Page 547 - How to Make Money in Stocks Trilogy

Institutional Portfolio Ideas 415

phrase caveat emptor had more meaning for investors, both institutional
and individual alike.
The implementation of SEC Rule FD, governing fair disclosure of mate-
rial company information to both institutional and individual investors, in
2000 has restricted the ability of major brokerage research analysts to
receive inside information from a company before it is released to the rest
of the Street. This further reduced any advantage that can be gained by lis-
tening to most Wall Street analysts. We prefer to deal only with facts and
historical models rather than opinions about supposed values. Many
research analysts in 2000 and 2001 had not been in the business for 10 years
or longer and therefore had never experienced the terrible bear markets of
1987, 1974–1975, and 1962.
On still another subject, many large money-management groups proba-
bly deal with entirely too many research firms. For one thing, there aren’t
that many strong research inputs, and dealing with 20 or 30 firms dilutes the
value and impact of the few good ones. Confusion, doubt, and fear created
by conflicting advice at critical junctures may prove to be expensive. It
would be interesting to know how many analysts have been highly success-
ful in their own investments. This is the ultimate test.

Financial World’s Startling Survey of Top Analysts

A Financial World article dated November 1, 1980, also found that analysts
selected by Institutional Investor magazine as the best on Wall Street were
overrated and overpaid, and they materially underperformed the S&P aver-
ages. As a group, the “superstar” analysts failed on two out of three stock
picks to match either the market or their own industry averages. They also
seldom provided sell recommendations, limiting most of their advice to
buys or holds. The Financial World study confirmed research we performed
in the early 1970s. We found only a minority of Wall Street recommenda-
tions were successful. We also concluded during a period where many sell
opinions were in order, just 1 in 10 reports made a sell suggestion.

Database Power and Efficiency

On any day, most institutional money managers receive a stack of research
reports. Trudging through them in search of a good stock is usually a waste
of time. If lucky, they may spot 1 in 20 that’s right to buy.
In contrast, managers with access to WONDA can rapidly screen all
the companies in our database. If the defense industry pops up as one of
the leading industries, they can call up 84 different companies whose pri-