Investment research analysts “study publicly traded companies and make recommendations on the securities of those companies,” according to the SEC. “Most specialize in a particular industry or sector of the economy. They exert considerable influence in the marketplace, and their recommendations or reports can influence the price of a company's stock.
“While analysts provide an important source of information in today's markets, investors should understand the potential conflicts of interest analysts might face." That’s an excerpt from “Analyzing Analyst Recommendations,” published by the SEC in 2010.
Here are reviews of two books that help investors understand conflicts of interest. The lesson of both books is: Always assume stock analysts are self-serving.
Blood on the Street: The Sensational Inside Story of How Wall Street Analysts Duped a Generation of Investors
By Charles Gasparino
Free Press 2005, 368 pages
In the booming 1990s, stock analysts Jack Grubman, Henry Blodget, and Mary Meeker issued buy recommendations for the stocks of certain corporations. Those stock values soared, and kept soaring. So did the prestige, celebrity, and salaries of Grubman (at Salomon Smith Barney and later Citigroup), Blodget (Merrill Lynch), and Meeker (Morgan Stanley). Then the tech bubble started to burst, and they saw it coming, but they continued to give high ratings to, let’s see, the tech companies that brought their investment banking business to Salomon, Merrill, and Morgan. When those stocks tanked, the deceptive practices of the analysts were laid bare. SEC chairman Arthur Levitt looked the other way while investors lost billions in stock value.
A little-known attorney general from New York named Elliott Spitzer stepped in to hold Wall Street accountable — for a while. Charles Gasparino, who broke this story in the Wall Street Journal, tells it here in fascinating detail, in an understated style that nevertheless evokes outrage.
Confessions of a Wall Street Analyst: A True Story of Inside Information and Corruption in the Stock Market
By Daniel Reingold, Jennifer Reingold
Harper 2007, 384 pages
“Confessions” does not accurately describe the substance of this book. The author (a Wall Street analyst from 1989 to 2003) did nothing wrong, so he had nothing to confess. What he does is gripe about the analysts (mainly his competitors) who did things wrong, like insider trading and sellout analysis. He hammers home the lesson that “insider influence is so pervasive in the financial markets that investors should avoid individual stocks completely” (Publishers Weekly).
Analyzing Analyst Recommendations
The SEC says, “As a general matter, investors should not rely solely on an analyst's recommendation when deciding whether to buy, hold, or sell a stock. Instead, they should also do their own research — such as reading the prospectus for new companies or for public companies, the quarterly and annual reports filed with the SEC — to confirm whether a particular investment is appropriate for them in light of their individual financial circumstances."
More on conflicts of interest, disclosure rules, and how to protect yourself from biased stock analysts: https://www.sec.gov/tm/reportspubs/investor-publications/investorpubsanalystshtm.html
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