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Should We Ignore Stock Research From Big Bank Analysts?


Just like with bond rating agencies, sell-side equity research is fraught with conflicts of interest.

It might seem surprising that banks, who presumably would be concerned about their reputations for putting out accurate research, would issue dodgy advice. After all, investors can always check up on the reputations of equity analysts by turning to the business publication, Institutional Investor, which ranks analysts annually based on the accuracy of their calls. However, Landell-Mills says that wining banking business from commercial companies is far bigger a priority.

"The Morgan Stanley (NYSE:MS), JPMorgan (NYSE:JPM), and Goldman Sachs (NYSE:GS) brands are so strong and so well-entrenched in investors' minds that their analysts can make the worst mistakes or the worst recommendations one month, and publish an equity research report the month after that everyone still reads because it's Goldman," explained Landell-Mills on the hold investment banks have over investors, traders, and asset managers.

"We need to stop putting these banks on pedestals but that's extremely hard to do. They are big organizations who generate a lot of profit. So it's natural to think: It's Goldman and it's successful, so I want to associate with it and I want to listen to what they're doing and thinking," he continued.

Realizing that there was a gap in the market for objective equity research, Landell-Mills started his own buyer-pays independent firm, Indigo Equity Research, in 2009. Both institutional and retail investors can access his firm's research, which he says does not focus on proving a Buy, Sell, or Hold recommendation.

"I focus on describing the company and what's going on, and I provide an opinion, and I leave it to the reader to decide what he wants to invest in based on his risk profile," shares Landell-Mills. "Because what I found when I worked in private banking was that you can walk into one meeting with a private client and recommend selling Amazon (NASDAQ:AMZN), and walk into the next meeting with a different client five minutes later and offer the reverse recommendation. It really depends on the individual's situation, his view of the market, whether he thinks the market is going up or down, and if he wants to be heavily exposed to volatility."

Landell-Mills says that it is unlikely that independent equity research firms like his will go mainstream because investment banks simply are much better connected to the business and money management world.

"[Investment banks' analysts] will visit all the asset managers in person, where they do presentations, and connect them to companies' management," he says. "For example, they would take the management of General Electric (NYSE:GE) or AT&T (NYSE:T) to meet the asset managers. They provide all these services, like taking them out for lunch, on business trips, to skiing, or to Las Vegas. These events occur much less than before, but they still happen."

Even if independent research firms are able to avoid conflicts of interest, Damodaran was still skeptical of their ability to offer high-quality stock recommendations.

"The average active portfolio manager delivers about 1% less than the S&P 500 (INDEXSP:.INX). The average analyst, with or without bias, is going to do about the same. After all, what is the competitive advantage that an analyst has over the rest of us in a market like the US, where all information is available for anyone with an online connection?" he said.

Retail investors, Damodaran added, should ignore all equity research reports. "Read them for comedic value, not for investment value."

Twitter: @sterlingwong
No positions in stocks mentioned.
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