January 29, 2002
From the desk of Mindles H. Dreck:Sell Side vs. Buy Side
Matt Welch points us to This Story in the LA Times by David Shaw:
Like investors, many financial reporters rely heavily on stock analysts. But analysts often have an inherent conflict of interest. Companies such as Enron have considerable leverage over them, saying (implicitly, if not explicitly), "We support the analysts who support our stock," meaning they'll give their lucrative investment banking business to those firms whose analysts issue strong "buy" recommendations for their stock.That's why analysts get paid so much, says Gordon Howald, an energy analyst for Credit Lyonnais. "It's not because they write nice reports with glossy covers. It's because they help generate fees for their firms by taking a very, very optimistic view of a stock, even if they don't necessarily believe it."
It's about time the press learned to talk to "Buy Side" analysts. The above quote refers to "Sell Side" analysts, who work at brokerage firms and are primarily motivated by the order flow (brokerage and other services) exchanged for their information. Institutional investors don't necessarilly take Sell Side recommendations, what they are looking for is solid information. Because Sell Siders are visible and prominent, companies used to give them a ton of useful detail. This flow of information has slowed a bit since Reg. FD and negatively impacted the Sell Side - which I'll talk about another time.
Buy Side analysts work for investors or money managers. Their pay depends entirely on the quality of their work and recommendations. There is little cost to a sell recommendation from a Buy Side analyst, and much upside if they are right. Many more Buy Siders dumped Enron, for obvious reasons.
The sell side likes the media, the buy side generally doesn't.
And there are certainly more than 16 analysts when the buy side is included, Mr. Shaw. Look around a bit if you want to report on this.
Posted by Mindles H. Dreck at January 29, 2002 10:01 AM | Technorati inbound links