security analysis in the 21st century: the former paradigm

One of my California brothers-in-law, a savvy investor and an Apple devotee, sent me an email the other day lamenting the parlous state of brokerage house analysis of AAPL.  He supplied this link from Apple Insider as evidence.

The article talks about Peter Misek, an analyst from Jefferies, who:

1.  had a price target of $900 for AAPL last year while the stock was going up and one of around $400 now that the stock has weakened

2.  made a series of (mostly negative) predictions about new products and current sales for AAPL, none of which have come true, and

3.  is blaming his misses on AAPL management failures and has used these occasions to downgrade the stock further.


In one sense, this is “normal” Wall Street behavior.   As an analyst trying to make a name for himself, Misek has been making out-of-consensus predictions.   He wants distinguish himself from the crowd and catch the attention of institutional clients who might direct trades (and therefore commissions) to his firm in exchange for access to his research.  In this, he’s following the time-honored dictum that customers will remember the home runs and quickly forget about the strike outs.

From what I’ve read on the internet–I haven’t seen Mr. Misek’s actual research, and have no desire to–what really sticks out in this case is the lack of skill he’s shown in the predictions he’s made.

Even that is not so surprising.

An illustration:

Early in my career (I’d been a buy-side oil industry analyst for maybe three years), I got a call to interview for a job as assistant to Charles Maxwell, then the dean of Wall Street sell-side oil analysts.  I went.

The interview was with the research director for Maxwell’s firm.  It was very short.

The hours were long.  The pay was poor.  I would be away from home visiting companies and clients about 60% of the time.  The payoff would come–if one did–three or four years hence.  Having made a reputation with clients, and with Charlie’s blessing, I’d be hired by a major brokerage firm as its oil analyst.  I’d do basically the same work as before but be paid the equivalent of several million dollars a year in today’s money.

The look of horror on my face at the prospect of a ton of boring travel–hadn’t they ever heard of the telephone?–was enough to tell both of us that I wasn’t the man for this job.

Two points:

–back in the day, securities analysts spent long apprenticeships learning their trade before they were allowed to take the reins as sell-side analysts covering major companies. and

–compensation was relatively high.

Both factors have changed a lot during the past decade.  Nevertheless,  I don’t think either the investing public or the companies being researched understand what’s happened.  Neither group appears to me to have adjusted to the new world we’re in.

More tomorrow.





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