Many years ago, when I worked as the vice-president of a consulting company, staffers were discussing how a client was so competitive that it got in the way of his success. I casually mentioned how hard it was for me to understand that behaviour, since I was not very competitive myself.
How wrong I was. After the meeting, one colleague had the guts to tell me he hoped I really didn't believe that about myself. I was, he said, "the most competitive person" he knew. Furthermore, everyone considered me a "know-it-all" who would argue a point just to prove how smart I was. "Other than that," he quipped, "everybody loves you."
Amazingly, until he took me aside, I had no clue others saw me that way. Not only did it make me less well liked, but getting ideas from others was being hampered by my need to always be right. It limited my ability to perform at my leadership best.
Call it my Achilles heel: a behavioural weakness so powerful that, despite many other strengths, it could impede career success.
Everyone suffers from at least one such fatal flaw, a quality so annoying that, even as people seem to score success, it can sabotage possibilities of further promotion or stand in the way of forming the networks that help a career grow.
Anyone who wants to be a leader or aspires to that role needs to discover his or her Achilles heel, and take steps to overcome it.
The flaw can take many forms: an inability to listen effectively, a lack of showing appreciation, dismissing other people's opinions, being overly critical, having to be right all the time, tending to micromanage, blaming excessively or resorting to sarcasm.
Ironically, people often remain blissfully unaware of their Achilles heel even while all those around them are painfully aware of it. It may even be a regular topic of conversation among colleagues and subordinates, yet nobody will tell the one person who needs to know it.
How can otherwise smart and successful people be so unaware of such critical flaws?
One major reason is that we rarely see ourselves the way others see us. And the higher up we go, the less likely anyone is to point out our flaws. Employees and peers may feel it's too risky to confront a manager. They may also feel someone would not be open to such feedback, especially when the flaw is perceived to be so much a part of a person's identity.
What's more, many leaders never ask.
So how can you discover your Achilles heel? Simple: Don't delude yourself. Assume you have such a flaw, since most of us do. Then ask, and enlist the help of others in changing it.
To create an environment that will invite such feedback, tell people that you want it. State your awareness there are ways leaders behave that hamper their effectiveness - and say you want to be a more effective leader.
Here's a tip: It has been my experience that people are more likely to offer up constructive feedback if they are asked to provide both positive and negative comment.
So it's best to ask both what is working well, and what one thing you do that you could change to make the biggest difference.
Another tip: Be receptive to the reply. Don't debate or defend it. How you react to hearing about your Achilles heel can either shut down conversation or encourage it.
So rather than get defensive, be open. For example, if an employee tells you that you would be more effective if you were more consistent, don't respond with something like "I may appear inconsistent, but let me explain." Rather, ask for clarity: "Can you give me some examples of what you mean by inconsistent or can you help me with a recent example of when I acted this way?" Then ask for specifics about how you could act differently.
Here's a third tip: Humour helps. If people won't give you the goods directly, they'll often hint at it or give veiled feedback in the guise of jocularity.
One client, the chief executive officer of a health care company, learned about his Achilles heel through a jab at an office party. A peer offered up a toast to "the manager most able to cut you to greatness with his tongue."
The room burst into laughter. But the CEO caught the seriousness of the comment behind the humour and took the time later to ask about it. He learned that, while employees liked his high expectations and the way he coached, they felt his critical comments often left them feeling inadequate and unappreciated. That was his Achilles heel.
So what do you do once you've identified yours? It's time to try to change it.
Changing behaviour, especially habits built up over a lifetime, is never easy. But there are things you can do to help ease such a transition.
The first step is to let those around you know you are aware of your flaw, and want to make change.
Recently, I was working with a senior vice-president of branch banking for a large financial institution. Through formal feedback, he learned his tendency to micromanage was a real impediment. He then let his team know he was aware of the flaw, and wanted to learn how to micromanage less and trust more. He asked for help in better understanding his behaviour and requested they point out instances when he was overmanaging versus being helpful.
You can also reinforce for yourself your efforts to change. For instance, write down the change you want to make on a card and carry it with you. Jot it down on sticky notes that you place on your desk. Your messages might say something simple like: "Let people do their job" or "Don't argue just to prove you are right."
Then be conscientious about your efforts. The micromanager, for instance, decided that, every time he was tempted to ask someone about the status of a project, he would hold off for a few hours; every time, he was tempted to correct someone's work, he would ask himself first if what he was about to say was truly helpful. This made him catch his micromanaging behaviour before he acted on it.
