Home > Uncategorized > The case for BIAS

The case for BIAS

I have been reading websites on how to interpret analyst valuations and recommendations.  From what I’ve read, there’s always a warning that the recommendations can be biased based on a number of reasons and investors should thoroughly read the disclosures, do their own research, etc.   There are many reasons why the analyst could be biased or have “conflicts of interest”, I have listed out the ones that I found  from the SEC (U.S. Securities and Exchange commission):

http://www.sec.gov/investor/pubs/analysts.htm 

  • Investment Banking Relationships—When companies issue new securities, they hire investment bankers for advice on structuring the deal and for help with the actual offering. Underwriting a company’s securities offerings and providing other investment banking services can bring in more money for firms than revenues from brokerage operations or research reports. Here’s what an investment banking relationship may mean: 
  • The analyst’s firm may be underwriting the offering—If so, the firm has a substantial interest—both financial and with respect to its reputation—in assuring that the offering is successful. Analysts are often an integral part of the investment banking team for initial public offerings—assisting with “due diligence” research into the company, participating in investor road shows, and helping to shape the deal. Upbeat research reports and positive recommendations published after the offering is completed may “support” new stock issued by a firm’s investment banking clients.
     
  • Client companies prefer favorable research reports—Unfavorable analyst reports may hurt the firm’s efforts to nurture a lucrative, long-term investment banking relationship. An unfavorable report might alienate the firm’s client or a potential client and could cause a company to look elsewhere for future investment banking services.
     
  • Positive reports attract new clients—Firms must compete with one another for investment banking business. Favorable analyst coverage of a company may induce that company to hire the firm to underwrite a securities offering. A company might be unlikely to hire an underwriter to sell its stock if the firm’s analyst has a negative view of the stock.
     
  • Brokerage Commissions—Brokerage firms usually don’t charge for their research reports. But a positive-sounding analyst report can help firms make money indirectly by generating more purchases and sales of covered securities—which, in turn, result in additional brokerage commissions.
     
  • Analyst Compensation—Brokerage firms’ compensation arrangements can put pressure on analysts to issue positive research reports and recommendations. For example, some firms link compensation and bonuses—directly or indirectly—to the number of investment banking deals the analyst lands or to the profitability of the firm’s investment banking division.
     
  • Ownership Interests in the Company—An analyst, other employees, and the firm itself may own significant positions in the companies an analyst covers. Analysts may also participate in employee stock-purchase pools that invest in companies they cover. And in a growing trend called “venture investing,” an analyst’s firm or colleagues may acquire a stake in a start-up by obtaining discounted, pre-IPO shares. These practices allow an analyst, the firm he or she works for, or both to profit, directly or indirectly, from owning securities in companies the analyst covers.

The SEC is the primary overseer/regulator for U.S. securities markets.  They’re supposed to protect investors!   Please educate yourselves by reading the entire link that I’ve provided above.

Personally, I think this is a very tough job because people go above and beyond for money and some find questionable/illegal ways to do this at the expense of others.   The stock market is zero-sum game, meaning that when someone gains $1,000, someone else will lose $1,000.

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Categories: Uncategorized
  1. Sasi
    February 18, 2010 at 3:53 pm

    This is good to know. So if these analysts can be (legally) biased like this, why would even trust them?

    From all that I’ve read, indexes do better than analysts almost 100% of the time over the long run.

    • February 20, 2010 at 10:17 pm

      Yes, however I am hoping to determine which analysts can be trusted 🙂

      One thing to note about indexes though is that the bottom dwellers get dropped off the index. i.e. if a particular company goes to the dumps, it may be replaced by a better performing company.

  2. Sasi
    February 22, 2010 at 3:14 pm

    Isn’t that a good thing if you’re buying indexes? It’s almost like someone is automatically readjusting your portfolio for you.

    • February 23, 2010 at 5:39 pm

      Yes when you buy, but not when you’re reading performance because it could be thrown off I believe but I might be wrong there. I’ll see if I can find some research about that, so far no luck!

      • May 24, 2012 at 3:23 am

        First off, investment bank tredars are now fundamentally a business of the past (or soon will be). Proprietary trading has been declared prohibited so investment banks are no longer allowable to hire tredars to trade for the companionship’s account. As a substitution for, the ancient trading departments are life spun off and labeled as asset management divisions or becoming ring fence funds with close ties to their former mother companies. Secondly, the relative pay between bankers and tredars doesn’t stay on an overall try out. Pay is based off of many things: experience, division, performance, etc. . .At the start, tredars seem to make more than Investment bankers in view of the fact that tredars are allowable to go tasks which really add value; they trade even as the i-bankers do the rumble work on pitch books based off of financing place together by more older bankers. Over time though, the bankers start to take on more responsibilities and have superior upward mobility. Once you rise above the rank and file and can start dependability some creative work with things like M A (which is fantastic in view of the fact that the pay-offs for the bank are huge even as the risks are non-extant, unlike in trading). I can’t tell you an average pay for tredars in view of the fact that the facts vary so much, but the subsequent must give you a feel for the general amount of cash available:1. As a first year analyst (merchant banker) Goldman will pay you around $ 120k (bonus and salary)2. After 2 years as an analyst you be converted into eligible for better bonuses and commonly hear a title to make you feel best (like vice head). . .last year the average for goldman sachs employees was just below $ 600k (salary and bonus)3. After you go further than the VP the boards you be converted into a Administration Boss; at this amount you are liable making aptly around $ 750-$ 800k (salary and bonus)4. Permanently, after life an MD for around 10 years, most people are existing the spot of Partner. The average junior Partner makes around $ 1m-$ 3m and the average normal partner makes between $ 3-$ 6m.6. In 2006, the CEO made $ 65mWhen tredars start out they have a moderately tiny salary but are eligible for large bonuses. The only really fastidious digit I have for this is that Lehman Brothers used to pay it’s tredars $ 1m for each $ 20m they made for the companionship.I hope this was caring. . .are you wanting to go to Wall Road? 0Was this answer helpful?

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