Shoddy Research Hampers Investors

BOSTON (TheStreet) -- If you own Apple (AAPL) stock, your investment is riding on the success of the upcoming iPad, the company's latest gadget after the iPod and iPhone.

Consider this yardstick: On March 12, estimated iPad pre-orders peaked at a rate of 25,000 an hour before a drop-off during the weekend to about 1,000 per hour.

"With three weeks and two weekends left before they ship, I wouldn't expect much more than half a million in pre-orders and reservations," Fortune magazine quoted someone who readers assumed was an expert. "My best guess would be that they hit the 1 million unit milestone by the second week after it ships."

That opinion, validated by what's considered among the best financial magazines in the world, came not from a well-known technology analyst or top research firm. It was offered by a Venezuelan blogger using the name of a hobbit as his alias.

None of that is meant to demean the methodology deployed by "Deagol," aka Daniel Tello, for the Web site Investor Village. But it bolsters a claim by MIT Sloan School of Management lecturer John DeTore regarding the state of investment research.

DeTore, a former research director at Putnam Investments and Wellington Management, is chief investment officer of the new Boston-based hedge fund Denver Alternatives. He's a critic of what he calls the "dismantling" of investment research. As he sees it, the quality of analysis has diminished so markedly in recent years, much of it's mined from non-traditional sources.

"Ten years ago, powerful research teams, both in investment firms and on Wall Street, had a deep understanding of the major public firms," DeTore says. "The result was 30- to 60-page research reports with major conclusions. Maybe you didn't like what the analysts said, but they were informed. Now, we're left with a bunch of bloggers who just want to know if you meet your quarter or not."

DeTore raised his concerns at a recent conference held by the Massachusetts Institute of Technology. Included on a panel were several CIOs, representing small- and large-cap companies.

He presented them with a scenario. There's a new strategic opportunity that will have a high return. Any skilled analyst would recognize that it adds shareholder value to plow money into this opportunity. How would you communicate this to the marketplace?

Fifteen years ago, the investment chiefs said, they would have been grilled by a research analyst, forced to explain the intended benefit and, if their message resonated, they could expect "buy" recommendations and a higher stock price.

Today?

"They would just say we missed the quarter and we would get 'sell' ratings."

The problem, in part, lies with the financial freefall that defined 2008 and led to the wholesale withdrawal of money from active fund managers. Many funds disappeared and, in turn, many research analysts were laid off.

DeTore says the shift has left the capital-allocation system in disarray.

"What if we are not being very good at identifying bad ideas and the capital isn't following the good ideas?'' he says. "When our market system functions well, it's through people buying and selling shares, taking capital from the weaker companies and giving it to the innovative ones."

DeTore says there's no shortage of young, bright and eager students hoping for a career in investment research. Firms just need to once again recognize the value.

"Those investment firms that have maintained their dedication to excellent fundamental research will have a real edge in today's markets," he says.

-- Reported by Joe Mont in Boston.

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