by Vivek Kaul/ DNA Money
These analysts are a bunch of crooks and the worst type of crook is a crook that wears a suit and is interviewed on CNBC — Mitch Zacks in Ahead of the Market
Anjali Shah, an anchor with a leading business channel, had reached a stage in life where gradually her friends had been getting married. And this metrosexual Indian woman had started feeling the pangs of loneliness.
Today, she was meeting Rakesh Ahuja, a hot shot equity analyst she had met in a matrimonial site.
Equity analysts working for stock brokerage firms are supposed to write research reports which tell customers of the brokerage firm which stocks to buy and sell.
These reports usually carry a recommendation at the start — like buy, hold or sell. A buy recommendation means that, as per the analyst’s view, investors should buy that particular stock. A sell recommendation means exactly the opposite i.e., the investors should sell the stock. A hold recommendation means that investors should neither buy nor sell, but hold on to the stock that they have already accumulated.
The recommendation is the most widely used piece of information in an analyst’s report. As Mitch Zacks points out in his book, Ahead of the Market, “Not surprisingly, the recommendation is probably the most widely used piece of information in the analysts’ research reports, simply because it is, at face value, easy to understand and appears straight forward”.
During the course of anchoring, Anjali had realised that most of the equity analysts hardly issue sell recommendations.
But she had neither the time nor the inclination to find out.
They met at the appointed hour. And before Rakesh could say anything, Anjali sprang the question. “Why do you analysts hardly issue any sell recommendations on stocks?”
“The research reports that I and others of my ilk write are distributed by the brokerage firm to institutional investors like mutual funds, insurance companies, foreign institutional investors and individual investors. And any analyst worth his salt is bothered usually about the institutional investors and not individual investors. This is because the level of respect an analyst commands among institutional investors essentially decides what he earns,” replied Rakesh.
“But that does not answer my question”, said Anjali.
“First things first. If I issue a sell recommendation on a company, the company can limit my access to them. This can put me at a huge informational disadvantage vis- a-vis other analysts in the market. Then I really do not want to upset my main customers, the institutional investors, by issuing a sell recommendation. This is because a sell recommendation spreads like wild fire, with everybody wanting to sell out.
This can lead to the value of their portfolios falling dramatically. So, I put a stock on a hold recommendation, giving enough time to the institutional investors to get out and then I may or may not issue a sell recommendation. And, finally, the brokerage does not make money by my writing reports. They make money by selling shares. And these days, there are more investors looking to buy stocks than sell.
“As Mitch Zacks points in Ahead of the Market, ‘A buy recommendation has more value to a brokerage firm because it gets the brokers on the phone selling stocks to new clients and opening new accounts”,’ came a long and slightly irritated response from Rakesh.
The example is hypothetical