Home > Articles > Business & Management > Finance & Investing

This chapter is from the book

Wall Street Has a Congenitally Favorable Bias

Think of Wall Street as if it were the auto industry. Automobile companies make cars and trucks. Through their dealers, they sell these products aggressively. Given their vested interest, auto dealers recommend “buy.” You have never heard them tell consumers to “sell.” An article by Clifford S. Asness in the Financial Analyst Journal makes a similar comparison. He accurately states, “A large part of Wall Street’s business is selling new and used stocks and bonds, which strangely they do make recommendations about.”

The Street rarely espouses bearish views on the very products it wants to sell to clients. No matter how deep the bear market or how clouded the outlook, brokerage firms want investors to continue investing in stocks. A leading firm emphasized in its February 2009 magazine to investor clients, “Defensive investing does not mean staying out of the markets. Look for conservative opportunities.” John C. Bogle, founder of the Vanguard mutual funds, claims: “Our financial system is driven by a giant marketing machine in which the interests of sellers [Wall Street] directly conflict with interest of buyers [investors].” Fifty percent of all trades are sales, by definition. Yet more than 90% of all research is directed at buyers, positive Buy recommendations, or Holds.

The press also leans heavily to the optimistic side. Entering 2008, amid the worst bear market since 1931, the leading financial magazines featured cover stories such as “Your Comeback Year—2009,” “Get Your Money Back—A Six-Step Plan to Rebuild Your Savings,” and “Yes, Things Are Grim, But Here’s Your New Plan to Emerge Stronger.” Even the venerable Barron’s, in advertising the debut of its new newsletter, emphasized that it would present an “investment idea each day...90% of the calls will be bullish.” Wow, 225 Buy recommendations a year—one every business day! And almost all Buys, even in a bear market. That same publication features an annual market forecast by 12 leading Street investment strategists. At the outset of 2008, the panelists’ S&P 500 predictions for the year ranged from 1525 to 1750. The end result was an astonishing miss from the actual 903 at year’s end. The dozen 2009 forecasts for the S&P 500 were again universally bullish, from 950 up to 1250, despite the bear market scenario.

Wall Street is totally oriented to a rising market and upward-moving stock prices. The common terms used to describe stock market conditions are heavily slanted toward the positive. When the stock market drops and you lose money in your stock holdings, it is called a “correction.” When the market rises, the Street does not call it a “mistake.” “Volatility” and “turbulence” are other terms that often surface to describe a falling market. Isn’t a surging market just as volatile as a declining one? A plummeting market finally bottoms out, and it is seen as “stabilizing,” a favorable description. But if stocks are soaring, the market is never portrayed as being unstable. When the economy dips into recession or the employment level falls off, it is termed “negative growth.” The government is the same way. When Ben Bernanke testified before Congress, he refused to use the R-word (recession), instead referring to a “contraction” of the economy.

The Street just keeps trying to sugarcoat or neutralize the situation even when stocks are diving, as during the 2008 bear market. As Barron’s described, its attitude is like the federal government’s: “Fundamentally everything’s fine...not to worry, it’ll soon get better.” Or “Wall Street...enjoys singing in the rain without an umbrella, hoping to lift investors’ spirits—and, just coincidentally, brokerage commissions and positions—by pretending to espy nonexistent rainbows, accompanied, of course, by their obligatory pot of gold.”

Most institutional investors hold stocks, long positions, and rarely sell short or bet on a decline. Analysts are given incentive to issue Buy opinions by the favorable feedback that flows from major institutional owners of the stocks and from corporate executives. They are discouraged from expressing negative views by the adverse reaction and often disparaging remarks that follow from these constituencies. In fact, when organizations are holding several million shares of a stock, you can imagine their reaction to a Street downgrade that drives the price several points lower. These organizations have portfolio managers who make stock selections; they do not need Wall Street analysts for that purpose.

A Wall Street Journal study in early 2004 found the positive bias to be most glaring at smaller brokerage firms that still seem to be in the rut of hyping a lot of Buy recommendations. Even the ten major firms that agreed to several research reforms in a 2003 industry settlement with the New York Attorney General averaged about twice as many Buy ratings as Sells. The ratio was almost seven times more Buys at smaller firms. In a mid-2006 CFA magazine article by Mike Mayo, it was noted that of the recommendations on the ten biggest market cap stocks in the U.S., there were 193 Buys and only 6 Sells. Systemic bias? Analysts’ opinions are swayed by vast brokerage investment banking opportunities with these major corporations. The system is stacked against negative recommendations.

Analysts have a tendency to fall in love with the companies and stocks that they are advocating. It is like identifying with your captors. Human instinct. Their bias is ineffaceable. Some of this insanity was eliminated when subservience to investment banking was reduced. But do not think for a second that full objectivity has been restored. The percentage of favorable Street recommendations still far outweighs negative opinions, at least if you take published ratings literally. In early 2001, ten months into the precipitous market slide that followed the Internet bubble, Salomon Smith Barney had only one Underperform and no Sells among the nearly 1,200 stocks it was covering. According to Zacks Investment Research, of the 4,500 stocks it tracked in the fourth quarter of 2005, amid the ongoing bull market, 42% were rated Buy or Strong Buy. Only 3% carried Sell or Strong Sell recommendations.

At the end of 2007, after a notable stock market drop, the distribution of Wall Street research opinions was 49% Buys, 46% Neutrals, and only 5% Sells. During 2008, the number of hedged, unhelpful Neutral or Hold Street opinions skyrocketed as stock prices nose-dived, but Sells remained scarce. By the end of January 2009, some 16 months into the bear market, according to Bloomberg data, there were still less than 6% Sell recommendations on the Street, compared to 58% Neutrals and 36% Buys. In randomly glancing at a February 2009 research report on a healthcare company, I noticed the analyst carried 17 Buy ratings on the 28 companies covered, more than 60% favorable views despite a bear market. This is typical. The major brokerage firm that altered its opinion rating system in 2008 required its analysts to rank at least 20% of the stocks under coverage as Underperform (Sell). That led to 31% of all the stocks covered by the firm being rated as Sell, an admirable balance compared to the rest of Wall Street; but it still left 69% of the coverage universe with ratings of Buy or Neutral during perhaps the worst bear market since the Great Depression.

A study by UCLA, UC Davis, and the University of Michigan reveals another form of skewed recommendations. Independent stock research opinions are more accurate than those of analysts from brokerage firm investment banks. The record is about equal during bull markets when Buy ratings are prevalent. But independents stand out in bear markets such as 2008, when they promulgate more negative views. Brokerage firms are reluctant to downgrade investment banking clients. Gee, why am I not surprised? A brokerage analyst invariably maintains a closer relationship and has more access to executives of an ongoing banking client. Studies prove that the analyst at the brokerage that leads a company’s initial public offering provides noticeably more affirmative coverage than analysts at firms unaffiliated with the deal.

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