Market Watch

[Joemoney]

Good Article: Research bias is incidental

By Thomas Kostigen, CBS.MarketWatch.com
Last Update: 12:01 AM ET May 28, 2002

LOS ANGELES (CBS.MW) -- The fact that Wall Street is being held accountable for its biased analyst advice is just another example of Joe Sixpack investor putting the blame for his losses on someone else.

When is the average investor going to learn that they are responsible for their own investments? Caveat emptor applies to stocks and bonds too, don't ya know.

After the stock market collapse of 1987, derivatives were to blame. Then, of course, hedge funds came into the picture as "deceptive."

The Internet boom. The tech combustion. Enron accounting. And now it's analyst integrity.

Every loser has a scapegoat.

Here's a thought: before you invest your hard earned money in a company -- look it up yourself.

I've heard that doctor's patients get second opinions. Even, dare I say it, people date before they get married. The idea of research extends to all aspects of our lives. Ignorance is no excuse when it comes to money and investing.

But people are ignorant when it comes to money and investing. In a recent survey conducted by Boston-based insurer John Hancock, almost half of the investors surveyed believed money market funds included stocks.

This in an age when you can't open a newspaper, turn on the television, listen to the radio, or log on to the Internet without being inundated with financial information.

Securities and Exchange Commission's data files and records on every publicly traded company have been available online since 1996. Moreover, almost every search engine or quote server has research and report links tied to ticker symbols.

Last year, the SEC conducted exam sweeps of sell-side analysts' relationships with investment banking departments. This occurred just after media reports began surfacing on accounting irregularities at Enron. Again, this was last year.

Investors are slow to react and protect themselves. Fully 75 percent of those investors surveyed by John Hancock haven't rebalanced their portfolios over the past 12 months.

Yet, investors are quick to place blame.

Michael Milken, Ivan Boesky, Frank Keating, and Kenneth Lay are just a few of the poster boys to whom the investing public has attached fault and waged suit. Merrill Lynch sidestepped the picture show last week when it paid $100 million without admitting or denying guilt for analysts providing misleading research reports.

A finding or admission of guilt surely would have meant flurries of lawsuits, hundreds of millions of dollars in losses, and bankruptcy.

All of this is, of course, after the fact; investors traditional route to rectification.

Stanford University reports that investor lawsuits rose 60 percent in 2001 -- after the downturn in the stock market.

However, ignorance, as any judge will tell you, is no defense. Simply ignoring the fact that there's an inherent conflict of interest in a stock analyst recommending to a stock broker that he or she "buy" shares in a company stock the brokerage firm -- for which they both work -- underwrites, shouldn't excuse investors.

Indeed, brokers themselves didn't always do what their analysts said. In the most recent issue of the stockbrokers' trade magazine, Registered Representative, many brokers said they knew better than to follow their own analysts' advice.

If such conflicts of interest were so apparent to people who had financial incentives to ignore, but chose not to, shouldn't these conflicts have been obvious to the rest of us, as well?

Marc Lackritz, president of the Securities Industry Association, last June testified before Congress on the topic of analyst integrity. He readily admitted that analysts can "shade their conclusions one way or another."

"We in the industry as well as those who regulate us long have been well aware of this," Lackritz stated.

Regulators knew. Industry professionals knew. Every one, it seems, but investors knew that analysts' integrity is to be questioned. Wake up and smell the bear market.

To be sure, supposed white knights are arriving at investors' doors. Charles Schwab is touting in a series of new advertisements it's lack of conflict of interest.

Still, Schwab's rendering of investment advice gets them more trading dollars. Fidelity and others won't be far behind in trying to snatch customers away from Wall Street firms.

The point is that all broker dealers have inherent conflicts. We have to be smart enough not to buy into their game.

Morningstar, Lipper, Thomson Financial, Hoovers, Multex, and scores of other financial data and research firms provide checks and balances to Wall Street analyses.

You don't have to ditch your broker, or your brokerage firm. You just have to know better -- and take responsibility for your own investment decisions.

http://cbs.marketwatch.com/news/story.asp?print=1&guid={0ABA9E4F-9CA2-4E46-AABF-F1793BD70959}&am...