It can also help to track and rate your progress. The micromanager committed himself to 30 days of trying to change. Every day during that month, he gave himself a grade on how well he had performed.
He found that both of these moves made a big difference in his daily behaviour. And the month-long commitment began to create a new habit.
It's also a good idea to make it fun for others. The micromanager invited his team to levy a fine of a dollar every time he slipped up, with the money going toward a team dinner. Even when he didn't agree, he went along.
Six months and $210 later, his team let him know that he was, as one employee said at the fine-funded dinner, "officially kicked out of the micro-man club."
The CEO with the biting tongue also made an effort to change. Over a year, he worked to balance positive feedback with constructive coaching, and was careful about the way he worded his criticisms.
A focus on this one behaviour paid off. Said one employee: "We used to dread hearing his feedback because he could tear you to pieces. Now, we all agree that fixing this one thing about his style turned him from being perceived as an ogre to being seen as a mentor."
One of the interesting things about your Achilles heel is that, once it's pointed out, it becomes painfully obvious. Over the few weeks after I was told about being a know-it-all, I started to notice how often I argued, how many times I would hardly listen to others' ideas because I was so eager to share my own, and how often I was talking just to prove how smart I was. I began to aggravate even myself.
So I went to those I worked with, let them know it was behaviour I wanted to change, and asked for help. I worked hard at not arguing a point just to prove I was right, on listening to the ideas of others, and on commenting on the value of their ideas..
I was able to change. And I realized that while being right might feel good at the moment, it wasn't serving my long-term interests. As a leader, I was much better off removing the poisoned arrow that had struck my heel.
Going toe to toe
Some people don't discover their Achilles heel until someone has the guts to tell them. Afraid to confront a boss or colleague about his or her flaws? Here are some tips:
Ask for permission. Try: "I have a lot of respect for you and have noticed some things I believe would make you more effective. Are you interested in hearing them?"
Balance negative with positive. Offer up at least three things you appreciate about the person before moving on to the flaw.
Frame feedback around future success. Few of us want to know our faults, but many want to know how to be more successful. So instead of telling someone he or she isn't a good listener, say, for example: "I think you would be more successful if you listened more to the ideas of others instead of debating."
Be sincere. Only offer up feedback if you honestly want to help. If that comes across, it's likely to get a better reception.
Be supportive. Say: "I believe you have good intentions and have great potential but I have noticed that your tendency to be critical often discourages others."
Give helpful examples and suggest alternatives. For example, say: "Sometimes people feel you don't trust them because you keep checking up with people. Perhaps you could set up regular meetings for updates and ask people to contact you in between if they need your help."
Saturday, June 14, 2008
Wednesday, June 11, 2008
With online trading, it pays to shop around
It's nice to know as you gas up your car or buy groceries that some things in life are still a bargain.
Online stock-trading commissions, for example. At a discount broker, also called an online or direct brokerage, you can trade stocks for as little as $1 to $29 over the Internet, depending on which firm you use, how large your account is and how often you trade. And whereas brokers used to use commission schedules that charged you a lot more for larger orders, many of them now use a flat rate.
With all sorts of daily living costs on the rise, now's a good time to make sure you're paying as little as possible to invest in stocks. Let's start with a reminder of how you benefit when you cut your trading costs.
First, and most obviously, paying less in commissions can help boost your returns. On a dozen trades per year, the difference between paying $10 and $29 per trade amounts to an extra $228 in your account. Low commissions can also help you put cost considerations aside so you can make buy and sell decisions for your portfolio based strictly on investing merit.
Several years ago, the standard online discount brokerage commission schedule was based on a $29 minimum for trades of up to 1,000 shares placed online. Lower costs were available to active traders - who make 30-plus trades per quarter - but this group represented only a small minority of customers.
E*Trade Canada intensified the level of price competition when it introduced a flat rate of $9.99 for clients who traded actively or had $50,000 in assets with the firm (with less, you pay $19.99). Very quickly, heavyweights like BMO InvestorLine, RBC Direct Investing and industry leader TD Waterhouse began to offer sub-$10 trades for clients with a total of $100,000 in assets. Note: The gap between online commissions and those for trades placed by telephone with a live agent are growing ever larger.
