“I still wasn’t convinced, until Bob whispered in my ear what I would make in the first year. It was about three times what I was paid at Bell Labs. I stopped protesting so loudly. He then said “And that’s for being right just 51% of the time,” Andy Kessler recounts in his book, Wall Street Meat – My Narrow Escape from the Stock Market Grinder. Kessler was a rank outsider on Wall Street, having come in as a semi-conductor analyst.
Now, what exactly is the role a stock analyst fulfils? At a very basic level, an analyst is supposed to have an opinion on the stock that helps investors make a decision whether to invest in that particular stock. But it is not as simple as that.
“Companies report earnings once a quarter. But stocks trade about 250 days a year. Something has to make them move up or down the other 246 days. Analysts fill that role. They recommend stocks, change recommendations, change earnings estimates, pound the table – whatever it takes for a sales force to go out with a story so someone will trade with the firm and generate commissions,” writes Kessler.
And what does it take to become an analyst on the Wall Street? “Let’s start with the basics. First, there are absolutely no qualifications whatsoever for an analyst job. I’ve always thought that a monkey could do the job, and many do. There are very few analyst training programs, and no obvious way to get a job as an analyst. Most are in the job by accident, as I certainly can attest to.” he writes.
Over time, Kessler was able to form an opinion on analysts in the business. “By watching other analysts in action, I figured out there were three types of analysts. There are: 1) those who know somebody in their industry, 2) those who know their industry and 3) those who don’t know anybody or anything. Lots of analysts had industry contacts – perhaps CEOs who they were buddies with or someone in the CFO’s office who was feeding them information.”
So, how do analysts who really do not know their industry survive? As Kessler writes “Though I was starting to be right on my stocks, I was increasingly convinced it didn’t matter. I looked around the research department, and noticed that very few analysts were right about anything. The job of an analyst has more to do with impressing everyone they come in contact with, and less to do with stocks. At one meeting I had with Fred Kittler, a portfolio manger at JP Morgan, he paused, looked me in the eye and said, “You realise, you are not in the analysis business, you are in the entertainment business.”