The Pied Pipers of Wall Street: How Analysts Sell You down the River by Benjamin Mark Cole

From the Publisher

Today's market watchers have increasingly come to rely on the opinions of brokerage firm analysts. But in this startling and revealing new book, Benjamin Cole explains why relying too heavily on what they say often isn't the best course of action. He demonstrates the economics of the brokerage business and shows why and how securities analysts frequently put the interests of the firm ahead of the interests of regular investors.

Many seasoned investors are already leery of the impersonal giants of the Wall Street brokerage business; they're looking for unbiased guidance and trustworthy sources of information for investment decisions. This book gives the reader solid guidance on separating reliable information from salesmanship. Cole offers a riveting, eye-opening view of the workings of Wall Street, challenges the supposed objectivity of analysts, and concludes by providing balanced, objective information sources the investor can turn to with confidence. To illustrate his points, the author traces the motivation and histories of specific analysts who have harmed or helped investors, with significant moves in the market following key pronouncements.

Carefully researched, documented, and constructed, this book is a fascinating expose of compromise and the unwritten agendas just below the surface of brokerage and underwriting businesses.

Brad Hill

Any investor swept up by the swirling currents of today's financial media should read this book.

Marshall B. Front

An unbiased, honest, objective, fresh view of Wall Street research.

John Lonski

[A] provocative and lively read, reminding all that the pricing system can emit false signals.

Library Journal

Books like Mark Dempsey's Tricks of the Trade (LJ 1/98) have exposed the ways of brokers. In this new cautionary work, financial writer Cole focuses his attention on financial analysts, who are supposed to evaluate objectively the investment potential of securities. Cole contends that in the best of times analysts were never very successful in making predictions, but in recent years they have become shills for their investment banking departments. He further points out that the 1975 deregulation and consequential reduction of brokerage fees forced brokerages to make most of their money through investment banking. Analysts, while theoretically giving independent opinions, in reality now exist to help their firms' client companies to sell new stock and support their stock prices. Cole argues that this has led to almost incessant optimism among most analysts. His book is easily read, and his points would be useful for all investors to consider. Recommended for all public libraries and to academic libraries where there is interest. Lawrence R. Maxted, Gannon Univ., Erie, PA Copyright 2001 Cahners Business Information.

Internet Book Watch

In The Pied Pipers Of Wall Street: How Analysts Sell You Down The River, financial journalist Benjamin Cole draws upon his more than twenty years of experience and expertise to give the reader a candid, nitty-gritty, and accurate picture of how the stock market brokers and consultants really work. A cautionary tale of the offhand, everyday, and routine deception that lurks within in too many "buy" recommendations from the analysts, The Pied Pipers Of Wall Street reveals the inherent conflicts of interest that work against the investor. It is also a clarion warning against blindly trusting brokerage analysts as the sole source of "objective" guidance on investing in stocks, bonds, and mutual funds. The critical importance of The Pied Pipers Of Wall Street has been lately underscored by the bursting bubble of the dotcoms and the wild rides provided by the technology stocks. If you have money in the market, or are considering buy and sell advice from market professionals, you need to read what Benjamin Cole has to say!

Product Details

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Table of Contents

Read an Excerpt

The new stars of Wall Street are the brokerage, or "sell side," stock analysts, thrust from behind the scenes to near celebrity status in the 1990s and into the 2000s. Where once brokerage researchers toiled in obscurity and were granted a measure of independence in their firms, now they are often the face and public persona for major stock brokerages. Their job today is to entrance the market with their flute work, to provide the captivating music that helps stocks rise, and rise again.

In part, this is the result of an explosion of financial media that has occurred since the 1980s, with the emergence of all-business-news cable television shows and an avalanche of financial magazines and newspapers. The Internet, seemingly invented for Wall Street, is throbbing with stock market Web sites, all manner of financial information and news, and, of course, online trading. It helps immensely that analysts' songs are today sought by legions of financial journalists and broadcast to an audience that largely has never seen a sustained bear market—until recently, anyway.

Certainly, by 2001 many individual investors had lost a lot of money in the stock market and felt like they were getting killed—or perhaps it is more accurate to say they had been led to slaughter. With millennial finality, the market fever of the late 1990s had broken in 2000, and broken hard. The Nasdaq Composite, which so captured the rise of Internet stocks and tech skyrockets, in 2000 fell to about half of its peak, the worst year for any major index since the Depression era.

