Chapter 8. Analyzing the Analysts

 

Analysts are supposed to be critics of corporations. They often end up being public relations spokesmen for them.

 
 --RALPH WANGER, former chief investment officer for the Columbia Acorn Fund

Wall Street as we know it may have disappeared in 2008. Bear Stearns, Lehman Brothers, and Merrill Lynch vaporized. The two remaining investment banks, Goldman Sachs and Morgan Stanley, turned themselves into chartered banks.

But though the Wall Street of years past is gone, Wall Street's function is very much a part of the present. For the most part, the titans of Wall Street still decide which firms have access to the public markets, controlling a large part of the capital that expanding companies need.

Those companies that reach the stock markets do so through an intersection of professionals and their firms. Bankers, consultants, and attorneys work on initial public offerings (IPOs). Analysts research stocks; portfolio managers buy what they like and sell or ignore what they don't. Collectively, the two create the consensual reality that is share value. Company management, for its part, works to build a successful company and generate profits. Each party in the process has its own set of incentives, motivations, and pressures.

This chapter will look at the interplay between investment bankers, analysts, portfolio managers, and company management to find signals that can help investors see around corners.

Investment bankers:

call on private and public companies ...

Get Market Indicators: The Best-Kept Secret to More Effective Trading and Investing now with O’Reilly online learning.

O’Reilly members experience live online training, plus books, videos, and digital content from 200+ publishers.