Is Wall Street Full of Bull?

Is Wall Street ‘Full of Bull’?
A well-respected analyst for 32 years, Stephen McClellan describes how analysts’ advice is biased and misleading for individual investors
Book review by Ben Steverman

SmartStops comment: This article is a Business Week magazine review of Stephen McClellans brilliant new book Full of Bull. Be sure to read this informative and well written review which will help you understand why being a self-directed investor can be a big advantage. You will also appreciate how SmartStops helps you to time your selling and protect your capital while the highly paid Wall Street analysts can’t seem to help you at all. Your comments about the article and the book are welcome. Post them here on our Blog.

Excerpts: “ In his new book, Full of Bull: Do What Wall Street Does, Not What It Says, to Make Money in the Market (FT Press, 2007, $22.99), McClellan, admits that price targets are "fiction," and buy/sell/hold ratings aren't taken seriously by professional investors. Analysts spend perhaps only 20% of their time on research and the rest on marketing and other tasks, he says. They create sophisticated computer programs to track a company's earnings, revenue, and cash flow in close detail. But the results are "not accurate at all," he says. In fact, analysts often miss big trends and have a terrible record as stock pickers.
Research isn't written for retail investors, but for institutions. Those institutions, including mutual funds and hedge funds, have far too much influence over an analyst's research, McClellan says. Companies and executives are also too good at manipulating analysts.
Even more blatant biases were exposed as part of the 2002-03 investigation by the New York State Attorney General and securities regulators, which led to the Global Settlement of Conflicts of Interest Between Research & Investment Banking that required 10 of the nation's top investment banks to pay $1.4 billion in penalties and restitution to harmed investors, including money for investor education and independent research.”

Link to article:

No Sign of Sell on Wall Street

No Sign of `Sell' on Wall Street as Analysts Say: `Buy,' `Hold'
By Yalman Onaran and Christine Harper

SmartStops comment: Every self-directed investor needs to understand that research analysts are reluctant to ever publish an outright “sell” recommendation. To do so would risk alienating the corporate executives that provide the data and insight that good analysts need for their research. The hedge funds and institutions speak the same language as the analysts and know that in most cases a downgrade to “hold” really means “sell”.

Excerpt: Anybody who followed the advice of Wall Street's top-ranked analysts, none of whom would say ``sell'' for a single company in the securities industry this year, is reckoning with subprime-like losses.
Research analysts were unreliable guides during the collapse of the subprime mortgage market. They failed to foresee about $66 billion of writedowns that led to the unprecedented departures of CEOs from Zurich-based UBS and New York-based Merrill and Citigroup in less than six months.
Only 7 percent of analysts' recommendations have been sell this year, down from 11 percent in 2003, data compiled by Bloomberg show.

Link to full article: