What's good for Wall Street is not necessarily good for investors.

How Wall Street does its business?

It has a very short-term focus. 

For example, Wall Street makes money up-front on commissions (not from long-term performance).

Therefore the Wall Street will always push for churn and will always push "hot" investments.

Is this business model fundamentally wrong?

Some argue that there is nothing fundamentally wrong with this business model. 

After all, many professionals make money in this manner without being responsible for the long-term results. 

It is, however, important that investors recognise this Wall Street bias, or they will be robbed blind.

This business model also encourages very short-term thinking, and a bullish bias. 

If stocks are going up, Wall Street is able to make more in the form of commissions. 

This bullish bias is seen in the percentage of stocks that are recommended by analysts versus those that are deemed "sells".

There are many examples of Wall Street's short-term bullishness that props up prices of various securities, but where those prices eventually fall dramatically. 

Take Home Message for Investors

Investors are advised to keep Wall Street's biases in mind when dealing with the Street.

Investors are to avoid depending on the Street for advice.

Read also:

• 
  
• Your investments using Mutual Funds or Money Managers
• Trading and portfolio management from a value investing point of view
• Value Investor's Opportunities in Distressed Securities
• Value Investing Opportunities in the Banking Sector
• Look at FUNDAMENTALS and POTENTIAL CATALYSTS when making investment decisions
• Where to look for Investment Opportunities
• Business value cannot be precisely determined. Make use of ranges of values
• Central elements to a Value Investing Philosophy
• The Philosophy of Value Investing and Why It Works
• Philosophy of value investing. Need to have clear strategies too
• How Wall Streets can create investment fads? The Junk Bond Market of mid-1980s
• Understanding these changes in the investment world allows investors to earn superior returns
• What's good for Wall Street is not necessarily good for investors
• Speculators, Investors and Market Fluctuations

Just How Smart Is Wall Street?

 Posted: August 12, 2011 1:48PM by Stephen D. Simpson, CFA

Individual investors see a steady stream of paeans to Wall Street, praising not only the substantial resources of professional investors, but also suggesting (sometimes subtly, sometimes not) that these professionals are smarter and more capable than the average investor. While there are certainly plenty of columns out there decrying the mistakes of professional investors and pointing out that disciplined individuals can do just as well, the fact remains that the financial media overwhelmingly tilts towards the idea that Wall Street is smarter than you or me.

TUTORIAL: World's Greatest Investors

But is it really? The word "smart" has plenty of definitions, but Wall Street has such a peculiar inability to learn from certain mistakes that it seems worthwhile to question just how smart the Street really is.

They Can't Stay Away From the BubblesNothing of any real size can happen in the investment world without the involvement of institutional investors. So while retail investors are often dismissed as the "dumb" money, it is the professionals who ultimately add the most air to investment bubbles.

It was professionals, not individual investors, who awarded absurd IPO valuations to stocks like TheGlobe.Com, Geocities or eToys.com. Professional investors were also apparently happy to pay upwards of 30 times sales for Cisco (Nasdaq:CSCO), Qualcomm (Nasdaq:QCOM) and JDS Uniphase (Nasdaq:JDSU) back in the bubble days.

Only a few years later, institutions happily dove into the housing bubble. Institutions apparently were not bothered by data that clearly showed affordability was declining at a precipitous rate and that lending standards were abysmally low. In fact, institutions got so casual about the bubble that they happily relied upon models that told them housing prices could never fall - even though there were plenty of examples from outside the U.S. that showed what could happen.

These are only two examples of how the institutional community is all too happy to believe "it's different this time" and "prices couldn't possibly fall from here." The fact is, that the Street is happy to play a game of musical chairs because the players almost always believe they'll find a seat before the music stops … even if years of history suggests otherwise. (Home price appreciation is not assured. For more, see Why Housing Market Bubbles Pop.)

A Few Gaps in Their Due DiligenceAlthough plenty of institutional investors now claim to have spotted the shenanigans at Enron and Worldcom and shorted the stocks, those stocks would have deflated much sooner if all of these people were telling the truth. The fact is, plenty of institutions lost huge amounts of money in names like Enron, Worldcom, CUC/Cendant, Waste Management and so on, when their accounting scandals finally became unsupportable. In fact, when Enron blew up, well-regarded names like Alliance Capital Management, Janus, Putnam, Barclays and Fidelity owned about 20% of the stock in total, and most major firms held some number of shares.

