1. Brokerage firm analysts research industries and companies to market their views to institutional investors, not individual investors or portfolio managers. 2. Analysts focus on a limited number of companies within a sector to thoroughly track them and assess how internal and external factors will impact them. 3. Analysts must rate companies as buys, sells, or somewhere in between and communicate their assessments to various audiences including institutional clients and the media.

1. It is important to first understand the function of a
securities analyst at a brokerage firm. Brokerage firms are
Wall Street investment banking firms on the sell
side, "selling" investment securities primarily to
institutional investors.

2. Unlike a stock analyst at a mutual fund, bank, or
investment management firm, research analysts at a
brokerage firm do not cater their research to portfolio
managers. Their job is to research a particular industry
sector and "sell" their research to the brokerage's
institutional clients.

3. Analysts narrow their focus on a limited number of
companies to track them as thoroughly as possible. They
want to be knowledgeable about as many details as
possible so they can best assess how both internal and
external factors will impact the company.

4. Having assessed the industry and an individual company's
outlook, analysts must then conclude if the company's
stocks are desirable investments (a Buy rating), have a
high probability of devaluation (a Sell rating) or rate them
somewhere between, and summarize their conclusions in
a research report. All of the companies an analyst tracks
must be observed and scrutinized continually, and the
assessments communicated to various
audiences, including: the brokerage firm's institutional
investor clients, the in-house sales force and traders on
the desk, and outside media sources.

5. Brokerage research analysts do not deal with individual
investors or their financial consultants. Rather, they are
marketing their views to institutional investors.

6. The sales force at the brokerage firm caters first and
foremost to institutional clients--mutual funds, hedge
funds, pension funds, banks, and others. The sales force is
continually relaying their analysts' research to these firms.

7. While research analysts are required to assign ratings such
as "Buy" or "Sell" to investments, institutional investors
do not stress these ratings so much as an analyst's
industry knowledge. In fact, the analysts that were ranked
highest in an Institutional Investor (II) magazine poll had
some of the worst stock picks.

8. While brokerage analysts typically excel at providing
thorough and analytical research about an industry and its
companies, their record of rating stocks accurately is
mediocre at best. This is because perceptive analysis and
an astute understanding of companies and industries have
little influence over an analyst's investment
recommendations.

9. The Wall Street system encourages this trend for five
primary reasons:

10. 1. Analyst Compensation. Analysts are compensated for
their status on the Street, their access to CEOs, their
profile and clout, and depth of knowledge as opposed to
the accuracy of their investment ratings. Salaries depend
on institutional client polls (e.g. the annual II
rankings), their overall influence on the
Street, institutional sales and trading evaluations, and
generally subjective assessments by research department
management.

11. There are no quantitative performance measurements.
Author Stephen T. McClellan of the book "Full of Bull"
goes so far as to say to "discount any flamboyant opinion
upgrades from April to June" because the timing is
suspiciously during when II votes are being angled for.

12. Consider that in 2006 the mean compensation for an II
ranked analyst was $1.4 million versus $590,000 for un-
ranked senior analysts. These kinds of incentives tarnish
what should be more objective research.

13. 2. Analyst Pressures. Analysts are risk averse to being
wrong so they are typically late to change ratings.
Brokerage analysts are often harshly critiqued so their
reasons for choosing to downgrade a stock from a Hold to
a Sell must be nearly unquestionable.

14. Most choose to ignore negative changes in a company for
too long so that by the time the evidence is
undeniable, most of a stock's losses have already
happened. For instance, only after Lehman Brothers' stock
fell from $80 per share to $7 did the three largest firms on
Wall Street finally downgrade their ratings.

15. Additionally, brokerage firms realize that a shift of opinion
from Hold to Sell will compel only a small portion of stock
owners to sell the stock, thereby creating a commission
for the firm. On the other hand, an upgrade to a Buy
opinion is more easily marketed to all the firm's investors
and will generate vastly more transactions and
commissions.

16. Analysts are therefore incentivized to rate stocks higher
than they otherwise might. Consequently, it is virtually
impossible to understand how enthusiastic or skeptical an
analyst truly is simply from their published ratings.

17. A rating of Underperform could mean either the analyst
suspects the stock will fall within a year or that it will not
appreciate as much as its competitors with higher ratings.
Conversely, a Hold rating could imply either that the
analyst is leaning toward an upgrade to Buy but does not
yet have enough evidence or that company's outlook is
poor, but they fear upsetting interested parties by
downgrading to a Sell.

18. 3. The Street's Short Term Bias. Wall Street favors stocks
that are rising now, not those that require patience to see
significant upside. Just as downgrades are typically late, so
too are upgrades to Buy.

