Performance

Last month we invited New York State Attorney General Eliot Spitzer to speak at our dinner honoring the members of this year’s All-America Research Team. After complimenting them, Spitzer promptly pointed out their flaws, citing a study that showed most to be poor stock pickers. In remarks that drew widespread coverage, he warned brokerage firms that advertising Institutional Investor winners as good stock pickers was a deceptive practice that had to end.

Last month we invited New York State Attorney General Eliot Spitzer to speak at our dinner honoring the members of this year’s All-America Research Team. After complimenting them, Spitzer promptly pointed out their flaws, citing a study that showed most to be poor stock pickers. In remarks that drew widespread coverage, he warned brokerage firms that advertising Institutional Investor winners as good stock pickers was a deceptive practice that had to end.

So, okay, no big deal. Our teams have never emphasized stock picking. The thousands of portfolio managers and buy-side analysts who vote for our teams say they value their sell-side counterparts for other things, like industry knowledge, integrity and accessibility. This year stock selection came in 11th. Big money managers know how to pick and trade stocks for themselves.

We agree that Wall Street should not mischaracterize our rankings, and we also think that Spitzer’s idea for a national database of analyst recommendations is a good thing: The more information, the better.

Information isn’t insight, though, and given Spitzer’s concern for retail investors, his focus on stock picking could turn out to be counterproductive. Sure, it would be interesting to find out how every analyst stacks up. But what then? Unlike institutions, individuals don’t get stock reports from dozens of sell-side firms; they don’t typically have multiple brokerage accounts. So what’s a small investor to do with this information? Open dozens of accounts and make trades based on the recommendations of the best-performing analysts? The last thing anyone should want to see is retail investors chasing performance. That’s a sucker’s game. In the late 1990s mom-and-pop investors poured into mutual funds with the best recent performance. They got hammered. That can’t be what Spitzer wants for common stock investing.

Moreover, a subtle bias toward active trading underlies such an emphasis on performance; retail investors should, most experts would agree, buy and hold. Not buy and sell, buy and sell, buy and sell. (Unlike institutions, they’d get killed on commissions.) At its extreme, excess retail activity became the day-trading disaster of the late 1990s.

Spitzer should be commended for his investigations. But some of his solutions might benefit from a little more research.

For recent articles on Wall Street research, its history and conflicts, please go to www.institutionalinvestor.com/research .

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