As far as the big firms have come in lowering commissions, they don't offer the cheapest trades around. For that, you have to try small brokers like Questrade and Interactive Brokers.
Both Questrade and IB have been around for years, primarily serving very active or professional traders who require high levels of data and flexibility in placing their trades. Questrade in particular has been trying to appeal to cost-conscious mainstream investors with a plan that offers commissions of 1 cent a share with a minimum of $4.95 and a maximum of $9.95.
IB describes itself on its website as "the professional's gateway to the world's markets," which tells you what type of clientele is being served. But the firm also has a detuned version of its trading platform, called WebTrader, which should be manageable for reasonably experienced investors who are comfortable with online investing.
The reason to consider IB is that it charges 1 cent per share to trade Canadian stocks and half a cent for U.S. stocks, with a minimum commission of $1. You read that correctly - you could, for example, buy 100 shares of a $50 TSX-listed stock and pay $1 in commissions.
Remember, though, that IB is a firm for serious traders (it doesn't even have registered accounts). You need a $10,000 (U.S.) deposit to open an account and you're subject to account fees if you don't meet requirements for a minimum level of activity. Stock market data feeds cost extra, although you can skip them.
The cheapest broker for your account depends in large part on how much money you have. With a small account, you'll pay a minimum of just under $20 at Credential Direct, E*Trade and Qtrade, or less at Questrade and IB. Most other brokers charge in the $25 to $29 range.
Many brokers now cut their cost to the sub-$10 range if you have $100,000 in assets with them, and this usually encompasses multiple accounts. If you have your registered retirement savings plan account at one broker and your registered education savings plan and cash accounts elsewhere, consider a consolidation to get up to the $100,000 mark (or, in the case of E*Trade, $50,000).
Despite the trend for falling commissions, trading costs remain on the high side at some brokers. Scotia McLeod Direct Investing charges $28.95 for up to 1,000 shares and up to 3 cents per share for trades of more than 1,000 shares. If you placed an order for 5,000 shares of a stock trading at $7, you'd pay $150. Compare that to the flat $10 commissions available elsewhere. For active traders, SMDI offers flat-rate commissions of $8.95 to $14.95.
CIBC Investor's Edge charges a minimum of $25 for market orders, where you accept or agree to pay the going market cost of a stock, or $28.95 for orders where you put limits on what you'll accept or pay. If you're an active trader, CIBC offers a deal of $395 paid upfront for 50 trades.
When choosing a discount broker, low commissions have to be balanced against the quality of service, tools and resources available. Consult The Globe and Mail's annual online brokerage survey, available on Globeinvestor.com (look for the Noteworthy headline close to the bottom of the homepage, on the right side), and check individual brokerage websites for demos and other information. Also try the ratings issued by a company called Surviscor on its website at surviscor.com.
When assessing the importance of commission costs on your portfolio, remember that the number of times you buy and sell stocks is just part of the equation. With low commissions, you can be aggressive and yet cost effective in managing your portfolio.
For example, you can cheaply use stop-loss orders, where your stocks are sold at preset prices to either lock in gains or limit losses. It's also more economical to rebalance your portfolio, which means selling down your winners and putting more into asset classes that are under-represented. One last benefit of cheap commissions: It's more cost effective to average your way into a stock, which means making multiple periodic purchases to limit the risk of making a big commitment to a stock or exchange-traded fund just before it tanks.
Discount brokers have become a lot more price competitive in the past year or so, providing a welcome price to the rising cost of so much else. Make sure you're getting your fair share.
Discount brokerage cost comparison
You're an occassional stock trader who is looking for the lowest possible costs for trading online. Here's a comparison of minimum commissions at a variety of brokers.
