Every year the Fortune magazine comes out with ‘All Star Analysts’, the annual ranking of Wall Street analysts. Both analysts and investors are interested in these rankings. For analysts, it decides their pay structure, and for investors,
it works as a beacon to approach the right analyst to make the right investment decisions. Unfortunately, analysts like Mary Meeker (Internet stocks) and Jack Grubman (telecom), who were on the top of the ‘All Star Analysts’ also topped
those who misled investors. Given the brouhaha about the Wall Street research, and analysts’ failure to recommend the right stocks to clients year after year, it is clearly evident that the credibility of Wall Street research is up for a litmus test. Consider this. According to the Fortune, in 2003, S&P 500 gained 26% and Nasdaq recorded a 50% growth. Compare this with an average analyst’s portfolio (of stocks, which he tracked), which gained just 11%. Most importantly, think like an investor who lost money when the techbubble burst in 2000; it’s obvious to ask a very basic question—do we need buy or sell recommendations of the analysts to make investment decisions? Perhaps this question has made Barry Tarasoft, Research Director at S G Cowen, a mid-sized Wall Street firm to make a remarkable decision, a decision to shun releasing quarterly reports and to give buy or sell recommendations. Cowen was followed by some other research firms on Wall Street. Jonathan Schiffman, Professor of Accounting, Fairleigh Dickinson University says, “Disappointment in the quality and consistency of traditional recommendations that have lacked the critical, independent thought that was expected made these firms to make such a decision.”

However, Kent L Womack, Associate Professor of Finance, Tuck School of Business at Dartmouth, avers, “There is a large perception that recommendations have been biased. Large institutional investors ‘say’ that what they really care
about is the analysis and models of companies, not the recommendations. Hence, to stay out of the recommendation business, if some choose to go that way, may not be so costly since many firms ‘say’ they don’t use that piece of the information anyway.”