Analysts,
Thanks For Telling Us
To Buy In A Bear Market
Poor
stock research costing Singaporean investors billions
of dollars. Its time to start grading the performance
of brokerages.
Jan 3, 2001
When the Singapore stock market fell one day, an analyst
attributed it to the overnight Wall Street decline.
Fair enough. But then a few days later when shares
rose, another researcher explained it was also due
to US weakness.
How was that possible? Because, the man beamed, foreign
funds would now return to Singapore. When I heard
it I thought that the world of stock analysing had
gone bonkers.
Actually, like they say, I ain't seen nothing yet.
Of all the rude awakenings that the bear market brought
last year, the one that stands out is the poor standard
of stock analysis in Singapore.
Do you remember the October market rally of 1999 when
analysts were predicting, almost to a man, that the
New Year would be an even stronger year and a ST Index
of 3,000-3,200?
It was then hovering around 2,600. As that year ended,
the ST Index never reached 3,000 or even 2,000, but
only 1,927. Instead of rising, it had fallen by 22.3
per cent.
For Singapore to become a market regional centre and
promote public investment there has to be a quantum
leap in the industry's advisory capability. At the
moment with a small exception, it is poor.
The upgrading is more important with the approach
of E-trading. In the future, brokers and remisiers
will themselves take on the role of advisors in order
to survive. Imagine the harm they will inflict on
their customers if standards remain what they are
today.
And most of the causes of the recent weak performance
were not imponderable ones that caught the world by
surprise. They included US interest rate hikes, the
collapse of NASDAQ, Indonesia's chaos and Asia's financial
instability, where signs had been evident for a long
time.
It is, of course, true that investors often under-mention
the contribution of researchers when the market is
going up but blame them when the rains came. You know
what they say: "If I make money, I'm smart. If I lose,
the broker is stupid."
But the last phrase is not always wrong in Singapore.
Researchers are paid big bucks to give good advice.
They have to be smarter than the taxi driver in stock
picking. Besides, if Singapore is to be a regional
hub, standards have to be world class.
When 17 of our finest brokerages consistently pronounce
a stock a "strong buy" or "overweight" (and one "neutral")
and it goes down by 60 per cent in less than a year,
something is terribly wrong.
The stock market is full of such stocks. Analysts
cannot, of course, be blamed for a bad market, only
for failing to warn their customers about it. Otherwise
why do we need them?
What is this telling us? Firstly, our analysts are
generally below par. Many of them are young, textbook-bound
and have poor reading of the market.
Some are doing things wrong like issuing a "buy" advice,
then forgetting to follow it in later when fundamentals
turn and the price has plummeted.
In other words they tell you to buy at $6.00 and sell
at $3.00.
Sure there are researchers and there are researchers.
Some are good or very good while the rest cost their
clients dearly.
They also missed out on the severity of the Asian
financial bug, the ST Index's sharp market from 2000
to 1,000 (a 9 year low) in just 12 months.
Instead they started telling clients to pick up bargains
during the early part of the decline when street-wise
investors were selling.
You can tell the bad from the good. The bad has twice
as many "buy" recommendations in a long bear market
as the smart ones, a mini-disaster for people who
heed them.
With their noses stuck on what they had learn at business
school, they dish out theoretical advice; after a
30 per cent fall, buy.
Another failure - not many brokerages gave early recognition
to the new economy as NASDAQ surged or a warning of
an imminent sell-down of "old economy" stocks - until
too late.
More recently, they were again slow to react to the
dot.com collapse.
Few were clever or fast enough to warn people about
the impact of Indonesia's rising woes on the Singapore
market.
To be fair, the business of giving advice has been
made tougher by the IT revolution which is changing
life itself. The dot-com business is unpredictable.
Even seasoned global players like George Soros and
Warren Buffet threw up their hands and professed bewilderment
at the markets. All the rules seem changed forever
- until the NASDAQ tanked.
Covering the dot.com companies, in particular, is
next to impossible as the savvier Americans are discovering.
There were numerous examples recently of companies
looking well suddenly going bust.
"An analyst's performance also depends on outside
factors beyond his control. One is company transparency,"
explained a brokerage director.
Unlike in the West, managers here just don't understand
that it is their job to grant more access or information
to researchers.
On the flip side, inexperienced researchers hunt in
packs; what one says today so will say half a dozen
tomorrow. Others are just number crunchers, basing
their assessments by just looking at accounts and
avoiding the harder work of talking to workers, customers
and checking warehouses.
But investors suspect there is a more sinister reason
why some analysts dish out so many "buy" or "overweight"
calls in the early phase of a falling market.
"If I want to believe the worst, I'd say the research
department is merely following company policy. More
"buy" calls mean more business and in a poor market,
they are needed.
Another darker suspicion is that the unscrupulous
push out "buy" orders to allow favoured customers
to unload - or vice versa.
How can we lift competency and fairness for stock
researchers? Have a grading system for their companies
to be conducted by a credible institution, like the
Singapore Securities Investors Association of Singapore
(SIAS) or a government-selected committee.
It should devise a method of grading their research
work at least once a year and making the results public.
At the end of the day, analytical work is not just
about gathering data and digesting knowledge; good
instincts are as important.
Recently, the Asian Wall Street Journal conducted
a six-month long, stock-picking experiment, pitching
taxi drivers against professional money managers in
several cities.
Who came out better? Yes, you guessed it - the drivers.
I think the next time I take a cab, I'll work on rearranging
my poorly performing portfolio.
Seah
Chiang Nee