Minimum
Broker commission Web address
BMO InvestorLine $25 market bmoinvestorline.com
less than $100,000 in assets $29 limit
$100,000+ $9.95
CIBC Investor's Edge $25 market investorsedge.cibc.com
$28.95 limit
Credential Direct $19 credentialdirect.com
Disnat
disnat.com
less than $100,000 in assets $29
$100,000+ $9.95
eNorthern $24 enorthern.com
E*Trade Canada
canada.etrade.com
less than $50,000 in assets $19.99
$50,000+ $9.99
HSBC InvesDirect $29 investdirect.hsbc.ca
Interactive Brokers $1 interactivebrokers.ca
National Bank Direct Brokerage $28.95 nbdb.ca
Qtrade $19 market qtrade.ca
less than $100,000 in assets $23 limit
$100,000+ $9.95
Questrade $4.95 questrade.com
RBC Direct Investing
rbcdirectinvesting.com
less than $100,000 in assets $28.95
$100,000+ $9.95
ScotiaMcLeod Direct Investing $28.95 scotiamcleoddirect.com
TD Waterhouse
tdwaterhouse.ca
less than $100,000 in assets $29
$100,000+ $9.99
Trade Freedom $9.95 tradefreedom.com
Five ways for keep brokerage commissions low
1. Consolidate assets at one firm to benefit from low rates for large accounts.
2. Ask if there are any data or market access fess in addition to posted commissions.
3. If you typically trade more than 1,000 shares at a time, flat-rate commissions will save you a lot of money.
4. Hyper-active traders may qualify for lower rates than are posted here.
5. Avoid trading by phone through a live agent - it costs substantially more.
Online stock-trading commissions, for example. At a discount broker, also called an online or direct brokerage, you can trade stocks for as little as $1 to $29 over the Internet, depending on which firm you use, how large your account is and how often you trade. And whereas brokers used to use commission schedules that charged you a lot more for larger orders, many of them now use a flat rate.
With all sorts of daily living costs on the rise, now's a good time to make sure you're paying as little as possible to invest in stocks. Let's start with a reminder of how you benefit when you cut your trading costs.
First, and most obviously, paying less in commissions can help boost your returns. On a dozen trades per year, the difference between paying $10 and $29 per trade amounts to an extra $228 in your account. Low commissions can also help you put cost considerations aside so you can make buy and sell decisions for your portfolio based strictly on investing merit.
Several years ago, the standard online discount brokerage commission schedule was based on a $29 minimum for trades of up to 1,000 shares placed online. Lower costs were available to active traders - who make 30-plus trades per quarter - but this group represented only a small minority of customers.
E*Trade Canada intensified the level of price competition when it introduced a flat rate of $9.99 for clients who traded actively or had $50,000 in assets with the firm (with less, you pay $19.99). Very quickly, heavyweights like BMO InvestorLine, RBC Direct Investing and industry leader TD Waterhouse began to offer sub-$10 trades for clients with a total of $100,000 in assets. Note: The gap between online commissions and those for trades placed by telephone with a live agent are growing ever larger.
As far as the big firms have come in lowering commissions, they don't offer the cheapest trades around. For that, you have to try small brokers like Questrade and Interactive Brokers.
Both Questrade and IB have been around for years, primarily serving very active or professional traders who require high levels of data and flexibility in placing their trades. Questrade in particular has been trying to appeal to cost-conscious mainstream investors with a plan that offers commissions of 1 cent a share with a minimum of $4.95 and a maximum of $9.95.
IB describes itself on its website as "the professional's gateway to the world's markets," which tells you what type of clientele is being served. But the firm also has a detuned version of its trading platform, called WebTrader, which should be manageable for reasonably experienced investors who are comfortable with online investing.
The reason to consider IB is that it charges 1 cent per share to trade Canadian stocks and half a cent for U.S. stocks, with a minimum commission of $1. You read that correctly - you could, for example, buy 100 shares of a $50 TSX-listed stock and pay $1 in commissions.
Remember, though, that IB is a firm for serious traders (it doesn't even have registered accounts). You need a $10,000 (U.S.) deposit to open an account and you're subject to account fees if you don't meet requirements for a minimum level of activity. Stock market data feeds cost extra, although you can skip them.
The cheapest broker for your account depends in large part on how much money you have. With a small account, you'll pay a minimum of just under $20 at Credential Direct, E*Trade and Qtrade, or less at Questrade and IB. Most other brokers charge in the $25 to $29 range.
Many brokers now cut their cost to the sub-$10 range if you have $100,000 in assets with them, and this usually encompasses multiple accounts. If you have your registered retirement savings plan account at one broker and your registered education savings plan and cash accounts elsewhere, consider a consolidation to get up to the $100,000 mark (or, in the case of E*Trade, $50,000).
Despite the trend for falling commissions, trading costs remain on the high side at some brokers. Scotia McLeod Direct Investing charges $28.95 for up to 1,000 shares and up to 3 cents per share for trades of more than 1,000 shares. If you placed an order for 5,000 shares of a stock trading at $7, you'd pay $150. Compare that to the flat $10 commissions available elsewhere. For active traders, SMDI offers flat-rate commissions of $8.95 to $14.95.