In addition to the Nasdaq Composite, stock indices such as the venerable Dow Jones Industrial Average and the Standard & Poor's 500, had each breached all-time records in 1999. The S&P 500, for example, had more than quadrupled in the 1990s, reflecting a bull market to hold its own against any other in history. It was a market unknown to veterans, even as it was taken for granted by growing millions of Americans, who in the 21st century own stocks by far greater percentages than ever before. Yet as investors are learning anew, it isn't always sunny on Wall Street, even if the widely quoted brokerage analysts are forever promising blue skies.

In the swoons on the major stock indices after 2000, a massive $3.5 trillion of paper wealth (some might call it "digital dollars") had been unceremoniously wiped out on Wall Street. Stocks that millions of Americans had been told would soar—Amazon.com, eToys Inc., Priceline.com, and even solid performers like Microsoft or Cisco Systems—instead tanked, losing half, 80 percent, or in the case of e-tailer eToys and shopping service Priceline, nearly all of their value on the exchanges.

And yet, in early 2000, weren't all the brokerage seers predicting another year of the bull? Wasn't Abby Joseph Cohen, the chief investment guru for Goldman Sachs, invincible? Wasn't everybody on CNN in agreement?

Brokerage analysts today—many of whom work for global behemoths, with thousands, and even tens of thousands of stockbrokers—have linked arms with their investment banking departments, to help smooth the road for the successful issue of IPOs (initial public offerings), of secondary equity offerings, and of bond offerings. Analysts are there to help the huge trading institutions, the money managers, and the mutual funds ease in and out of positions, profits in hand, even if the retail investor is left holding the bag. Much like lawyers, the brokerage analysts' job today is to make a "best case" for a stock, not to be objective skeptics of a company's future performance.

Ironically, the body of federal securities law that pertains to brokerage analysts, largely developed fifty and more years ago and affirmed in the famous SEC v. Ray Dirks decision in 1983, grants safe harbor to these professionals. The law assumes analysts are still in their traditional garb of pure researchers, separated from investment banking and trading departments by the noble (if now nonexistent) so-called Chinese wall. Thus, under the law, analysts are granted the latitude to be almost completely unhindered when expressing their views, as if they were journalists or pundits. But financially, they are beholden to their employers and largest clients. Even the recently passed SEC Regulation FD implicitly embraces the hope that analysts wish to do a good job, and just need less baggage or some minor rule-tinkering to do so.

The law and current regulation don't recognize what almost every Wall Street pro no longer even considers controversial: that Wall Street today is a half-century and a world away from that business climate embodied in SEC regulations. Where the law sees a stock market researcher hunched over his slide rule, pros take for granted the present-day constellation of analyst hype, market fever, ubiquitous financial news, cyberized trading, and gigantic brokerages and mutual funds armed with mega-dollar advertising budgets. Where once independence was their hallmark, analysts today are effectively part of the investment banking and marketing departments of brokerages.

This book takes a hard look at stock market analysts and their role in the changed brokerage industry and the financial media. It is not a reassuring examination. For one, numerous academic and industry studies have concluded that analysts' "buy" recommendations, as a group, actually underperform the general market. The reason for this has much to do with the nature of the compromised relationships described here.

In tracing how the role of the securities industry analyst has been transformed, The Pied Pipers of Wall Street presents first a microcosmic view of one analyst's conflicted actions. It then looks more broadly at the evolution of Wall Street and how it got to where it is. Highlighted are a number of interesting, sometimes outrageous, IPOs and secondary offerings that have been flogged by analysts at major firms. Also examined are the antics of Wall Street Minor—the financial shenanigans of regional or single-shop brokerages and self-styled analysts, whose dealings mimic many actions of the big houses. In addition, the book reviews short traders and how they can serve as a valuable tonic on the market—yet how the Street has nearly wiped that breed of investor out of existence. Also provided is a compilation of some independent and highly regarded research outfits that can be of real value to the individual investor seeking unbiased guidance, and a final chapter on the Securities and Exchange Commission and possible regulatory reform.

If more investors knew of the changed market realities of the 1990s and beyond, they might tread with more caution, but unfortunately, in the words of the old saw, experience is what you get after you need it. In 2001, with the Nasdaq still off about half from its peak, many investors had already figured out it was too late to learn the new score on Wall Street. Their portfolios have been crippled, and it is hard to envision full recovery. One can only hope that other investors may learn from their experience, and not repeat it.