19. Quarterly earnings reports are the Street's "paramount
milestone." They carry considerable influence over stock
valuation and are analyzed critically. Institutions are
"trapped on the treadmill of quarterly performance
evaluations" with very short investment time horizons.

20. Individual investors must recognize that analysts are
writing for an audience of traders not investors. Analysts
are torn between looking at long-term indicators such as
earnings estimates or price targets, and the demands of
institutional players such as mutual funds who measure
performance quarterly and use those figures to compare
themselves to the competition.

21. Consequently, analyst recommendations usually reflect
how the stock might perform in a one to five month time
span, not one to two years. Lastly, analysts are forced to
make quick calls rather than quality ones. Once they have
chosen a position, it is more likely they will stick with it
even if later evidence suggests something else.

22. 4. The Street's Positive Bias. This positive bias is analogous
to the auto industry. Regardless of the market, auto
dealers have a vested interest to always say "buy."

23. Similarly, Wall Street has a distorted number of Buy or
Hold recommendations. Wall Street does not want to
suggest capital preservation or any timely retreat from the
market. Even in a deep bear market, brokerage firms need
to convince investors to keep buying stocks.

24. 5. The Street's Big Companies Bias. A final bias is toward
big companies/stocks with the greatest market
capitalization. These securities are traded most
frequently, held most extensively, and have the greatest
institutional investor interest.

25. This also means that large companies tend to be
excessively analyzed and reported on. The most
researched sectors include
technology, telecommunications, and healthcare because
research departments place the most analysts where the
most trading business is done, not necessarily where the
best investment opportunities lie.

26. Unlike the individual investor, mutual funds and other
institutions must purchase substantial volumes of stocks.
Because these are a brokerage firm's key target
audience, there is not a sizable enough financial payoff for
analysts to recommend smaller stocks.

27. Given these factors that can distort brokerage analyst's
stock recommendations, individual investors must
understand that most ratings cannot be taken as literal
advice for a personal portfolio. There is some value in the
Street's securities research for the individual
investor, however.

28. First, research reports are excellent for providing
background understanding and the essential business
metrics of companies and industries. Figures such as the
earnings outlook and profit forecasts are examined as are
the business'
operations, management, market, competition, potential
challenges, and financial stability.

29. Secondly, if investors listen in on companies' public
conference calls, they can be attuned to analysts'
questions and executive responses. Analysts have a
greater awareness of a company's culture, goals, and
management style, sometimes having direct access to
CEOs.

30. Having more information than those outside of Wall
Street, analysts can ask more pointed questions on
conference calls and hint at critical issues or what the
company may be attempting to cover up. Finally, analysts
can offer detached, unemotional observations about how
certain events might influence the company's future.

31. Wall Street may act as though it is fit to offer investment
advice to individuals, but that is not what it is structured
to do. The Street is structured to "trade
securities, perform securities transactions, distribute and
sell securities as a dealer, and do corporate finance deals.

32. Wall Street is not suited to be an investment
manager, financial advisor, or stock selector. These
services are a conflict of interest with the bedrock
brokerage and banking functions."

33. With a better understanding of how research on Wall
Street operates, individual investors can employ the
following tips for a better investment strategy:

34. * Look for stocks that are not currently being pushed by
analysts or widely recommended, but still show promise
and sound financials. Analyst upgrades to Hold are often a
good signal to Buy. Any opinion change that involves a
downgrade should be read as a literal Sell
recommendation.

35. * Make an early investment in healthy and promising
smaller companies not yet over-covered by Wall Street.
Small stocks offer individual investors the best
opportunity for future upside.

36. * Because Wall Street is subject to a short-term bias, the
best prospects for individual investors involve looking at
long-term value versus quarterly performance. Individuals
are not judged on a quarterly basis like institutional
investors, giving them the potential to realize more
substantial gains over the course of two to three years.

37. * Take note of a "lone wolf analyst," one who is willing to
singularly downgrade their stance. Analysts often mirror
each others' opinions and it takes courage for one to be
honest about a negative stance.

38. * Note an analyst's level of experience. Younger analysts
do not have the same relationships with executives or the
seasoned perspective that senior ones do. Look for at least
ten years of experience.

39. * Conference calls offer individual investors the closest to
an inside look at a company as they can find. It is helpful
to be attuned not only to what is said but to the tone of
the call and what is left to be read between the lines.
Notice what types of questions analysts are asking the
executive.

40. * Take advantage of being an individual investor who does
not have the biases and distractions that analysts on the
Street have. Take the time to be like a research analyst
independently, listening in on conference calls, reviewing
earnings models and examining companies' financials.

41. http://marketing.tyrone55.ws/?p=13