CIBC Investor's Edge charges a minimum of $25 for market orders, where you accept or agree to pay the going market cost of a stock, or $28.95 for orders where you put limits on what you'll accept or pay. If you're an active trader, CIBC offers a deal of $395 paid upfront for 50 trades.
When choosing a discount broker, low commissions have to be balanced against the quality of service, tools and resources available. Consult The Globe and Mail's annual online brokerage survey, available on Globeinvestor.com (look for the Noteworthy headline close to the bottom of the homepage, on the right side), and check individual brokerage websites for demos and other information. Also try the ratings issued by a company called Surviscor on its website at surviscor.com.
When assessing the importance of commission costs on your portfolio, remember that the number of times you buy and sell stocks is just part of the equation. With low commissions, you can be aggressive and yet cost effective in managing your portfolio.
For example, you can cheaply use stop-loss orders, where your stocks are sold at preset prices to either lock in gains or limit losses. It's also more economical to rebalance your portfolio, which means selling down your winners and putting more into asset classes that are under-represented. One last benefit of cheap commissions: It's more cost effective to average your way into a stock, which means making multiple periodic purchases to limit the risk of making a big commitment to a stock or exchange-traded fund just before it tanks.
Discount brokers have become a lot more price competitive in the past year or so, providing a welcome price to the rising cost of so much else. Make sure you're getting your fair share.
Discount brokerage cost comparison
You're an occassional stock trader who is looking for the lowest possible costs for trading online. Here's a comparison of minimum commissions at a variety of brokers.
Minimum
Broker commission Web address
BMO InvestorLine $25 market bmoinvestorline.com
less than $100,000 in assets $29 limit
$100,000+ $9.95
CIBC Investor's Edge $25 market investorsedge.cibc.com
$28.95 limit
Credential Direct $19 credentialdirect.com
Disnat
disnat.com
less than $100,000 in assets $29
$100,000+ $9.95
eNorthern $24 enorthern.com
E*Trade Canada
canada.etrade.com
less than $50,000 in assets $19.99
$50,000+ $9.99
HSBC InvesDirect $29 investdirect.hsbc.ca
Interactive Brokers $1 interactivebrokers.ca
National Bank Direct Brokerage $28.95 nbdb.ca
Qtrade $19 market qtrade.ca
less than $100,000 in assets $23 limit
$100,000+ $9.95
Questrade $4.95 questrade.com
RBC Direct Investing
rbcdirectinvesting.com
less than $100,000 in assets $28.95
$100,000+ $9.95
ScotiaMcLeod Direct Investing $28.95 scotiamcleoddirect.com
TD Waterhouse
tdwaterhouse.ca
less than $100,000 in assets $29
$100,000+ $9.99
Trade Freedom $9.95 tradefreedom.com
Five ways for keep brokerage commissions low
1. Consolidate assets at one firm to benefit from low rates for large accounts.
2. Ask if there are any data or market access fess in addition to posted commissions.
3. If you typically trade more than 1,000 shares at a time, flat-rate commissions will save you a lot of money.
4. Hyper-active traders may qualify for lower rates than are posted here.
5. Avoid trading by phone through a live agent - it costs substantially more.
Sunday, June 1, 2008
Through a glass rosily - John Daly
Meredith Whitney's "15 minutes" appear to be far from over. The CIBC World Markets banking analyst ascended to Wall Street's equivalent of Brad-and-Angelina megastardom last October when she downgraded her rating on beleaguered Citigroup Inc.'s shares and warned of a possible dividend cut. That triggered a $369-billion (all currency in U.S. dollars), one-day drop on U.S. stock markets already shaken by the subprime lending crisis.
And what's not to love? A smart, tough-talking blonde, married to former WWE wrestler John Charles Layfield (a.k.a. "Death Mask"), who--oh so rare among analysts--actually says what she thinks. "No one had the moxie to put in print what I put in print," she said.
Indeed, Whitney's pronouncements stand out because analysts rarely issue negative recommendations, and be-cause--so far, at least--she's been right. Although it shouldn't come as a surprise to any serious investor, analysts' buy recommendations still outnumber sells--or whatever euphemisms they use--by about 9 to 1.
