The Value of Real Research

Most traditional Wall Street research is based on an analyst making a prediction on a particular stock, usually by providing a rating on the stock and a future price target.

Our firm does not use this type of strategy. We focus on a client’s long-term goals, meeting their needs and determining an appropriate asset allocation. To implement their investment strategy, we rely on sound financial principles and academic data. Hopefully the following will clearly contrast this difference.

The Wall Street Journal reported on June 11 that Goldman Sachs was suspending coverage of many high-tech companies, after the departure of their lead analyst. This means “our current investment ratings and earnings estimates for the stocks are no longer in effect and should not be relied upon.”

The Journal stated: “clients have had reason to wonder whether they should have relied upon some of Goldman’s calls in the IT hardware sector. We previously highlighted the fact that Goldman’s stuck with its neutral rating on Apple from December 2008 to the present.” Goldman actually downgraded Apple in December 2008 to “neutral.” The shares are up more than 150% during this period. In changing its rating on December 15, 2008, Goldman cited weakening consumer demand for Apple’s products. This analyst could not have been more wrong in his analysis and future “prediction” (my term) for Apple.

When we implement a client’s stock portfolio, we generally utilize a fund manager that focuses on broad, global diversification. Their investment management is based on many years of rigorous academic research, not on predictions about specific stocks. As a result of their continuous research, they recently informed us that they will be excluding a certain segment of stocks from their small stock mutual fund.

This small cap strategy would currently hold about 2500 eligible stocks. Based on the new research, they will exclude approximately 240 stocks, which they have identified as “the worst of the worst.” They have identified the stocks to exclude based on specific financial criteria, not on the future predictions of the specific company. Over a 30 year period, from 1979 to 2009, this change would have resulted in an improvement of nearly 1.4% annually. This strategy would have had a return of 13.30% annually, versus the Russell 2000 index of 11.26%.

While we focus on meeting with clients, understanding their needs and determining an investment policy to help them reach their goals, we rely on the strength of this type of academic stock market research to implement the investment plan that we develop. As we don’t know of anyone who has an accurate crystal ball of the stock market, this is the most rational way of investing that we know of.

If you would like to know more about this topic, or our investment methodology, please contact us.

Sources: Wall Street Journal, June 11, 2010 “After Missing Apple’s Surge, Goldman Cuts Coverage” and April 21, 2010, Goldman on Apple: Yes, We’re Stickin’ to that “Neutral ” Rating

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