FULL OF BULL - excerpts from Chapter 1
Wall Street Analysts Are Bad at Stock Picking
It's a shocking truth, but the way the system is oriented, stock picking is not the analyst's job. Until recently, brokerage firms did not even track the accuracy of their analyst opinions. The skill was neglected for a long time. It was just not an important part of the analyst 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's 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 at all. An Institutional Investor magazine survey in the fall of 2006 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 sellside (brokerage) Street analysts. Of 12 factors ranked in order of priority, stock selection placed 11th. Obviously, this skill is not an analyst job function required by their foremost audience. As a result, stock picking is neglected.
The Entire Stock Market Is Biased in Favor of Buy Ratings
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've never heard them tell consumers to “sell.” An article by Clifford S. Asness in the Financial Analyst Journal makes this comparison. He accurately states that, “A large part of Wall Street's business is selling new and used stocks and bonds, which strangely they do make recommendations about.” Of course, the Street rarely espouses bearish views on the very products it wants to sell to clients.