Page 546 - How to Make Money in Stocks Trilogy

414 INVESTING LIKE A PROFESSIONAL

their auto analyst. These individuals may know the nuts and bolts of their
industries, but in many cases, have little understanding of the general mar-
ket and what makes leading stocks go up and down. Maybe this explains why
virtually every analyst appearing on CNBC after September 2000 continued
to recommend buying high-tech stocks on their way to 80% to 90%
declines. People lost a lot of money if they followed this free advice on TV.
A similar repeat performance occurred in 2008, when some fundamental
analysts recommended buying oils and banks on their way down since they
looked cheap. They then got a lot cheaper. An analyst’s job should be to
make money for clients.
Firms like to advertise they have more analysts, the largest department,
or more top-ranked “all-star” analysts. I’d rather have five good analysts who
are generalists than 60 or 70 who are confined to limited specialties. What
are your chances of finding 60 or more analysts who are outstanding at mak-
ing money in the market or finding moneymaking ideas?
The shortcomings of Wall Street analysts were never made plainer to
investors than during the 2000 bear market. While the market continued to
sell off and become the worst bear market since 1929, and former high-fly-
ing tech and Internet stocks were being decimated, Wall Street analysts
continued to issue “buy” or “strong buy” recommendations on these stocks.
In October 2000, one major Wall Street firm ran full-page ads calling the
market “One of the Ten Best Times to Own Stocks” in history. As we now
know, the market continued to plummet well into 2001 and 2002, making
that period one of the worst times in history to own stocks! It was not until
many of the tech and Internet high-flyers were down 90% or more from
their peaks that these analysts finally changed their tune—many days and
many dollars late!
A December 31, 2000, New York Times article on analysts’ recommen-
dations quoted Zacks Investment Research as follows: “Of the 8,000 rec-
ommendations made by analysts covering companies in the Standard &
Poor’s 500 Index, only 29 now are sells.” In the same article, Arthur Levitt,
chairman of the Securities and Exchange Commission, stated: “The com-
petition for investing banking business is so keen that analysts’ sell recom-
mendations on stocks of banking clients are very rare.” A mutual fund
manager quoted by the Times said: “What passes for research on Wall
Street today is shocking to me. Instead of providing investors with the
kind of analysis that would have kept them from marching over the cliff,
analysts prodded them forward by inventing new valuation criteria for
stocks that had no basis in reality and no standards of good practice.” Van-
ity Fair also ran an interesting article on the analytical community in
August 2001. Clearly, at no time in the history of the markets has the