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Is anybody else getting 3 to 6 copies of every email? Here we go again.
Norman E.
JW wrote:
>
> FYI...
>
> JW
>
> -----Original Message-----
> Tomments and Tommentary - April 19, 2000 (part 1 of 3)
>
> This email is a special supplement being delivered free to
> InvestorGuide
> Weekly readers. The comments below come directly from Tom
> Murcko, CEO of
> InvestorGuide.com (hence the name "Tomments and
> Tommentary"). Assuming you
> find them valuable, I'll put together more of them in the
> future, but only
> when I have something important to say that no one else
> seems to be saying.
> If you'd like to discuss what you read here with other
> investors (and me),
> please feel free to post your thoughts at
> http://www.investorville.com/ubb/Forum39/HTML/000002.html
>
> Someone tells you to buy a certain stock. Do you? Obviously,
> that depends on
> who is doing the recommending. But how do you decide who's
> worth listening
> to? Do you have any idea who tends to be right the most
> often, out of the
> sea of analysts, brokerage houses, newsletters, mutual fund
> managers,
> magazines, TV commentators and people you meet on the
> street? Probably not.
> But the internet will change that, revolutionizing stock
> picking by making
> it a meritocracy. And it's already starting to happen.
>
> The internet has increased the need for stock picking
> accountability, for
> two important reasons. First, the internet has created
> opportunities for
> commentators of all shapes and sizes to voice their
> opinions. With the
> increase in the number of stock pickers comes an increase in
> the importance
> of being able to differentiate between the good and the bad.
> Second, the
> internet is contributing to the popularization of stock
> picking.
> Conversations at your coffee shop are just as likely to be
> about favorite
> stocks as favorite sports teams, a very recent development
> that the internet
> has accelerated by enabling individuals to do their own
> stock research. With
> an increase in the number of people looking for stock
> recommendations comes
> an increase in the importance of being able to differentiate
> between the
> good and the bad.
>
> Everyone's rating stocks, but who's rating the raters? Until
> recently, the
> answer has been: virtually no one. Fortunately, while the
> internet is making
> stock picking accountability more important, it's also
> making it more
> feasible. A new breed of upstarts are using the internet to
> bring order to
> the chaotic world of stock recommendations. In this
> three-part essay, I will
> review each major category of stock picker, summarize that
> category's
> current level of accountability, its performance, and why
> that performance
> is suboptimal. I will also describe the web sites that are
> working to bring
> accountability to the area and how much success I expect
> them to have.
>
> - - - Analysts - - -
>
> Current Level of Accountability:
>
> Low. Who are the best analysts? You probably don't know, and
> neither do I.
> Magazines and newspapers occasionally publish rankings of
> the best analysts,
> but the lists are usually based more on reputation (deserved
> or undeserved)
> than on results. There is some accountability, in that you
> can record what a
> given analyst said and check back later to see whether they
> were right.
> Unfortunately, analysts don't make predictions that are
> specific enough to
> examine later for accuracy. Every brokerage has its own
> buy/sell/hold
> terminology, comprising in total more than 40 different
> terms (if you don't
> believe me, check out
> http://biz.yahoo.com/f/bc.html#ratings). This is done
> primarily in order to make comparisons between brokerages
> very difficult.
> What's worse, the terms don't mean what they appear to mean:
> "hold" sounds
> like a positive term, but is actually quite negative. To
> their credit, many
> brokerages include price targets in their recommendations,
> but they rarely
> specify the date on which they expect the target to be met.
> In an extended
> bull market such as they one we've been experiencing (at
> least until last
> week), it's very easy to set a price target 15-20% above the
> current price
> and just wait for the stock to creep up to meet the target.
> Although a few
> brokers make explicit performance predictions for each of
> their ratings (for
> example, Wit Capital's are at
> http://www.witcapital.com/research/undrstnd_ratings.jsp),
> these are in the
> minority.
>
> Performance:
>
> Due to the ambiguity of analyst predictions described above,
> I can't
> quantify aggregate analyst performance, but I can cite a few
> recent
> examples:
> - None of the 38 analysts covering Lucent notified their
> clients that the
> company's inventories and receivables were skyrocketing
> prior to the stock's
> 35% drop in January.
> - B2B portal VerticalNet hit an all-time high of 148 on
> March 7. That day,
> JC Bradford initiated coverage with a buy rating. The stock
> has lost three
> quarters of its value since then and now trades in the high
> 30s.
