Analysts should be allowed to actively trade stocks – including the stocks they cover – for their personal accounts. Discuss.
Or if you’re Felix Salmon and Paul Kedrosky – two of the more opinionated of the financial bloggers – engage in a blog-based version of a debate club.
Kedrosky is strongly in favour of analysts owning their stock picks, and has argued in the past that analysts who don’t own the stocks they cover shouldn’t be trusted.
Salmon, on the other hand, dismisses as crazy the notion that Wall Street stock analysts ought to “start trading for their personal accounts in the very stocks and asset classes they cover.” Furthermore,
I see no need whatsoever for analysts to own stocks, and I can foresee a whole host of problems should it start to happen. In other words, the downside is large, the upside is extremely tenuous, and there’s nothing really broken about this ban in the first place so why on earth are we trying to fix it.
The fact is that analysts are not stock pickers, no matter how much they might like to kid themselves that they are, and their value lies not in their stock picks, but elsewhere. Good stock pickers can get paid billions of dollars a year: they’re called hedge fund managers. Good analysts have a different skillset. Let’s celebrate diversity a little, here, and say that analysts help investors generate alpha; they don’t generate alpha themselves.
A parallel debate has also broken out in the comments at both blogs; commenters seem fairly evenly split between the positions held by Messrs Kedrosky and Salmon, and have also added new layers to the debate.
Scott Berry, a former analyst at SMH Capital, noted that the practical aspects of analysts potentially owning stocks had not yet been discussed:
How *much* stock should an analyst own? A thousand dollars? What about one share? Or would you advocate a percentage of an analyst’s investable assets? Makes a huge difference, no?
I still maintain that a better–and certainly much more practical–thing would be to publicize the impact of an analyst’s recommendations, relative to an appropriate benchmark. How a hypothetical $1000 in each of 10 different calls compares over time to $10,000 invested in the relevant index, say. If you want to know how good a stock picker an analyst is–assuming that’s relevant to you–that seems like the best way
Berry, who agrees with Salmon, says his policy as a sell-side analyst is not to hold stocks directly:
I believe this is the best way to keep myself free of potential sources of conflict in my analysis, and expect this to remain true as long as I write publicly in a way that favors a specific investment position. For the time being, my money is parked boringly, and somewhat uncomfortably, in a basket of asset-allocated index funds. I’m certain to be giving up some alpha, but I also don’t have to live by the tape, and I sleep better at night.
The debate continues.
Disclosure – FT Alphaville holds no positions in any of the bloggers or blogs mentioned. Honest.
Related links:
Just How Much Skin in Wall Street’s Game? – Deal Journal
Should Stock Analysts Own Their Picks? – Dealbreaker
The case for (and against) conflicted analysts – FT Alphaville