By DAVID MOON, Moon Capital Management
Since I first addressed the horrible problem of Wall Street analysts and
research over a year ago, it seems to be a more popular topic these days.
The State of New York threatens to launch an inquiry, as have a couple of
members of the US Congress. I suspect some politicians/investors got the
short end of an analyst recommendation and are ready to swing that stick at
someone. Too bad the guilty parties are still dodging the stick.
There are two problems with Wall Street research: it is often terribly biased
and almost always difficult to decipher. Words on Wall Street mean
something different than they do on Main Street. Only on Wall Street could
a highly paid professional make an 'aggressive hold' recommendation on a
stock. Only on Wall Street could only 2 or 3 percent of the stocks under
coverage receive a 'sell' recommendation. And only on Wall Street, it
seems, could the 'solution' to this problem actually add to the problem.
Because many Wall Street brokerage firms make a substantial portion of their
money selling investment banking services or executing client transactions, the
research reports they produce are often criticized for merely supporting those
two goals. Why would a firm produce a negative report on a company for
which the broker would like to raise money in a secondary offering or handle
their next acquisition? It seems that many people on Main Street are
finally waking up to this conflict and the implications for the reports produced
by these firms.
The Securities and Exchange Commission recently warned individual investors
not to rely solely on analysts' research reports when deciding whether or not to
buy a stock. If you are paying your broker for the value of her research,
what value is it if you can't use it to make your decision?
The financial news network, CNBC, has started trying to force analysts to
translate their doublespeak into real American English. During the daily
barrage of analyst interviews, every time an analyst gives a rating on a stock,
the network commentator will ask for an interpretation. 'We have an
'Accumulate' rating on the stock,' an analyst might say. To which the
network host will reply, 'just exactly what does that mean? Should our
viewers buy, sell or hold the stock?' This simple question will result in
a 60 second gibberish meandering about near-term this and intermediate-term that
and moderate or conservative investment postures. The recommendations
often have no practical value. But these exchanges make for entertaining
When we buy a stock for Moon Capital Management clients, our money goes into
that stock, too. My money is invested identically to our clients.
Seems to make sense to me; when I go home at night and think about my money, I
am thinking about my clients' as well. In an effort to "further ensure the
objectivity and independence of its research," one Wall Street firm announced
this week that its analysts are now prohibited from buying stock in any of the
companies they research. Presumably, this removes the risk that an analyst
might sell his shares while still maintaining a 'conservative intermediate-term
moderate hold' recommendation on a stock. To me, it seems a better policy
would be to force an analyst to invest his money identically to his investment
recommendations and at the same time. If an analyst covers a stock and
refused to own it, he should have to put a 'sell' recommendation on it. It
might make for more clear research reports.
The professional organization for analysts, the Association for Investment
management and Research, announced a plan to solicit comments and produce a
report outlining the problem of conflicts and (ideally) clarity of research
reports. Hopefully, the results will be thorough, client-oriented and
David Moon is president of Moon Capital Management, a
Knoxville-based investment management firm. This article
originally appeared in the News Sentinel (Knoxville, TN).