Back in 2002, it looked like the profession might change, when then-New York attorney general Eliot Spitzer went after analysts hard. His whipping boy: Henry Blodget, star tech analyst at Merrill Lynch during the dot-com bubble (see "Look who's back," page 9). In 2003, 10 leading firms agreed to pay $1.4 billion to settle conflict-of-interest charges, and Blodget accepted a lifetime ban from the securities industry without admitting or denying civil fraud charges.
Yet, today, the scandal is water long under the bridge. Sure, Chinese walls are higher now than at the turn of the decade, but most analysts still wear soft gloves when it comes to the companies they cover. But the intriguing question isn't why analysts don't tell the literal truth; it's why retail investors continue to believe analysts' recommendations.
In a study published last August ("Are small investors naive about incentives?"), University of California assistant professor of economics Ulrike Malmendier and Harvard Business School assistant professor Devin Shanthikumar looked at analysts' recommendations from 1993 to 2002. What they discovered proves what we already guessed: Small traders tend to follow recommendations literally, exerting upward pressure on prices after "strong buy" and "buy" recommendations, and no pressure following "hold" recommendations.
But large traders are savvier. They tend to buy after strong buy recommendations, hold after buy, and sell after hold. Why is the split so clear? Malmendier and Shanthikumar couldn't find a definite explanation in the data, although they say the reason could be gullibility, er, "investor naivete."
It's doubtful such a study would produce different results if 2008 trading activity was used, especially in light of the upsurge in websites such as newratings.com that are dedicated to tracking analysts' upgrades and downgrades.
But reading analysts' reports isn't rocket science, or at least it shouldn't be. Just ask Blodget, who has risen from the ashes and now publishes the Silicon Alley Insider, a popular online newsletter that concentrates on tech investments.
So how should individual investors read these reports? "Almost all analysts are going to be flat-out wrong at least 40% of the time," says Blodget. "As long as you understand that, the reports are very reliable. I think the quality of Wall Street research has gone up in the past 10 years, but that doesn't mean analysts are right about stocks more often."
Nor should you take their recommendations literally. "The media generally equates buy ratings with 'urging investors to buy,' which is often unfair to analysts, because the ratings themselves aren't actually action recommendations," says Blodget. "I know that sounds ridiculous, but it's true. Most firms use the words as nouns instead of verbs, as in: 'It's a buy,' and not ' Quick, mortgage your house and buy!' "
Within constraints, analysts appear to choose their words very consistently. In a study entitled "Do security analysts speak in two tongues?" published last October, Malmendier and Shanthikumar found that analysts' buy and sell recommendations tend to be more optimistic than their detailed earnings forecasts. Why? The analysts know that retail in--vestors pay close attention to the recommendations, but bigger players concentrate on earnings.
Even so, analysts employed by underwriting brokerage firms tend to be more positive than independent analysts. Yet they often revise earnings forecasts down just before companies issue results--making it easier for the companies to meet, or even better, the Street's consensus earnings targets.
Again, Blodget isn't surprised. Picking stocks is just a small part of an analyst's job. That job also includes client visits, detailed financial analysis, primary customer research, historical research, meetings with management and investment conferences. "For most professional investors, stock ratings are the least valuable service that analysts provide, because opinions are a dime a dozen," he says.
Putting it in even more startling terms, Blodget isn't optimistic that retail investors have a hope when it comes to playing against Wall Street. "A Little League team is always going to get destroyed by the Yankees," he once told Bloomberg. "It doesn't matter what field they play on, and that is exactly what happens when individuals try to compete with hedge funds."
As long as the retail investor believes the analysts, then there's no reason to believe he isn't right.
WHEN BUY MEANS HOLD
Ever read the back of your analyst's report? While there's lots of dull fine print to help you fall asleep, one reason to read it is to see how your analyst arrives at making a recommendation. Not all "buy" and "sell" recommendations are created equal.
Canaccord Adams, for instance, rates stocks as "buy," "speculative buy," "hold" or "sell." The buy stocks are supposed to generate a return of more than 10% over the next 12 months, while the speculative buy stocks have a significantly higher risk. The hold stocks are meant to generate a return of 0% to 10%, while the sell stocks are expected to lose money.
Okay, that seems fairly straightforward, but what if two stocks that are both rated buy are forecast to generate returns of 11% and 50%, respectively? If what you want are bullish stocks, you'll have to pay more attention to the analyst's target prices.