> - Three analysts maintained "buy" ratings on Iridium even as
> it lost 95% of
> its share value and went into bankruptcy.
> - Rite Aid, amid yet another reorganization, a cash crunch,
> and accusations
> of racketeering from the State of Florida, was rated by 11
> out of 12
> covering analysts as "hold" or better; the remaining analyst
> rated it a
> "moderate sell".
> - DrKoop.com has fallen more than 90% and is rapidly running
> out of money,
> but three of the five analysts who cover the stock have
> recommended it
> throughout its descent.
> Please note that this list is by no means exhaustive. I
> could have made it
> much longer, but I think these five representative examples
> will suffice.
>
> Analyst recommendations usually arrive too late to be
> useful. When bad news
> is revealed, analysts downgrade the stock. Good news,
> analysts upgrade. But
> the stock has already moved. Nevertheless, since
> accountability is low, this
> technique of recommending works to the analyst's advantage,
> since anyone who
> later checks what the analyst says about various stocks will
> see that the
> analyst has said good things about stocks which are doing
> well and bad
> things about stocks which aren't. Without exact tracking,
> it's hard to
> separate cause and effect.
>
> To those of you who use a full-service broker: have they
> ever given you at
> the end of the year a graphical report of when their
> analysts made
> recommendations and revisions and what happened to those
> stocks afterwards?
> If you're using a full-service broker instead of an online
> broker, it's
> probably because you feel the information and
> recommendations they give you
> justify the extra cost, but you deserve to know exactly how
> much those
> recommendations are worth to you. It would be extremely easy
> for them to
> provide this information, but doing so would probably show
> you that they
> generally downgrade only after the bad news has already been
> factored into
> the stock price, and they hop on board the hot stocks only
> after they've
> already experienced significant run-ups. In fact, some smart
> investors
> actually use analyst revisions as a contrary or a lagging
> indicator. If you
> do ask your full-service broker for such a report, request
> that they
> calculate the performance starting the day after (and not
> the day of) the
> recommendation, since the recommendation itself often moves
> the stock price.
>
> In addition to making stock recommendations, analysts also
> enjoy predicting
> upcoming earnings numbers. But they have proven to be so
> consistently
> inaccurate that investors and commentators have started
> paying less
> attention to them, and more attention to 'whisper numbers',
> available at
> sites such as EarningsWhispers.com and WhisperNumber.com. In
> fact, if you
> watch closely, you'll find that when a company announces
> earnings, the stock
> price tends to move based on how the actual numbers differ
> from the whisper
> numbers, rather than how they differ from the consensus
> analyst numbers.
>
> Explanation for Performance:
>
> Why is their performance worse than you might expect? Some
> of it could be
> blamed on a lack of skill, but the more reasonable
> explanation is conflicts
> of interest. Analysts are the primary way that a public
> company draws
> attention to its stock. Positive attention helps the stock
> go up, negative
> attention drives it down. So analysts have something of
> value that companies
> want: power. Similarly, companies have something that
> analysts want:
> underwriting business. Secondary stock offerings and bond
> offerings generate
> big bucks for underwriters, so there is a compelling
> opportunity for mutual
> back-scratching, at the expense of the investor who naively
> believes that
> the analyst is an objective source of information.
> Additionally, analysts
> who don't give a positive rating to a company will often
> find it difficult
> for them to get information from that company and to get in
> on its
> conference calls. Jeffrey Hooke, author of Security Analysis
> on Wall Street,
> says: "If an analyst gives a negative report on a company,
> he might be more
> candid than others, but he'll get cut off from information.
> If he did that
> to multiple companies, he'd be unemployed." The result is
> that "buy" ratings
> are common and "sell" ratings are rare. In fact, buy ratings
> became so
> common that investment banks started using "strong buy" to
> try to
> differentiate the real winners, and now "buy" actually
> sometimes has a
> negative connotation. And among the top Wall Street firms,
> less than 1% of
> all analyst recommendations are "sell" or its equivalent.
> The exceptions to
> this conflict of interest problem are the analysts who work
> for independent
> research companies, like Soundview Technology Group... oh
> wait, they were
> just acquired by Wit Capital. From Jeffrey Hooke: "Any
> analyst whose firm
> does major investment banking work--and nearly all of them
> do--is suspect. I
> don't know why the SEC doesn't ask these firms to spin off
> their research
> operations."
