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The Pied Pipers of Wall Street: How Analysts Sell You Down the River Hardcover – May, 2001
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From Library Journal
Books like Mark Dempsey's Tricks of the Trade (LJ 1/98) have exposed the ways of brokers. In this new cautionary work, financial writer Cole focuses his attention on financial analysts, who are supposed to evaluate objectively the investment potential of securities. Cole contends that in the best of times analysts were never very successful in making predictions, but in recent years they have become shills for their investment banking departments. He further points out that the 1975 deregulation and consequential reduction of brokerage fees forced brokerages to make most of their money through investment banking. Analysts, while theoretically giving independent opinions, in reality now exist to help their firms' client companies to sell new stock and support their stock prices. Cole argues that this has led to almost incessant optimism among most analysts. His book is easily read, and his points would be useful for all investors to consider. Recommended for all public libraries and to academic libraries where there is interest. Lawrence R. Maxted, Gannon Univ., Erie, PA
Copyright 2001 Reed Business Information, Inc.
Any investor swept up by the swirling currents of today's financial media should read this book. -- Brad Hill, Author and writer, Raging Bull Trading Center
[A] provocative and lively read, reminding all that the pricing system can emit false signals. -- John Lonski, Credit Market Economist, Moody's Investors Service
an unbiased, honest, objective, fresh view of Wall Street research. -- Marshall B. Front, Chairman, Front, Barnett Associates, LLC
Top customer reviews
The book is fairly short. It tells the story of the transformation on Wall Street with regard to most brokerage house analysts since May 1, 1975, the day the SEC eliminated fixed commissions for stock brokers.
Here is the story. Prior to May 1, 1975 fixed commissions were HUGE. For example in 1972 a single trade of 100,000 shares of Northwest Industrial Preferred (at $98) generated a commission to the broker of $28,000. In June 2011 dollars that would be a COMMISSION of $155,655. And today Schwab would do the same trade for less than $10.
Prior to that "May Day" some securities firms were even "institutional research boutiques" that did extensive research in exchange for institutions' commissions.
After May Day, those firms lost the income stream necessary to survive. Many long established stock brockerages went out of business. Others merged( and then frequently merged again). Cole writes that "of the thirty largest securities firms in the country in 1971, only two have survived to this day with their names more or less intact -- Merrill Lynch (one of the early consolidators) and Bear Stearns." That was written in 2001 and Merrill had to be saved by B of A and Bear had to be saved by JP Morgan Chase, so zero of the top 30 firms survived intact.
Anyway these firms had to find a new source of income, and that ultimately became underwriting (IPO's, secondary offerings, bonds, etc). And analysts became promotors in the investment banking process.
Cole tells the story in an engaging way. I particularly liked Chapter 4 which has the "pump and dump" stories of both a Planet Hollywood IPO and a Playboy Enterprises secondary offering. You read this and wonder why people are notin jail or why the SEC is asleep.
Chapter One has a great story of drug industry securities analyst named Hemant K. Shah and his attempt to falsely discredit a company called Biovail for personal reasons. Chapter Two described the process mentioned above where analysts changed from "sleuths to salesmen" and the reasons why that happened. Chapter Three continues on that line and introduces Henry Blodget and Mary Meeker to the story. It also tells the story of Marvin Roffman who got fired by his company for writing an honest report on the Donald Trump Taj Mahal which went bankrupt a year later. Chapter Four explains why of the 33,169 "buy" "sell" and "hold" recommendations made by brokerage analysts in 1999 only 125 were pure sells. (This chapter also has the great Plant Hollywood and Playboy Enterprises) story and introduces Jack Grubman to greater story.) Chapter Five continues this theme with more shady characters and interesting stories. Chapter Six talks about Short Traders and explains why they are relatively so rare (and in this sense, I mean short traders who are not just hedging). This chapter introduces a very interesting short trader named Manuel Asensio. Chapter seven suggests some sources of honest stock analysis and Chapter eight has some thoughts on stock analyst regulation.
All in all an excellent book. Clearly written, and always interesting with great stories for illustration and excellent historical exposition. A must read for all Wall Street Investors.
Besides his sure-handed command of the subject matter, the author lends additional credibility to his book by steering clear of hyperbole and hyperventilation, instead letting his research and shocking case studies raise the decibel level. The book also offers sources of honest stock research and analysis that investors can trust, then concludes by outlining several regulatory strategies being contemplated by the U.S. Securities and Exchange Commission to remedy the problem.
All in all, "The Pied Pipers of Wall Street" is a great work of public service by a journalist who has held the stock houses up to the public humiliation they richly deserve while throwing a life raft to investors.
This book is a little late in arriving. Ten years ago few reporters and almost no individual investors understood that brokerage firm analysts got a lot of their income for bringing in investment banking business (IPOs, mergers, debt financings, and fair value opinions). Then Wall Street Journal reporter, John Dorfman, broke the story. In the old days, sell-side analysts were supposed to be ignorant of what was going on with investment bankers (the so-called Chinese wall) so that the analysts could write objective reports without being compromised by inside information. That Chinese wall doesn't really exist any more.
More than ten years ago, few institutional portfolio managers and buy-side analysts paid much attention to what sell-side analysts have to say. They pay even less attention now.
As the book points out, a sell-side analyst "is just a banker who writes reports." Those reports usually just regurgitate the latest line from the company.
Mr. Cole embroiders the consequences of this long-past fundamental shift with a history of how investment banking fees came to dominate the securities business relative to trading commissions, scam artists posing in different roles, underwritings of lousy companies that later failed, the nasty tricks of short sellers, and how institutional investors can make a few bucks from flipping IPOs.
Although all of the material is accurate, the book's other problem is that it views what is going on from the outside in, rather than the inside out. A lot of the mistakes that happen occur because everyone relies on the companies to explain what earnings will be (thanks to Regulation FD), analyst coverage is very thin, and many analysts are extremely inexperienced. These "analysts" will become even more investment banker-like in the future. What temporarily resuscitated the role of the sell-side analyst as stock picker was the arrival of the on-line individual trader during the Roaring 90s. A long bear market will continue to undermine any economic role for sell-side analysts other than as advisers to company executives. Most CEOs still think that sell-side analysts are important (mostly because of the short-term momentum reports can temporarily create) and court them. Mr. Cole failed to pick up on this point. That's the reason why Jack Grubman at Solomon Smith Barney made $25 million in one year. Was he worth it? You decide.
I was pleased to see that the book included several studies that showed the weaknesses of both the estimates and recommendations of sell-side analysts.
Will the financial media continue to flock to sell-side analysts? Darn right they will. Everyone else in the industry has real work to do, and there's lots of air time to fill up.
Where else is advice not very helpful? How much do you rely on used car sales people? Vinyl siding sales people? Fortune tellers?
Look straight at the facts . . . and take the right action. Be sure to read John Bogle's book, Common Sense on Mutual Funds, if you want to beat almost all other stock investors.
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