The stock-picking system over at RBC Capital Markets is different than at Canaccord. RBC designates stocks as "top pick," "outperform," "sector perform" or "underperform" based on sector comparisons. Top picks represent an analyst's best bets, and can only comprise about 10% of his recommendations. Outperforms are expected to materially outperform the sector average over 12 months, while sector performs will be in line with the sector and, you guessed it, underperforms will underperform the sector.
If the sector is expected to underperform the market, then that outperform-rated stock in a lousy sector may suddenly look a lot less enticing.--Scott Adams
LOOK WHO'S BACK
In 1998, Henry Blodgetwas the boy-wonder analyst at Merrill Lynch who set a target price of $400 (all currency in U.S. dollars) for Amazon.com when it was trading at $242. After splitting, Amazon soared to the equivalent of $500. But four years later, he was the fall guy in Eliot Spitzer's offensive against tainted Wall Street analysts who had hyped stocks to help secure fat investment banking fees for their firms. No one received more scorn than Blodget, who was on record publicly recommending a stock like Excite@Home, while describing it in an e-mail to a colleague as "such a piece of crap!" By 2003, he had quit Merrill Lynch under a cloud and agreed to a lifetime ban from direct involvement in the securities business. Though only in his mid-30s, he appeared to be washed up. Notoriety often isn't fatal in America, however. Since his downfall, he's written an online column for Slate, and contributed to Fortune, Newsweek and The New York Times. Last July, he co-founded the Silicon Alley Insider, a New York City-based online news service that's garnered a big audience among do-it-yourself investors. In March, the website Wall Street 24/7 valued the Insider at $5.4 million, and ranked it No. 12 in its list of the "25 most valuable blogs," not far behind such Internet veterans as The Drudge Report (No. 8). Blodget is also a regular contributor to Yahoo! Finance's tech ticker, a news and video site.--J.D.
And what's not to love? A smart, tough-talking blonde, married to former WWE wrestler John Charles Layfield (a.k.a. "Death Mask"), who--oh so rare among analysts--actually says what she thinks. "No one had the moxie to put in print what I put in print," she said.
Indeed, Whitney's pronouncements stand out because analysts rarely issue negative recommendations, and be-cause--so far, at least--she's been right. Although it shouldn't come as a surprise to any serious investor, analysts' buy recommendations still outnumber sells--or whatever euphemisms they use--by about 9 to 1.
Back in 2002, it looked like the profession might change, when then-New York attorney general Eliot Spitzer went after analysts hard. His whipping boy: Henry Blodget, star tech analyst at Merrill Lynch during the dot-com bubble (see "Look who's back," page 9). In 2003, 10 leading firms agreed to pay $1.4 billion to settle conflict-of-interest charges, and Blodget accepted a lifetime ban from the securities industry without admitting or denying civil fraud charges.
Yet, today, the scandal is water long under the bridge. Sure, Chinese walls are higher now than at the turn of the decade, but most analysts still wear soft gloves when it comes to the companies they cover. But the intriguing question isn't why analysts don't tell the literal truth; it's why retail investors continue to believe analysts' recommendations.
In a study published last August ("Are small investors naive about incentives?"), University of California assistant professor of economics Ulrike Malmendier and Harvard Business School assistant professor Devin Shanthikumar looked at analysts' recommendations from 1993 to 2002. What they discovered proves what we already guessed: Small traders tend to follow recommendations literally, exerting upward pressure on prices after "strong buy" and "buy" recommendations, and no pressure following "hold" recommendations.
But large traders are savvier. They tend to buy after strong buy recommendations, hold after buy, and sell after hold. Why is the split so clear? Malmendier and Shanthikumar couldn't find a definite explanation in the data, although they say the reason could be gullibility, er, "investor naivete."
It's doubtful such a study would produce different results if 2008 trading activity was used, especially in light of the upsurge in websites such as newratings.com that are dedicated to tracking analysts' upgrades and downgrades.
But reading analysts' reports isn't rocket science, or at least it shouldn't be. Just ask Blodget, who has risen from the ashes and now publishes the Silicon Alley Insider, a popular online newsletter that concentrates on tech investments.
So how should individual investors read these reports? "Almost all analysts are going to be flat-out wrong at least 40% of the time," says Blodget. "As long as you understand that, the reports are very reliable. I think the quality of Wall Street research has gone up in the past 10 years, but that doesn't mean analysts are right about stocks more often."
