Investors'
Confidence Remains Shaken
By Andrew Leckey
Everyone
likes to feel protected, especially when it comes to family and
finances.
Unfortunately, turbulent
world events, especially those with the potential to hit close
to home, have shattered some of our national confidence.
We've also had to cope
with new financial vulnerability in the wake of continuing investment
scandals. The flamboyant U.S. investment scene of a couple of
years ago is now just memory, but we continue to pay dearly for
it.
Problems in the investment
industry go unnoticed when everyone's rejoicing over a rising
market, but a down market displays all warts. This sours investors
on the whole system, hindering economic recovery.
Consider the recent
case of Merrill Lynch & Co. agreeing to pay $100 million
and alter the way it monitors and pays its stock analysts. This
settled a New York state investigation that alleged analysts
gave small investors overly glowing stock reports about Merrill
Lynch investment banking clients while trashing those same stocks
in private e-mail messages to their colleagues.
New York Attorney General
Eliot Spitzer is now probing other firms with investment banking
operations to determine whether their research was tainted. For
example, he's investigating whether telecom analyst Jack Grubman
of Citigroup's Salomon Smith Barney received bonuses primarily
for being an important advisor to companies, rather than for
impartial analysis for investors.
Average investors want
honest, reliable recommendations, fully realizing that stock
investing is an inexact science that always carries some risk
with it.
"With a lot of
dirty laundry being hung out to dry, no matter what happens in
the short run a lot of people are very wary about listening to
analysts," said Kei Kianpoor, chief executive officer of
the Investars analyst performance tracking service in New York.
"Our own business model relies on there being good analysts
out there and our telling people where to look for them."
At Investars.com, which
has a $19 monthly subscription rate, the company constructs and
tracks hypothetical portfolios that follow the advice of the
analysts of brokerage firms and independent stock research firms
alike.
During the past 12
months, according to Investars, the following firms had the best
overall performance:
(1) Callard Asset Management,
up 8.21 percent; (2) A.G. Edwards, up 5.14 percent; (3) Ford
Investor Services, up 4.97 percent; (4) Alpha Equity Research,
up 3.56 percent; (5) Computrade Systems Inc., up 2.96 percent;
(6) Channel Trend Inc., up 1.52 percent; (7) Raymond James, up
1.49 percent; (8) Market Profile Theorems, up 1.08 percent; (9)
First Union, down 2 percent; (10) Merrill Lynch, down 2.19 percent;
(11) Morgan Stanley, down 2.48 percent; (12) Prudential, down
3.24 percent; (13) Salomon Smith Barney, down 3.89 percent; (14)
Deutsche Banc, down 4.59 percent; and (15) U.S. Bancorp Piper
Jaffray, down 5.13 percent.
Why are independent research firms outperforming?
"Independent analysts don't have conflicts of interest and a lot of them rely strictly on data, which means they don't fall prey to the charm of fancy lunches and the like," contends Kianpoor. "Because they cater to hedge funds and institutions that are likely to go short on a stock, they issue a lot more sell recommendations than investment banks do."
With investment banking fees few and far between, brokerage firms must refocus on retaining their retail customers with better service and quality research, Kianpoor asserted.
"Besides conflict of interest, there's the question of competence of analysts, as far as what they know and how good they are at what they do," said John Markese, president of the 180,000-member American Association of Individual Investors in Chicago. "Everything is moving in the direction of making analysts completely independent and separate from investment banking functions, but I don't know that they've gotten to the point where they're completely unbiased."
Even if a "wall" is built between investment banking and analysts, they'll be aware when their firm is bringing out an initial public offering, Markese pointed out. They may decide to initiate coverage of that IPO and be unwilling to write a negative analysis.
A number of firms with no investment banking ties provide stock reports, all requiring subscription fees.
Besides some of those previously listed, these include Argus Research, which covers 350 companies; Value Line, 1,700 companies; Morningstar, 1,000 companies; Gartner Dataquest, 200 companies; Red Chip Review, 150 companies; and Jaywalk, which sells research from 15 independent research firms.
"Investor confidence has been shaken by auditing failures, conflicts of interest by analysts and the sell-off in the market since the spring of 2000," acknowledged Marc Beauchamp, executive director of the North American Securities Administrators Association, organization of state securities regulators in Washington, DC. "Nonetheless, Americans continue to put money into the stock market."
Most are investing the "right" way, Beauchamp believes, which means through 401(k) plans and individual retirement accounts. They're dollar cost averaging, which is a system of investing a set amount on a regular basis, and they're diversifying their holdings. In many cases, they use mutual funds to do that.
Editor's Note: Andrew Leckey's column, "Successful Investing" appears regularly in the Bull & Bear Financial Report.
