This account is pending registration confirmation. Please click on the link within the confirmation email previously sent you to complete registration.
Need a new registration confirmation email? Click here
See Cramer's multi-million dollar portfolio for FREE and get his new book Get Rich Carefully! Learn More

The Daily Interview: Taking Brokerage Analysts to Task

The impartiality of Wall Street analysts has been criticized by some, but now the author of a new book about analysts blasts them unequivocally.


Benjamin Mark Cole
Author,
The Pied Pipers
of Wall Street:
How Analysts Sell
You Down the River

Recent Daily Interviews
IDC's
John Gantz
Terra Lycos'
Bob Davis
Prudential Securities'
Steven DeSanctis
Scudder's Latin
America Fund's
Paul Rogers
Choice Long-
Short Fund's
Patrick Adams
Williams Capital's
Michael Paisan
Benjamin Mark Cole, author of The Pied Pipers of Wall Street: How Analysts Sell You Down the River and a columnist for the Los Angeles Business Journal, maintains there are no unbiased analysts on Wall Street because, even if an analyst's firm has not done any underwriting for a company, there is always the possibility it might.

Cole believes investors should instead rely on stock analysis from neutral sources, such as Standard & Poor's and Value Line, and also do some sleuthing of their own.

TSC: In your book, you say that brokerage analysts are expected to partner with their investment banking departments. Why is that happening today and why didn't it happen in the past?

Cole: The signal change came in 1975 when trading commissions were deregulated. Prior to this time, it cost an awful lot of money to buy stocks. If you bought $10,000 worth of stocks, you paid several hundred dollars in commissions to your stockbroker. Wall Street profited on these regulated trading commissions. As antique an idea as it sounds, this is how Wall Street made its profits. And in those days, since investment banks couldn't attract retail or institutional business through lower rates, analysts were expected to pick good stocks for them to give investors a reason to trade through them.

In 1975, Wall Street realized that due to technological changes, they couldn't keep this Shangri-la and rates were deregulated. When the discount brokers like Charles Schwab started to emerge, rates started to go down. Suddenly, with trading really becoming a commodity, Wall Street didn't know how to make money.

Investment bankers have now become the new profit center. They're the guys who do the initial public offerings ipo of stock, secondary public offerings and bond offerings. So, the analysts, who before had tried to help the individual retail investor, are now aiding the investment-banking department because that's where they make their money.

If an investment bank does an initial public offering of a dubious stock, what is the analyst going to do? Is he going to say this stock's no good and destroy the profit-making ability of his own brokerage?

The analysts have become part of the marketing and investment-banking departments because the investment-banking department is the big profit center for all of these brokerages.

TSC: But not all analysts work for firms that have done underwriting business for the stocks they cover. How can an individual investor determine whether an analyst's firm has done any investment banking or underwriting for a company and may, therefore, be impartial? And are there any analysts you admire?

Cole: I would say there are no impartial analysts, and no, there are no analysts who work for brokerages that I admire. Their job has become that of lawyers. They are not the judge in the courtroom, they are the lawyers in the courtroom. And the lawyers' job is to put forward the best case on behalf of their client. Whenever you hear an analyst speak, consider him a lawyer on behalf of his client. They may be telling the truth, but it may not be the whole truth.

Even if a brokerage has not done any underwriting business for a company, they almost certainly have large institutional clients who have invested billions of dollars in a stock they cover, and having an analyst put out a negative report on that stock is a concern. Commercial banks now own brokerages, so commercial banking relationships could also be threatened if an analyst puts out a sell signal. And investment banks are always hoping for investment-banking underwriting or bond-underwriting business. There are even more conflicts that go on.

TSC: Are there any other resources investors can turn to, then, to find accurate and helpful investment information?

Cole: Yes, there are a number of places investors can go for research that is not compromised, in my opinion, and I outline a number of these in the chapter, "The Good Guys." Standard & Poor's www.personalwealth.com [now a part of BusinessWeek.com] has an excellent crew of analysts who do not do any underwriting business, so their analysts are largely impartial about how companies should be rated. I also like RedChip.com. And good old Value Line is not half bad. They have a good track record. Hulbert's Financial Digest is a newsletter that rates other financial newsletters. It also goes without saying that you should get a subscription to The Wall Street Journal.

TheStreet.com is another good source. More important than your individual stock analysis is the attitude of skepticism that you can pick up from the site. In the book, I even mention [TheStreet.com's columnist] Herb Greenberg for being one of the few people who tore into new Internet issuers as being pump and dumpers. As hard as it is to believe today, that kind of writing was hard to find in the midst of the Internet bubble.

I would also recommend that investors do their own research. All the company filings are available at www.sec.gov.

TSC: Why is it that analysts so rarely make sell recommendations?

Cole: Their role is to sell stock and to help their large institutional clients. Less than 1% of their recommendations are sell recommendations. It's proof to me that their role on the Street is to help the investment-banking department. In fact, an abundance of industry and academic data show that if you follow analysts' recommendations, you will underperform the market.

TheStreet.com has a revenue-sharing relationship with Amazon.com under which it receives a portion of the revenue from Amazon purchases by customers directed there from TheStreet.com.

Select the service that is right for you!

COMPARE ALL SERVICES
Action Alerts PLUS
Try it NOW

Jim Cramer and Stephanie Link actively manage a real portfolio and reveal their money management tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
  • Weekly roundups
TheStreet Quant Ratings
Try it NOW
Only $49.95/yr

Access the tool that DOMINATES the Russell 2000 and the S&P 500.

Product Features:
  • Buy, hold, or sell recommendations for over 4,300 stocks
  • Unlimited research reports on your favorite stocks
  • A custom stock screener
  • Upgrade/downgrade alerts
Stocks Under $10
Try it NOW

David Peltier, uncovers low dollar stocks with extraordinary upside potential that are flying under Wall Street's radar.

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
  • Weekly roundups
Dividend Stock Advisor
Try it NOW

Jim Cramer's protege, David Peltier, identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.

Product Features:
  • Diversified model portfolio of dividend stocks
  • Alerts when market news affect the portfolio
  • Bi-weekly updates with exact steps to take - BUY, HOLD, SELL
Real Money Pro
Try it NOW

All of Real Money, plus 15 more of Wall Street's sharpest minds delivering actionable trading ideas, a comprehensive look at the market, and fundamental and technical analysis.

Product Features:
  • Real Money + Doug Kass Plus 15 more Wall Street Pros
  • Intraday commentary & news
  • Ultra-actionable trading ideas
Options Profits
Try it NOW

Our options trading pros provide daily market commentary and over 100 monthly option trading ideas and strategies to help you become a well-seasoned trader.

Product Features:
  • 100+ monthly options trading ideas
  • Actionable options commentary & news
  • Real-time trading community
  • Options TV
To begin commenting right away, you can log in below using your Disqus, Facebook, Twitter, OpenID or Yahoo login credentials. Alternatively, you can post a comment as a "guest" just by entering an email address. Your use of the commenting tool is subject to multiple terms of service/use and privacy policies - see here for more details.
DOW 16,501.65 -12.72 -0.08%
S&P 500 1,875.39 -4.16 -0.22%
NASDAQ 4,126.9670 -34.4910 -0.83%

Brokerage Partners

Rates from Bankrate.com

  • Mortgage
  • Credit Cards
  • Auto
Advertising Partners

Free Newsletters from TheStreet

My Subscriptions:

After the Bell

Before the Bell

Booyah! Newsletter

Midday Bell

TheStreet Top 10 Stories

Winners & Losers

Register for Newsletters
Top Rated Stocks Top Rated Funds Top Rated ETFs