Nor should you take their recommendations literally. "The media generally equates buy ratings with 'urging investors to buy,' which is often unfair to analysts, because the ratings themselves aren't actually action recommendations," says Blodget. "I know that sounds ridiculous, but it's true. Most firms use the words as nouns instead of verbs, as in: 'It's a buy,' and not ' Quick, mortgage your house and buy!' "
Within constraints, analysts appear to choose their words very consistently. In a study entitled "Do security analysts speak in two tongues?" published last October, Malmendier and Shanthikumar found that analysts' buy and sell recommendations tend to be more optimistic than their detailed earnings forecasts. Why? The analysts know that retail in--vestors pay close attention to the recommendations, but bigger players concentrate on earnings.
Even so, analysts employed by underwriting brokerage firms tend to be more positive than independent analysts. Yet they often revise earnings forecasts down just before companies issue results--making it easier for the companies to meet, or even better, the Street's consensus earnings targets.
Again, Blodget isn't surprised. Picking stocks is just a small part of an analyst's job. That job also includes client visits, detailed financial analysis, primary customer research, historical research, meetings with management and investment conferences. "For most professional investors, stock ratings are the least valuable service that analysts provide, because opinions are a dime a dozen," he says.
Putting it in even more startling terms, Blodget isn't optimistic that retail investors have a hope when it comes to playing against Wall Street. "A Little League team is always going to get destroyed by the Yankees," he once told Bloomberg. "It doesn't matter what field they play on, and that is exactly what happens when individuals try to compete with hedge funds."
As long as the retail investor believes the analysts, then there's no reason to believe he isn't right.
WHEN BUY MEANS HOLD
Ever read the back of your analyst's report? While there's lots of dull fine print to help you fall asleep, one reason to read it is to see how your analyst arrives at making a recommendation. Not all "buy" and "sell" recommendations are created equal.
Canaccord Adams, for instance, rates stocks as "buy," "speculative buy," "hold" or "sell." The buy stocks are supposed to generate a return of more than 10% over the next 12 months, while the speculative buy stocks have a significantly higher risk. The hold stocks are meant to generate a return of 0% to 10%, while the sell stocks are expected to lose money.
Okay, that seems fairly straightforward, but what if two stocks that are both rated buy are forecast to generate returns of 11% and 50%, respectively? If what you want are bullish stocks, you'll have to pay more attention to the analyst's target prices.
The stock-picking system over at RBC Capital Markets is different than at Canaccord. RBC designates stocks as "top pick," "outperform," "sector perform" or "underperform" based on sector comparisons. Top picks represent an analyst's best bets, and can only comprise about 10% of his recommendations. Outperforms are expected to materially outperform the sector average over 12 months, while sector performs will be in line with the sector and, you guessed it, underperforms will underperform the sector.
If the sector is expected to underperform the market, then that outperform-rated stock in a lousy sector may suddenly look a lot less enticing.--Scott Adams
LOOK WHO'S BACK
In 1998, Henry Blodgetwas the boy-wonder analyst at Merrill Lynch who set a target price of $400 (all currency in U.S. dollars) for Amazon.com when it was trading at $242. After splitting, Amazon soared to the equivalent of $500. But four years later, he was the fall guy in Eliot Spitzer's offensive against tainted Wall Street analysts who had hyped stocks to help secure fat investment banking fees for their firms. No one received more scorn than Blodget, who was on record publicly recommending a stock like Excite@Home, while describing it in an e-mail to a colleague as "such a piece of crap!" By 2003, he had quit Merrill Lynch under a cloud and agreed to a lifetime ban from direct involvement in the securities business. Though only in his mid-30s, he appeared to be washed up. Notoriety often isn't fatal in America, however. Since his downfall, he's written an online column for Slate, and contributed to Fortune, Newsweek and The New York Times. Last July, he co-founded the Silicon Alley Insider, a New York City-based online news service that's garnered a big audience among do-it-yourself investors. In March, the website Wall Street 24/7 valued the Insider at $5.4 million, and ranked it No. 12 in its list of the "25 most valuable blogs," not far behind such Internet veterans as The Drudge Report (No. 8). Blodget is also a regular contributor to Yahoo! Finance's tech ticker, a news and video site.--J.D.
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