligated to protect the privacy of personal information consistent with this Privacy Notice
  • To a school, organization, company or government agency, where Pearson collects or processes the personal information in a school setting or on behalf of such organization, company or government agency.

Links


This web site contains links to other sites. Please be aware that we are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of each and every web site that collects Personal Information. This privacy statement applies solely to information collected by this web site.

Requests and Contact


Please contact us about this Privacy Notice or if you have any requests or questions relating to the privacy of your personal information.

Changes to this Privacy Notice


We may revise this Privacy Notice through an updated posting. We will identify the effective date of the revision in the posting. Often, updates are made to provide greater clarity or to comply with changes in regulatory requirements. If the updates involve material changes to the collection, protection, use or disclosure of Personal Information, Pearson will provide notice of the change through a conspicuous notice on this site or other appropriate way. Continued use of the site after the effective date of a posted revision evidences acceptance. Please contact us if you have questions or concerns about the Privacy Notice or any objection to any revisions.

Last Update: November 17, 2020