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This is one of the best Wall Street related books I have read to date. Daniel Reingold was, at one time, the top Telecommunications Analyst for sell-side firms on Wall Street. He lived through the “dot-com” boom and bust in 2000 and the corporate frauds involving WorldCom and smaller telecommunication companies.
For those who don’t understand the difference between sell-side analysts, and buy-side analysts, Daniel provides an excellent explanation. He explains that Sell side analysts “published their research in reports that were then ‘sold’ to outside investors from large pension funds, mutual funds, and other large institutions, which is why they were known as ‘sell-side’ analysts. In practice, these reports were not really sold; they were given to the institutional investors in exchange for the fund managers buying or selling stocks through the firms with the most helpful research.” He then explains that “the second group of analysts, a much larger but not as well-compensated group, worked directly for the large institutional investors that bought the sell-siders’ research. Their job was to recommend which stocks their employers should own in their portfolios. They were known as ‘buy-side’ analysts because their firm would ‘buy’ sell-side research, and sell-siders catered to them as their clients.”
This distinction between sell-side analysts and buy-side analysts is pivotal to the story of Dan’s career, since sell-side analysts have the ability to greatly influence and impact the markets through their research and opinions. As an active trader who has never experienced life on Wall Street, I found the behind the scenes life of an analyst very intriguing. Firstly, one must realize that full-service investment banks such as Goldman Sachs, JPMorgan Chase, Morgan Stanley, Barclays, UBS and CitiGroup, make most of their fees off of their Investment Banking businesses. These activities generally include helping customers raise funds in capital markets and giving advice on mergers and acquisitions (M&A). The conflict of course, is that investment banks want to attract companies to do banking business with them, which is difficult to do if an analyst is hindering the same company’s stock price by rating them as a hold or a sell. To deal with this conflict, regulators have insisted that banks build a “wall” between their banking and research divisions, but as this book shows, that is easier said than done.
Dan’s story is important to traders as it makes one realize the values of research, and the potential issues that you, as an investor, can run into by relying on it for your investment decisions. It also shows how large institutional investors truly have an advantage over the layman when it comes to trading and investing. As Dan says, early in his career, he learned his “first lesson that life on the Street, with its uneven information flows, often rewarded the powerful and connected over the merely smart. It distorted the entire market in the process”. Key points to remember for any trader when watching price patterns and hearing rumours / news.
Although the book focused on the TeleCom sector, an area I am not particularly knowledgeable about (or interested in for that matter), it actually proved to be the perfect backdrop for Dan’s story. Additional lessons for investors can be learned from this book as it talks about the dot-com and tech boom, insane valuations of small start-ups, and the ‘creative’ accounting which allowed companies to post such amazing growth revenues and profits until everything finally came crashing down. Even though you and I, as relatively small-time investors, would never catch these accounting errors while large corporate research divisions and auditors missed them, it does show that often ‘too good to be true’ stock stories, really are. With the recent boom in Social Networking Stock IPOs, one has to wonder if their valuations are reasonable given company financials.
To conclude, this is an excellent read for any investor to learn about what we’re all up against when trying to trade successfully against the pros. Though somewhat discouraging in some aspects, everything I learned from this book will help me focus my trading strategy on ways to avoid, or benefit from, the impacts of insider information or undue influence on analyst reports.
