The Triad Perspective

Triad Investment Management, LLC is a SEC-registered investment adviser based in Newport Beach, California.  We manage portfolios, including retirement and corporate accounts, and provide investment counsel to our select group of clients, which include:
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Let's Bake Some Bread

It's common knowledge that the folks on Wall Street--brokers, Wall Street analysts, investment bankers--operate in one giant universe of conflicts.  So many, in fact, that movies have done justice to the subject more than once.  Have you seen The Wolf of Wall Street, Boiler Room, The Big Short, or Money Monster?  Almost comedic if not for the fact that the innocents--customers--get taken to the cleaners.
The most obvious conflicts revolve around Wall Street analysts saying things they don't really mean.  Usually saying buy when sell is more appropriate.  Why do they do this?  Because that's where the money is.  If an analyst tells investors to sell General Motors stock, guess what GM does?  Cuts the analyst's firm out of future deals to sell stock or bonds for GM.  Human nature being what it is, and mortgage payments, car payments, college funding and other little financial inconveniences being what they are, it would take mighty strong discipline to issue a sell opinion.
Previous misdeeds by wayward Wall Street analysts have resulted in litigation, fines and other nasty treatment for the worst offenders, along with new laws prohibiting analysts from issuing unwarranted rosy reports.  The formerly robust pipeline to lucrative investment banking deals has been shrunken, if not completely closed.  So, what's a compensation-loving analyst to do?
Why, pivot, that's what.  Getting huge fees from the General Motors' of the world is tougher today.  And investors no longer pay much for trading commissions, due to deregulation of commission rates and the advent of electronic trading.  But investors will pay for "corporate access."  What's that, you say?  

Analysts line up meetings for large investors with top management at public companies.  Large investors, hedge funds and others will pay for this access.  Think this doesn't happen much?  According to one survey, over 90% of companies go on these "investor roadshows" to promote their stock.  Investor surveys show this access is highly prized, and results in trades being steered to the "helpful" firms.
What we have now is essentially the same outcome as before.  In the past, Wall Street analysts put a rosy glow on research reports to win future business opportunities with these corporations.  Now they don't say sell because the same corporations will refuse to meet with the investor clients of these same analysts.
A recent Wall Street Journal article highlighted the problem. 
Said one analyst: " It's a decision I have to make on my sell-rated stock: whether I will forgo the opportunity for corporate access, which clients will explicitly pay for." 
Another analyst remarked " when your compensation is in part based on how many meetings you set up in a given year, it's really tough to stick to your guns." 
Yet another analyst was told by investors that they had little interest in his research but were only paying him to set up meetings.  " I wanted to be valued for my analytical abilities, but arranging meetings became such a critical part of the job." 
This poor guy was sometimes asked to sit outside the room so investors could ask questions without him!  Astounding.
Is it any surprise that, according to FactSet Research, of the roughly 11,000 analyst recommendations on S&P 500 Index companies, a mere 6% are sell ratings?
Why is this important?  For sophisticated investors, it's probably not, as they understand how the game is being played, and don't rely on analyst buy/sell recommendations.  They're just looking for access to private conversations with corporate bigwigs. 
For our part, we do our own research and don't consult brokerage ratings when making investment decisions.  We don't even track which analyst is saying what about a company.
But for the retail investor, it's a giant caveat emptor.  Buyer beware.  That buy rating just put out on your favorite company?  Or the sell rating that never sees the light of day?  Just a few things to ponder before pulling the investment trigger.
As the old German proverb says: " Whose bread I eat, his song I sing."  Just make sure it's not your hard-earned "bread" that's being consumed by a conflict-ridden system.
-John Heldman, CFA

Past performance does not guarantee future results.  Results are presented net of fees and include the reinvestment of all income.  The opinions expressed herein are those of Triad Investment Management, LLC and are subject to change without notice. Consider the investment objectives, risks and expenses before investing. The information in this presentation should not be considered as a recommendation to buy or sell any particular security and should not be considered as investment advice of any kind. You should not assume that any securities discussed in this report are or will be profitable, or that recommendations we make in the future will be profitable or equal the performance of any securities discussed in this presentation. The report is based on data obtained from sources believed to be reliable but is not guaranteed as being accurate and does not purport to be a complete summary of the available data. Recommendations for the past twelve months are available upon request. In addition to clients, partners and employees or their family members may have a position in any securities mentioned herein. Triad Investment Management, LLC is a SEC-registered investment adviser. More information about us is included in our SEC Form ADV Part 2, which is available upon request.  

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