Firstly, I'm glad to finally announce the first meetup, to be held on September 16th at the Recanati School of Business in Tel Aviv University. Our first event will feature Oded Zehavi from Leumi Card, a payments veteran, who will speak about industry trends in Israel and abroad. We will then invite three startups to present to the crowd, and receive feedback from Oded. If you have not yet responded, please RSVP here.
When you think of traditional investment research, you probably think of some relative or friend who worked on or near Wall Street. These people probably worked at a large Investment Bank on the Sell-Side, or for a large Buy-Side or independent research house. The work consisted of reading filings, attending conference calls and meetings with companies in a specific industry, studying macro trends (often analyzed by other teams within the firm) and writing long, wordy, and often uninteresting research reports. As always, these reports would include both text on the current state of the company and their personal feelings on the company's future, as well as a series of financial projections, often based on the expected earnings guidance provided by the company in question.
The result was somewhat poor, insofar as it was always behind the times - regardless of the brilliance of its authors, markets moved faster than the printed word. Even a PDF version sent instantly would not be timely enough for the average reader, who would likely get his/her hands on it days or weeks later.
Additionally, coverage was limited to stocks that were trading in large quantities and those firms/industries that the firm had relationships with. This meant that a large number of companies had little to no coverage at all for investors to get advice on their investments.
Over time, the value of the text in these documents declined, to the point that the First Call earnings consensus and stock targets were the only important numbers in the whole document. The constant need for new and relevant financial news further tied the noose around traditional investment research.
An additional factor played out in the early 2000's following the dot-com bust. Our friends in the Web 2.0 world, Henry Blodget (seemingly vindicated via Silicon Alley Insider) and others used their pedestal of Investment Analyst to lie to the stock buying public about companies, often motivated by the fees their banks would receive from lucrative Investment Banking deals. The corruption was probably best personified by the infamous Sandy Weill and Jack Grubman saga, in which Sandy alledgedly asked Jack to promote Worldcom stock in exchange for Sandy's support in getting Jack's kids into a very exclusive prep school. The lies went so deep on the Sell-Side, that Investment Banks were required to formally split Investment Banking and Research (remember Frank Quattrone's "bank within a bank" at Deutsche Bank and Credit Suisse First Boston, offering Research and Investment Banking in San Francisco and the Valley?)
If you recall back in those days, Sallie Krawcheck was hired by Sandy Weill's Citigroup from Sanford Bernstein, an independent research house at the time, now part of AllianceBernstein Investment Management.
At the time, everyone expected that Sell-Side Investment Research was dead, and would be replaced by independent providers, like Bernstein. However, there were very few people who believed that the entire market was about to be flipped on its head, thanks to the internet and Web 2.0.
One additional factor that is critical to mention here is the full liberalization of conference calls and investor relations, provided by CCBN in the late 1990s. Along with regulators who spotted the trend and required open access to all via the internet and phone, this liberalization further diminished the value some stock analysts had previously, in direct correspondence with management teams and coveted access to quarterly calls.
Enter the Internet
The advent of the internet chat room and instant messaging created an instant change in the investment research business. All of a sudden, individuals were able to share their stock picking ideas, and their rationales with an audience. There were a few examples in the 1990's and early 2000's of high school students who successfully pushed specific stock tickers via these methods.
However, the world got more sophisticated - Yahoo! Finance and its competitors on MarketWatch and later Google Finance allowed users to share ideas and read others analysis of specific stocks. While a high percentage of this content was of poor quality, for the more obscure stocks, there was significant value being provided by the community to individual investors.
Enter Blogger, and subsequently the Financial Blogging channels like SeekingAlpha. All of a sudden, nearly anyone with a voice could post their argument to the public, be scrutinized, and become an "Independent Investment Researcher". Of course the quality varies, but in general, the community benefits from more up-to-date and more obscure coverage than the traditional market could ever offer. In many stocks, the only place to find any advice are these sites, and often the frequency of posts includes reviews of traditional investment research.
Recently, the advent of Twitter and subsequently StockTwits further liberalizes the investment research space, by offering all players the chance to post their views on a second-to-second basis, and 'push' their views to a wave of people interested in hearing them. It's a novel concept, that has really changed the landscape even further.
I expect that investment research professionals will begin using these systems with more frequency, and that the regulatory bodies will follow over time. Investment Research will likely never be the same as it was, with more transparency on the accuracy of predictions and the like, but it will be hard to completely demolish the existing pro market, if only due to the limited money making possibilities of blog writing, vis a vis formal investment research salaries and bonuses.
Where do you think Investment Research is going? Send a comment to start the conversation?