Even in the wake of scandal after scandal, institutions have apparently not filled all the gaps in their due diligence. During the housing bubble and crash, institutions were largely blind to the balance sheet time bombs of financial companies like Washington Mutual and AIG (NYSE:AIG), to say nothing of their off-balance sheet liabilities. Even in the last few months, John Paulson reportedly lost millions of dollars on his position in Sino-Forest when evidence finally arose that the company may have grossly overstated its asset base. Likewise, plenty of other smart money investors have gotten caught up in other Chinese debacles. (For more, see Hedge Fund Due Diligence.)

Overconfidence, Especially in Their Own ModelsHowever smart Wall Street professionals are, it doesn't shield them from overconfidence in their abilities and their models. Time and time again some sharp-eyed professionals will spot a profitable anomaly in the markets - junk bonds or Latin American sovereign bonds that price in too much risk of default, undervalued mortgage bonds, unexploited absolute return strategies and so on. In the early days, there are in fact plenty of great opportunities, but eventually word gets out, other investors try to replicate the strategy and investment bankers rush to fill the supply of look-alike products.

The list of well-known implosions goes on and on - from the heyday of junk bond-fueled LBOs to the numerous emerging market sovereign debt debacles to the "see no evil" models of the U.S. housing market. In almost every case, though, the fundamentals change, the experts fail to notice, more leverage gets poured into the process and it all blows up in everyone's collective face.

The case of Long Term Capital Management (LTCM), though a 13-year-old story now, is still a great example. Mixing very experienced and successful Wall Street professionals with a small army of PhDs, LTCM used very high amounts of leverage to exploit small inefficiencies in the market. Unfortunately, early success brought more capital into the firm than it could manage, more leverage was employed to squeeze bigger returns out of smaller anomalies, and then suddenly some of the key relationships underpinning its models fell apart. The end result was a spectacular failure - one so large that the federal government stepped in to help the unwinding process from destabilizing the financial markets.

TUTORIAL: Credit Crisis: Historical Crises

The Bottom LineThese are just a few brief examples of the "factory seconds" that Wall Street churns out with surprising regularity. What of the fact that Wall Street routinely puts its faith in the projections and promises of management teams with no record of competence or success? Or what of the fact that Wall Street professionals routinely trust their investors capital with people and instruments that have previously failed?

The fact is, Wall Street is made up of people and people (even well-trained and well-compensated examples) make mistakes. Whether its greed, overconfidence or a sincere belief that it is somehow different this time, Wall Street cannot resist taking a chance on money-making opportunities. The point here is not to bury Wall Street or excoriate its professionals for their mistakes. Rather, the point is that everybody makes mistakes and investors should never be intimated out of their own good judgment and common sense just because the "smart money" thinks differently. (For more on smart money, see On-Balance Volume: The Way To Smart Money.) 

Read more: http://financialedge.investopedia.com/financial-edge/0811/Just-How-Smart-Is-Wall-Street.aspx#ixzz1VKT47J00

British analyst fined £50,000 for misleading message

British analyst fined £50,000 for misleading message

January 13, 2011
LONDON, Jan 13 — A former investment analyst has been fined £50,000 (RM250,000) for sending misleading information via instant messages, pushing shares in a property company up sharply, Britain’s market regulator said today.

Christopher Gower, at the time a senior research analyst at MF Global Securities, sent messages to 14 clients, a Bloomberg reporter and MF Global salesmen implying he had obtained insider information about the REIT status of Enterprise Inns.

What Gower learned during a meeting with the head of Punch Taverns was, in fact, already in the public domain and portraying it as insider information misled the market, the Financial Services Authority said.

Starting his instant message “Hot off the press”, Gower said he had just had a meeting with the chief executive of Punch Taverns. “They have heard from HM Revenue & Customs that it is highly likely Enterprise Inns has been granted REIT status and ETI are due to announce this on May 13 at interims,” he went on to say in the message on May 7, 2008.

“Expect ETI to bounce, was up 10 per cent on previous HMRC news, but then fall back as (the market) realises it will take time to implement.... more on my meeting to follow,” he said.

Enterprise Inns shares rose 4.45 per cent after Gower’s messages were sent, amid high volume.

While the FSA accepted 34-year-old Gower did not intend to give the impression he had inside information, it said he had not observed proper standards of conduct.

“There is no excuse for a senior retail analyst to be so careless with messages that could have such an impact on the market,” Margaret Cole, the FSA’s managing director of enforcement and financial crime said.

“Gower’s dissemination of inaccurate information contributed to a large increase in the volume of shares traded and a disorderly market in ETI shares.”

MF Global was not available to comment. — Reuters

Never trust an Analyst or an Investment Banker

The reason given being they are self-serving. Although they will give you the impression that your interest is paramount, they too benefit from pushing their investment products.