>
> As described in the section above, analysts' earnings
> estimates tend to be
> predictably inaccurate. Why is this so? Most analysts have a
> herd mentality.
> No analyst wants to be the only one who was wrong, but if
> all analysts are
> wrong in the same way it won't seem like their fault;
> rather, the essential
> information causing the discrepancy simply must not have
> been available. If
> all analysts are wrong in the same way, they won't all lose
> their jobs. But
> if one analyst goes out on a limb with a bold prediction
> that turns out to
> be wrong, his/her career could be jeopardized. So they all
> watch what
> numbers each other publishes and they try to stay in the
> middle of the pack.
> Because of this, it takes time for the herd to move in
> response to new
> information, and so the average expectations lag behind the
> latest news.
> Additionally, analysts often publish lowball earnings
> estimates that they
> are confident the company will have no trouble exceeding (so
> that when the
> company does report better than 'expected' numbers, the
> stock can get a
> boost). The rationale is the same as for giving a strong buy
> recommendation
> for a less-than-stellar company: the analyst is providing
> the company with
> something of value, in the hope of future reciprocation.
>
> I should point out that as with most rules, there are
> exceptions. Some
> analysts do provide valuable recommendations and good
> earnings estimates,
> and some analysts do not cave in to conflicts of interest.
> If you rely on an
> analyst for advice and/or stock picks and are confident that
> you're getting
> your money's worth, then by all means I encourage you to
> stick with them.
> The important point is that without a sufficient level of
> accountability
> it's very difficult and time-consuming to determine which
> analysts are
> earning their keep.
>
> Sites Working to Improve Things:
>
> There are a few sites working to bring accountability to
> analysts'
> recommendations. The most notable of them is BigTipper.com.
> This site
> aggregates analysts' price targets and tip sheets, and then
> reveals their
> track records. Choose from among the hundreds of analysts
> and see a list of
> stocks they recommended, when the recommendation was made,
> and what the
> stock has done since then. This isn't completely scientific:
> it weights all
> picks equally rather than giving extra weight to the
> analyst's top picks,
> and it doesn't enable analysts to later sell positions when
> the outlook
> changes. However, these enhancements would require
> additional input from the
> analysts, so the current system is probably the best that
> can be done under
> the circumstances.
>
> Additionally, several sites and magazines occasionally
> invite a group of
> analysts to participate in a stock picking competition. The
> best example is
> MSN MoneyCentral's Strategy Lab
> (http://moneycentral.msn.com/articles/invest/derby/derbsumm.
> asp?primer).
> Each analyst explains his/her strategy and manages a mock
> portfolio in
> accordance with that strategy. Transactions are recorded
> along with
> explanations for the trades, and performance is tracked to
> see how well each
> analyst is doing. I applaud these analysts for having the
> confidence to put
> their reputations on the line, and hope others will follow
> their lead.
>
> Also, some magazines and newspapers are adding to analyst
> accountability, by
> mentioning whether the analyst's firm does underwriting
> business for any of
> the companies mentioned in the article. This implicit
> acknowledgement of a
> potential conflict of interest alerts readers to take what
> the analyst says
> with a grain of salt. The practice isn't as common as it
> should be, but
> hopefully it will be soon.
>
> I expect that BigTipper.com will continue to grow in
> popularity, and that
> other sites will soon offer similar information, enabling
> more individual
> investors to gain access to analyst performance data. The
> benefits will be
> twofold: analysts will be more careful and less likely to be
> influenced by
> conflicts of interest, knowing that their recommendations
> are going on their
> 'permanent record' for all to see; and individual investors
> will be better
> able to differentiate between high-quality and low-quality
> analysts, and
> will be able to immediately know which ones are worth
> listening to.
>
> Coming Soon:
>
> Part two of this essay will be delivered next Wednesday, and
> will look at
> two more groups of stock pickers: mutual fund managers and
> columnists. We'll
> review their performance, provide reasons why it's worse
> than you may have
> thought, and describe some sites that are trying to bring
> increased
> accountability to these groups. The third and final part of
> this essay will
> be delivered the following Wednesday, and will look at
> individual stock
> pickers, and a new breed of sites that are hoping to prove
> that some
> individual investors can outperform the so-called experts.
> ____________________________________________________________
> _________
>
> Copyright 2000 by InvestorGuide.com. Please feel free to
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> does so at their
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> InvestorGuide.com) responsible. We are not responsible for
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> tent.htm
> ____________________________________________________________
> _________
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