A lot has happened on Wall Street since themarket began its plunge in March 2000.Not only have portfolios been severelyreduced, but we've also suffered through no end ofscandals. Corporate executives have been taken totask and some to jail. Corporate governance hasbecome a serious issue as investors andregulators are demanding that directors"oversee" and that CEOs be paid inamounts they have "earned."
COMMITMENT TO RESEARCH
Recently, almost all of the major brokeragefirms have moved to trim costs byseverely reducing their research departments.In fairness, they have a seriousproblem. Now that New York state'sattorney general has forced them to separateinvestment banking and researchfor sale, how do they pay for the researchdepartment? In the 1960s, commissionsexceeded a dollar a share. That was morethan enough to cover a first-rate researcheffort that had as its goal to make moneyfor its clients. Then negotiated commissionrates fell to pennies a share. Therewas no money in that new formula tosupport a research staff. That's why analystshad no choice but to become a money funnel,generating deals for the investment bankingdepartment. "I'll follow your stock if you will selectus to manage your next underwriting."
The possibility of that quid pro quo supposedlyhas been stripped away by recent legal action.That is why many analysts with high salaries areheaded for the unemployment line, even if theywere honest. Whatever research coverage continuesis also being concentrated on larger companiesfor larger mutual fund clients. Dozens and dozensof smaller and medium-sized companies are beingleft without any research attention. And hundredsof skilled, but smaller, institutional investors are nolonger being invited to attend conferences thebigger firms host.
It is my belief that mostinnovation occurs at smaller,more entrepreneurialcompanies. The larger acompany becomes, themore the decision-makingprocess moves toward theboring consensus. Smaller andmedium-sized companies are morelikely to grow faster in periods of economicmalaise. They can increase theirmarket share, introduce exciting newproducts that can have an impact ontheir sales numbers, and they canrespond more rapidly to changing marketconditions. Large companies withbillions in quarterly sales are hard-pressedto perform well when the economyis punk. While they usually havemore financial staying power, all theycan do is pare expenses and wait for abetter day. When Wall Street stops covering themid-sized, more interesting companies, thosecompanies have to reach investors without them.Some use investor relations firms. Some go on theroad to bring their story directly to professionalinvestment firms unfiltered by the brokerage community.Various trade groups aresponsoring industry-wide investment conferencesto reach the broad investment audience.
THE GOOD NEWS
During the Clinton years, the SEC adoptedRegulation FD (full disclosure). It is now a violationof the securities laws for information to bemade available selectively to favored institutionalinvestors. To make sure that the same informationis made available to all investors, most conferencepresentations are now posted oncorporate Web sites. The smarter investorrelations departments disseminatepress releases in advance of anypresentation to a limited audience sothat any new information is publiclyavailable simultaneously to all. Almost allcompanies orchestrate scripted conferencecalls to announce their quarterly earnings. Theytake questions from a preselected group of analyststhey know to be friendly. Others who might beshort-sellers or otherwise hostile to the companyare blocked from asking any questions the companymight find objectionable. Even so, such presentationscan be very informative for investors.
THE BAD NEWS
If you have a full-time job pursuing a career inmedicine, how can you find the time to do research?Accounting skills help enormously. Evaluatingbusiness plans is another skill that is required.A skilled portfolio manager ought to be able to dothis better than a person who dabbles for fun. Animportant lesson of the past 3 years is that investingsuccessfully isn't as easy as it looked in the late '90s.
If you decide to seek help to repair your portfolio,find a financial advisor with a good record. Ifthe brokerage firm you are considering hasn't outperformedthe averages in the past 8 months, thenkeep looking until you find a firm that has.
Joan E. Lappinis president of NYC-based Gramercy Capital, whichhas been ranked number 1 in Nelson's Directory of Registered InvestmentAdvisors. Gramercy will be hosting an investment seminarat the New York Yacht Club in Newport, RI, in mid-July and againin August. To reserve a place or for questionsor comments, call 212-935-6909 or e-mail email@example.com.