One of the most interesting thing I came across which is worth sharing here is understanding the job of the analyst. We come across analysts' reports regularly. In the present cyclical bull market many of these reports are very bullish. However, recall how many of these analysts' reports were bearish, downgrading the stocks, even when the market was already at the depth of the recent severe bear market.

The most important point to take home is that the MAIN job of an analyst is not to analyse!!! It never was and neither is even today. Hear this, and repeat this often. Keep this in your mind whenever you read an analyst report. (Of course, ze Moolah's blog is an exception, he is not an analyst. Tan Teng Boo, Dali's blog and a few others are in this category. ;-0 )

In fact, an analyst is a salesman. His present job description is very much that of a stock-pusher. This is not unlike that of a drug dealer pushing drug. Of course, this is a rather poor comparison, but you do get the point.

They are there to dress up the report on the company to make it nice so that investors can buy or sell their products they have an interest in.

Who are these present analysts? Are they the white haired chaps who have worked for many years on the job. Most unlikely. They are often perhaps the young 23 to 25 year recently graduates from elite universities who have been given the task to produce the analyst reports on the various companies. They certainly lack the experience of the market.

However, let us not totally dismiss the roles of the analysts and the investment bankers in our investing. Of course, do read the reports but always invest based on your personal opinion and research.

Where the Herd's Headed

NOVEMBER 20, 2008, 6:34 P.M. ET
Where the Herd's Headed

Merrill's monthly survey of fund managers shows some movement into stocks and bonds. Should you follow?
By BRETT ARENDS


My favorite monthly publication has just come in. No, not The Atlantic, Forbes, or GQ.
The Merrill Lynch Global Fund Manager survey.

OK, I admit it. I'm a stock market nerd. I love this stuff. The survey offers probably the best insights into what the big institutional money managers think about the market. Where they are placing their bets. And, sometimes, what they might do next.

It's a contrarian's bible. These are the people who move markets. So the assets they already own too much of are going to have a hard time outperforming, because who is left to buy more? Meanwhile, the reverse can be true for those investment classes they are currently neglecting.
The latest issue is a fascinating read. The big money crowd, the world's best financial minds, have looked at the wreckage of the worst financial crisis in 80 years. They considered the parade of humiliating fiascoes on Wall Street. And the bumbling and eye-watering extravagance in Washington. And yet the two asset classes they still seem to like are IOUs issued by the federal government, and stocks on Wall Street.

Go figure.

If you are thinking about investing in equities, you should know that institutional investors are already overexposed to U.S. stocks at the expense of the rest of the world. A thumping 55% of the fund managers surveyed now have more money in U.S. equities than their benchmark would require: Just 19% say they are under-invested in Wall Street.

Meanwhile, the picture for British and European equities is almost exactly reversed. Nearly half the fund managers say they are underinvested there.

Of course there is a lot of economic misery to come in Europe – especially in Britain, whose real estate bubble has only just begun to deflate.

Yet it's unclear whether this bad news is already factored into share prices there. British and European share indices have more than halved since last year's peaks and are now trading on multiples last seen in the mid 1980s. Several shrewd value managers are arguing that Europe – and Japan – now offer the best long-term buys.

As for bonds: I've been trying for weeks to understand fully why anyone would lend money to the federal government for thirty years, let alone at today's anemic interest rates.

The bailout parade slowly making its way through Washington, each package dazzling the crowd with its size and extravagance, is surely going to lead to slow-motion default in years to come through devaluation and inflation. That's a disaster scenario for bonds.

Nor could I understand why the only Treasurys that were unloved were TIPS – the ones that actually have inflation protection.

Now I know. These fund managers, the people who move the market, have suddenly written off inflation as a near impossibility. A startling 87% think core inflation will be lower a year from now than it is today. Just 5% think inflation might be higher.

Complacency?

You make the call. Note that just a few months ago more than four-fifths of these guys thought inflation was going to be higher than normal. So it's fair to say they're capable of changing their minds, dramatically, in a short period.

Heaven help anyone in the way when the herd suddenly changes direction.

At the moment, 84% of the fund managers think the global economy is already in recession.
One startling fact: Hardly any professional fund managers believe Wall Street analysts anymore. A whopping 90% told the Merrill Lynch survey they thought the consensus earnings estimates on the Street for the next year were too high. Amazingly, 59% called the estimates "far" too high.

That's a pretty damning indictment.

Doomsayers claim that stock markets must fall further because earnings forecasts have to come down.

Sure, Wall Street analysts remain laughably bullish. But it turns out no one with any money believes them anyway.

Write to Brett Arends at brett.arends@wsj.com