Trusting Research: What to do now?

Of late, their has been a clamor over the suspected misuse of analyst research by investment banks and their large institutional customers excluding the average investor from critical information and from juicy IPOs and other investments.   Analyst Doug Rogers sheads some light on this timely topic below.   
 

Utilizing The Research Tool

Equity research, particularly that produced by major investment banking institutions, has come under tremendous fire recently for its practices and potential conflicts of interest.  Within the confines of legal scrutiny and the relationship of many investment banks and their respective research arms, there is certainly a strong case to be made and particular examples of wrongdoing that have been addressed by regulators.  The industry is now shifting its focus on independent research providers such as ManageSource Research and attempting to develop a regulatory environment that protects investors by removing undue influence and economic pressure on analysts that could affect their judgment.  The question is: Will it work? And as an investor, what can you do to use research effectively?

The first question, “Will it work?” pertains to the regulatory mandates that have recently been passed down to financial services firms regarding internal research practices.  Just like the Sarbanes-Oxley act, I fear that many of the mandates are poorly executed and hurriedly developed, so they are likely to either create greater problems, inefficiencies and costs in the future, or be relatively ineffective.  However, the spirit of some of the mandates, particularly with regard to the isolation of analysts from influential senior management and bankers who maintain significant vested interest in positive research reports, and in the shift towards independent equity research providers and making such research more readily available alongside a broker-dealer’s proprietary offering, is sound.  What has been completely overlooked however, are the synergies and efficiencies that pervade financial services from the trading floor, through the brokerage bullpen and up to the investment banking group and the research analysts. 

I am certainly not vindicating any wrongdoing and those that have mislead or otherwise acted illegally should be dealt with appropriately, but I would, as usual, like to offer a unique and less radical approach to the situation. 

The various facets of the brokerage and banking firms can never truly be made mutually exclusive of each other.  Consumers and corporations would suffer from significant drops in the amount and comprehensiveness of information available to them through the research process, as well as higher costs for trading, account maintenance, clearing, etc., etc.  These processes have grown together because they are more effective when working in a holistic fashion.  Imagine if you could not have a savings and a checking account at the same bank?  Or, remember when you couldn’t get $9 trades in 9 seconds and then use your Visa/ATM/Check card from the same account to take the kids to Sea World?  I am trying to demonstrate that the question is really one of morality, ethics and oversight through comprehensive checks and balances and not through mandating different processes in the hopes that ethics improves along with greater restrictions.  In fact, just like a teenager who’s told not to drink beer when they go out with their friends, process restrictions will likely cause increased friction, resentment and possibly even lower ethics among the parties, while the consumer (you!) suffers from higher costs, greater confusion and lower efficiency from your financial services firm.

The solution for individual investors is to start identifying and utilizing research for what it truly is: one of the best, most comprehensive tools available to help support your investment decisions.  My pragmatic neurons are itching again, and just like with any tool, investors need to develop a strategic program that should center around research and the financial information contained therein, but that also encompasses a broad due diligence process (as we’re mandated to disclose, disclaim, recommend, urge and badger investors to do in every report anyway).  Optimally, you would want to begin with research from a highly regarded independent provider such as ManageSource Research (naturally!).  The report should be able to provide you with a legible and comprehensive account of the underlying company and their business while positioning the issue within its peer group and the overall market to help you determine what forces will affect the company’s performance and overall results.  You will also have access to a large amount of ratios and fundamentals that are critical for two purposes: 1. demonstrating the absolute performance and current condition of the company, and 2. as a relative guidepost that enables you to compare it with the other investments that are being considered at the same time. 

Once the primary fundamental elements have been garnered from the research and you have read the report, ask yourself “is this reasonable?”  In other words, be critical about the content.  Has everything been disclosed satisfactorily?  Has the analyst identified risks and negative items in addition to the positive ones?  Are the firm and the analyst credentialed?  Does it make sense (Warren Buffet’s favorite question!)?  Do you feel comfortable with what you’ve read?  Once these questions have been answered and you’re ready to proceed, the due diligence process should expand to include technical studies and charting (Prophet Finance is by far my favorite at http://www.prophetfinance.com), company news, a review of the market and competition, corporate filings, and any other pertinent material that you can review to help support the research findings and your own methodology, perspective, risk tolerance, desired returns and position within your portfolio.  Remember: you don’t want to own them all, just the ones that are the best for you and represent the best opportunity for success within your investment strategy.

Wishing you clarity in your research and pragmatic success from your investments…..

Douglas Rogers, ManageSource Research, RIA

Feel free to email us your thoughts at ask@stockupticks.com

Doug Rogers and ManageSource Research

ManageSource Research has been working diligently to add products and services that complement our core research and provide our clients with greater value.  During  the past year, we have initiated a joint venture with an established financial services company that provides clients access to banking services such as capital structure analysis & consulting, Venture Capital and "Angel" capital, as well as market research and competitive analysis.  Contact us to discuss your needs.

To enhance our digital image and vastly improve the promotion of your company's research we are nearly complete a total redesign of our website, managesource.com, that will include vibrant new imagery and graphics, simpler site navigation and access to information as well as web-standard tagging to vastly improve our visibility to search engines across the 'net.  We will also be initiating an advertising program through the Linkshare Network to increase site traffic, and adding embedded elements such as daily news to enhance the site's affinity among users.  All of this means significantly greater exposure and ease of access for your company's research.  Our fees are all-inclusive and we can work out a package that creates the most significant value proposition for your current needs.  Drop us a line or give us a quick call to find out how ManageSource Equity Research can help your Bulletin Board listed company achieve its goals in the equity market place

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