Investors of the world, unite! The Motley Fool declares May Day on the U.S. stock markets, the most powerful capitalist force on the planet. Individual investors are increasingly important to the vitality of the stock market, yet, in terms of policy and regulation, our voices are a mere whisper compared to the organized lobbying efforts of the business, exchange, and institutional investor constituencies. Events over the last year have highlighted some significant flaws in the way that the U.S. markets are run. This is a direct threat to our economic well-being, for honest markets are certainly part of the reason that the U.S. is the destination of choice for so much capital from overseas.
Well, guess what? The markets need us, individual investors, to help keep it vital. It is our responsibility to demand that they be run in a way that is equitable, transparent, and benevolent, not just for us, but for all constituencies. We are willing to take risks that companies will succeed or fail as businesses; we should not be willing to risk that we are being deceived, or that the information we are provided is not an accurate representation of a company's economic condition.
From May 1 to May 8, The Motley Fool will present its ideas for best practices in the marketplace. We hope that these ideas will stir debate among individual investors. We have set up a discussion board for just that purpose. We will release a new Declaration each day at noon.
Declaration #2:
We, as individual investors, will pay no heed to Wall Street analysts unless they include disclosure of their firms' linked business dealings with the company covered AND a past record of their own recommendations overlaying a graph of that stock's price performance.
Problem: Individual investors, in their quest for information about publicly traded companies, have long looked to Wall Street analysts for opinions. Unfortunately, there is no way for these same individuals to make a determination of the analysts' conflicts of interest or the past record of the analysts' recommendations.
In the past five years, we have seen the rise of a new phenomenon: the role of equity analyst as a public figure. Several analysts have become household names through intense self-promotion, bold calls, working for a high-profile bank, or even covering the right industry.
This celebrity rises from the confluence of several events. First and foremost was the rise of the investor class in the United States. While fewer than 20% of all households owned stock in some form in 1980, by 2000 the percentage surpassed 55%. Second was the democratization of information thanks to the tremendous growth of the Internet. Individual investors no longer had to wait for days to receive public information to arrive by mail. They can actively seek out information as fast as the institutions with only a few keyboard strokes. Third was the rise in popularity of the financial media, particularly television, where investor information shows made the transition into entertainment. Suddenly, sell-side analysts and money managers who had interesting perspectives and attractive personalities were hot commodities on television.
We see nothing inherently wrong with this arrangement. Investors look to analysts to provide interpretation of corporate information, and analysts who are particularly effective in this regard ought to be well compensated. However, what has been plowed under during this rise to celebrity are two elements key to understanding the danger inherent in investors placing too much credence in analyst opinions. One is the lack of understanding by individual investors that, unlike auditors, analysts do not perform a public service. Their motivations are and should be driven by the interests of their employers. The second danger is that neither a common nomenclature nor an external rating system exist to track the past performance of analysts.
We contend that individual investors maintain the power in their relationships with sell-side analysts. The only power analysts have over us is that which we grant them. As such, it remains the responsibility of individual investors to choose what analyst information we find credible. After all, information that is not deemed credible has vastly reduced value. Unfortunately the current environment rewards analysts not for being correct, or for even being astute, but for getting their names in print and their faces on television. By paying any heed at all to these analysts, we are rewarding them based upon their abilities to self-promote rather than their analytical ones.
What to do now
It is within our ability to change the way analysts are rewarded, but more than any other declaration in the Manifesto, this one requires personal discipline. Whenever you see an opinion by an equity analyst, look to see if there is disclosure of conflicts of interest. If no such disclosure exists, studiously ignore the opinion. In investing, what you do not know CAN hurt you. Analysts gain their power to influence when their opinions have "the ability to move a stock." The only way they can actually do that is if people react to their opinions. So, don't.
Feel free to voice your displeasure to journals and newspapers relying too heavily on Wall Street analysts for commentary in articles about the market or specific companies. It is rare that you will see a disclosure in a newspaper, but an article that quotes several analysts in order to have a "diversity of opinion" is quite common. Let the papers know by writing to the editor that you expect them to find different, better, less-conflicted sources for true diversity. Write the editors. Email CNBC. Let them know that you think they provide no service at all by feeding consumers advice from analysts.
This is a call to action. We intend to make the opinions of individual investors heard about issues that directly affect their ability to participate in the public markets. Please take a moment to comment on this and subsequent Manifesto points that will be released over the next four market days, even if just to say, "Hear, hear!" or "I agree and would further say..." or "I disagree because.... " We will deliver these comments to the SEC, members of Congress, and the exchanges prior to the SEC Investor Summit scheduled for May 10, in which our own Bill Mann will be a panelist.
Tomorrow
Motley Fool Manifesto, Part 3: We want an accurate picture of our companies' financial conditions. Stop the accounting shenanigans. Tune in around noon on Friday!