for 50 percent of the analysts bonus. Top executives also review a printout of how much business is done in the analysts stocks. The report is called "stock done" for short. Paine Webber keeps careful records of what percentage of trades it handles in every stock, and its market share in stocks it provides research for, compared to market share of competitors. Michael Culp, then director of Prudential Securities, instituted a rule requiring his analysts to make 110 contacts a month, but, he added quickly, most of his analysts were not affected, because they were making 135. Another firm ranks analysts recommendations when calculating their bonuses. A buy recommendation is worth 130 points, a sell recommendation only 60. Sell recommendations dont generate nearly as much business as buy recommendations. No points are added for accuracy.

Making the Institutional Investor All-Star Team, according to The Wall Street Joumal list, ranks second. "The team," as weve seen, results in big commissions for the analysts firm. Even as he denied the importance of the Institutional Investor poll, one research director said, "Most of the guys know theyll be visiting for 1- in the spring." That is, the analyst will be making the annual pilgrimage to visit institutional cUents, imphcitly lobbying for their vote to fame and fortune. "Im a lonely guy in March and April, shortly before the balloting," the research director continued.

Do you find these remarks disturbing? I do. After all, most investors put their savings in the hands of research experts, whose forecasts are the cornerstones of their recommendations. But the forecasts are a trivial factor, or even a nonevent in determining their compensation. Unfortunately, thats always been the name of the game.

There are other direct pressures on analysts. An important one, well known on the Street, is the fear of issuing sell recommendations. Sell recommendations are only a small fraction of the buys. A company that the analyst issues a sell recommendation on will often ban him or her from further contact. If he issues a sell recommendation on the entire industry, he may receive an industry blackball, which virtually excludes him from talking to any important executives. If the analyst is an expert in the industry, and it represents an important part of his intellectual property, he is facing major career damage by pressing the sell button.

Recommending a sell, even when the analyst proves to be dead-on, can be costly. In the late 1980s, an analyst at Janney Montgomery Scott issued a sell recommendation on one of the Atlantic City casinos owned by Donald Trump. Trump went bananas and insisted the analyst be fired for his lack ofknowledge. Shortly thereafter, he was fired, but naturally, said the brokerage firm, "for other reasons." The analyst proved right

and the casino went into Chapter 11. Out of a job, he won the equivalent of a few years of salary from an arbitration panel. But the analyst was never rewarded for his excellent call and, in fact, suffered because of it.

Another analyst was banned from an analysts meeting of then highflying Boston Chiclcen. His offense: he had issued a sell recommendation on the company. "We dont want you here," Boston Chickens CFO told him. "We dont want you to confuse yourself with the facts." A number of studies indicate that analysts issue five or six times as many buy as sell recommendations. Obviously, career pressures have an impact on the buy-sell-hold rating.

Many companies lash out if analysts write negative reports. The retribution can take many forms. One analyst at Prudential Securities wrote a number of negative reports about Citico in 1992. Frusti-ated that Prudential could not become the lead underwriter in some asset-backed bond deals, a Prudential investment banker went to Citico and was told the reason was the analyst. The same analyst, a year later, criticized Banc One and its complex derivative holdings, which eventually cost Banc One hundreds of miUions of dollars in write-offs. Banc One stopped its bond trading with Prudential. By coincidence, the analyst left the firm shortly thereafter. A Kidder Peabody analyst repeatedly recommended the sale of NationsBank. The bank stopped all stock and bond trading with Kidder for its trust accounts.-*

For analysts at brokerage firms that are also large underwriters, the pressure is even greater. Negative reports are a major no-no. Bell South officials were unhappy about comments of a Salomon Brothers analyst who stated its management was inefficient and ranked it sixth out of the seven regional Bells. Salomon, a bond powerhouse, was excluded from the lucrative lead-manager role in a large Bell South issue. In late 1994, Conseco fired Merrill Lynch as its lead underwriter in a big bond offering shortly after its analyst downgraded Consecos stock. Smith Barney, according to sources, believes it lost a chance to be part of the underwriting group of Owens-Coming Fiberglass after one of its analysts wrote a negative report on the company in early 1995.-

Just how heavy career pressures can be for analysts working for major underwriting firms if they recommend a sale is shown in an academic study. The work examined 250 analyst reports from investment banlcing houses, matching them up with 250 from brokerage firms that did not conduct investment banking. The conclusion: investment banking house brokers issued 25% more buy recommendations and a remarkable 46% fewer sell recommendations."

What is apparent from the above is that the most important responsi-bihty of the analyst for the brokerage firm is to be a good marketer. The

Psychological Influences on Analysts Decisions

In the last chapter, we saw that expert forecasts were 8 1 off the mark in many fields besides the stock market. In publishing, politics, medicine, warfare, or betting the ponies, experts were wrong time and again. We further examined our ability to process large amounts of information, in areas from radiology to psychology, and found that here, too, we often were not up to the task. Specifically, man has proven to be a so-so configural or interactive processor of information. The stock market requires high-level configural reasoning to weigh thousands of market, company, industry, economic, and political inputs at the same time. Most people simply cannot do it.

We also saw that increased information makes experts more confident, but unfortunately not more accurate. For the security analyst, as we considered briefly, the availability of information has gone up almost exponentially in recent years. The analyst traveling with a laptop can run spreadsheets, check stock quotes, receive faxes, or even tap into voluminous databases. At home base, his data input capabilities increase enormously. As a J. P. Morgan technology analyst puts it, "This business

analyst has to tell a good stoiy, not one that is necessarily right. The bottom line is commissions. A good marketer and a good forecaster are different animals. We have already seen one example of the All Stars significantly unde erforming the market with their picks. Another example is that major money managers, to whom the All Stars devote the bulk of their attention, consistently do worse than the averages.

Analysts of necessity use disingenuous gradations that actually mean sell, such as underweight, lighten up, fully-valued, overvalued, source of funds, swap-and-hold, or even strong hold. As Peter Siris, a former analyst at UBS Securities, summed it up, "Theres a game out there. Most people arent fooled by what analysts have to say ... because they know in a lot of cases theyre shills. But those poor [small] investors- somebody ought to tell them.""

Youve been warned!

Even if brokerage firms dont focus on accurate estimates, however, analysts are not punished for producing them. Although underwriting firms may be pressured by clients or potential clients not to make sell recommendations on their stocks, to my knowledge an analyst has never been reprimanded for a conservative earnings estimate on a clients stock. The question still remains: Why are analysts forecasts too optimistic?