Thursday, April 05, 2007

Analyst cat has ten lives....!

In an era of increasing corporate governance, SEBI with a lot more teeth to bite and disclosures by corporates coming in real time, how relevant are analysts in today’s world ? Each day as I watch business channels, they don’t give me any new insights. I don’t get any new stock ideas except the one that I’d already been fed with by other forms of online and offline media including the daily pink sheets and news portals.

The availability of free analytical tools and financial data on the Internet is a catalyst for the democratization of security analysis, and as traditional consumers of sell-side analysis learn how to do it themselves, the demand for commercially produced research decreases. The basics aren't rocket science. Most people are reasonably capable of learning them. (My friendly lassiwala knows a thing or two about bonus, dividend and stock splits – and for the rest he checks up with his savvy customers while he makes the drink for them) In this respect, sell-side analysis adds value for lazy people, but there are no real barriers to entry for people that want to learn how to do it. That's not to say that all of finance is like that, but if you want to know when to buy or sell your stock on a fundamental basis, you can easily learn to do it yourself.

Today, management isn't allowed to tell a sell-side analyst anything they haven't already told the public. You, theoretically have access to the same information as the analyst. A sell-side analyst can't give me any material information about the company that I can't, with a little effort, get myself. If sell-side analysis was considered "marketing" before, it's even more the case now.

Essentially, if you have some free time and know how to trade online after analyzing the results comparison sheet of BSE / NSE and keep a casual watch on the price movements, in about a few days you’d realize the professional analyst makes the same mistakes as you do. After all, not for nothing that random theory still holds good.

The difference could just be that he had spent a million bucks at Wharton / Harvard or from an IIM, to make it with a straight face for his clients on scales you would never imagine.
Still it's not time to sing requiem for the analyst, I guess.

Soon it would be worth their while for big brokerages and fund houses to move their Sell side analysts to trading desk and call them "desk analysts". No, they don't do housekeeping, but they can call clients and flog analysis. If they are not already at it. Why do it? That way, it is making the change to better service its best clients. Unlike normal analysts, these desk analysts can give on-the-fly recs, don't publish research, and aren't bound by any new SEBI dislosure regulations affecting research. While a cynic would call this a way to end-run regulation, I think it’s an overdue change.

Joseph Weisenthal suggests a better way for Sell-siders to escape extinction – become an outsourced Buy-siders. This is how it works. Buy-siders frequently get their sell side lap dogs to do a lot of work for them, especially if they have a favoured client. What makes this outsourcing especially appealing is the fact that it is a cost which is covertly passed on to the fund's clients. Using a "full service" broker means that a fund is accepting higher trading costs in order to get these "value-added services" for their clients. But of course the clients are the ones who pay for these services. Full blog post here.

Let's stop pretending that equity analysts can operate in a some rarified world separate from how their income is generated (i.e., trading). As Paul Kedrosky says - Analysts are salespeople. Always have been, always will be.

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Blogger Diogenes said...

There is no "real" analysis on the sell side. Many money managers need an investment process - euphemism for analyst/ third party reports. Thus the analysts have a role to play in the "Cover Your Ass" game. If clients can trade directly, sell side houses wil never be needed.Agree with you that Sell Side will forever reamin marketing and selling machines. The sell side kind of fundamentals are just excuses given to make suckers buy stocks.

2:17 AM  

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