When the anti-Wall Street rant morphs into just another sales pitch

I know there’s a movement spearheaded by indexers, Bogleheads, Efficient Market Hypothesists, Random Walkers and just plain haters of vampire squid to hate everything Wall Street.  This is not a post defending the barbarians at the gate or even the monkeys in charge of the business.  Rather, I’m riffing on a more recent phenomenon I’m experiencing — that of the mainstream contrarian.

Just another sales pitch

Listen, with so much money at stake, Wall Street has brought opprobrium on itself with outsized returns, lavish lifestyles and bigger than life personalities.  Cramming poor investment schemes and products down clients who should and shouldn’t know better has been a staple of the business for decades.

So, of course, it comes as no surprise that a lot of people have been looking for alternatives.  Better ways of investing, saving and planning for their financial futures.  And it comes as no surprise that a whole industry of products and services arose to supply these investors.  From slick investment newsletters, communities of pundits punters like Seeking Alpha, talking heads on CNBC and even the ETF industry — all have merely taken the old Wall Street model and merely updated it.

Enter the mainstream contrarian.

So, instead of crappy structured products being sold hard by brokers, investors are left with hundreds of arcane ETFs without any real idea what to do with them.  Buy and hold ’em?  Well, that doesn’t really work for investors on the cusp — or in — retirement who need to actively generate income.  Asset allocation?  Well, who really knows what the right mix of risk and return is for anyone?  401(k)s?  Well, those are being manipulated and forcibly rebalanced in a way that’s good for the mutual fund companies, bad for investors.

Evoluton, not revolution

We’ve taken the honorable pursuit of looking for better alternatives to Wall Street yet have merely replaced Wall Street with another manifestation of slick sales people taking advantage of unsuspecting investors.  Investors eat up the anti-Wall Street pitch.  That there is a better way.

And there is.  But it can’t be sold; It has to be bought.  It requires being intellectually honest and not just compliantly honest.  It requires creating technologies, services, and platforms that say:

hey, the old way typically didn’t work.  We have just one possible solution.  But to be honest — we’re dealing with uncertainty. Nobody really knows the right way to do this.  We believe ours is a good product/service but ultimately, we’re all in this together, trying to plan for a future which is ultimately unknowable.

I guess these aren’t really solutions as much as they are gamemplans.  This way, this evolution (not, revolution) in financial services truly departs the old way.  Otherwise, it’s just the Wall Street wolf dressed up in anti-wolf clothing.

Bloomberg beefing up reflects good things for financial industry

I’ve written about previously (here and here) about Bloomberg’s expansion bloombergand eventual dominance of financial media from news to data and consumer.  The WSJ reports today that indeed, Bloomberg is forecasting a respectable 10% growth rate for 2010 and plans to add an additional 1300 employees.

The revenue gains would come largely from a projected increase of 12,000 subscriptions to the Bloomberg Professional service, which provides data, analytics and news geared to financial-services professionals.

Bloomberg’s revenue for last year was estimated at $6.25 billion, according to a person familiar with the matter. Based on that estimate, the new projections would push revenue to nearly $6.9 billion this year.

Growth is good for Bloomberg and ostensibly, the media giant is seeing increased demand for its terminals from institutional investors — a sign that things are picking up on Wall Street and Stamford, CT.

With the recent acquisition of BusinessWeek and content sharing deals that land Bloomberg content on the WaPost and beyond, Bloomberg is turning up the manheat on Dow Jones.

Be afraid, be very afraid.

Investment newsletters REALLY bearish — time to buy?

Wow! Expectations that U.S. stocks will drop at least 10% has risen to the highest levels since April 1984.

In a recent survey of investment newsletters by Investors Intelligence, Bloomberg reports that:

The following are results from Investors Intelligence’s
analysis of investment newsletters for Jan. 27 through
yesterday. The company determines the proportion of writers who
are bullish and bearish on U.S. stocks, as well as the
percentage who anticipate a correction, or 10 percent decline,
in the market.

           This Week   Prior Week    Comments
Bullish      38.9%        40.0%      Lowest since July 21
Bearish      22.2%        23.3%      Lowest in two weeks
Correction   38.9%        36.7%      Highest since April 1984

Time to buy?

Bloomberg finds piggybacking analysts sucks

John Dorfman, investor and Bloomberg columnist, has been following the 4 most popular and hated stocks among Wall Street analysts for the past 11 years.

According to Dorfman’s research:

For 11 of the past 12 years, I have studied the performance of analysts’ four favorite stocks, and the fate of the four they most scorned…Their favorites, on average, were flat during those years while the four stocks they hated most gained about 6 percent annually. The Standard & Poor’s 500 Index had an average gain of about 9 percent.

Wall Street Stinks

winners-and-losers1Dorfman attributes this bad performance to the fact that analysts are “not all-knowing” and like most human beings,  “extrapolate the recent past as a guide to what comes next.” Check out the whole article to see which 4 stocks are currently most highly rated by security analysts and which 4 are currently the pariahs.

Dorfman concludes with a short review of each of the stocks.  I’d like to delve just a bit deeper here, though.  There is definitely a divergence in Wall Street’s sell side and Stamford’s buy side in the ability to accurately pick stocks.

Buy side vs. sell side: winners vs. losers

Whereas research like Dorfman’s show an inverse relationship of the best ideas in the sell-side community to stock performance, research like Cohen, Polk, and Silli’s “Best Ideas”  and Martin and Puthenpurackal’s “Imitation is the Sincerest Form of Flattery” indicate that investors have a lot to gain by piggybacking the best ideas and cloning guru investor portfolios.

So, why is Wall Street, which is just as smart IQ-wise as the buy-side, so bad at picking stocks?  I just don’t think Dorfman’s “they’re just human” critique is sufficient because buy-side guys are human, too.  In fact, I’d wager that the majority of good buy-side analysts cut their teeth on the sell-side.  Does moving to Connecticut improve stock selection (like to see that research paper)?

Companies like AlphaClone are entirely focused on helping investors exploit the alpha produced by certain professional investors (see my AlphaClone: The cure for investor insanity).  Why the divergence?

Rather, there are structural reasons why piggybacking the buy-side works, while aping the sell-side doesn’t.  Some possible reasons for this underperformance:

  • Wall Street analysts are reactive, not nimble enough with changes in ratings to make investors money on the way up or down
  • industry coverage structure requires that each analysts has to have some buys and some sells in an environment that a good portfolio manager may completely avoid such a sector
  • unlike popular folk wisdom, good companies don’t make good stocks and vice versa.
  • Analysts are trained like MBAs to take a more organic, longer term view on companies while the market continues to focus on shorter milestones

Thoughts?  Let me know in the comments below.

[Hat tip: My Investing Notebook]