Security Analysts

A reputation for providing high quality securities research and investment advice is arguably the most sought-after objective of every Wall Street institution. Although the message is often subtly phrased, brokerage houses, bank trust departments, investment advisory services, and mutual funds all heavily orient their promotional activities toward creating such an image of expertise. In the aggregate, however, the hard data on actual portfolio performance histories,l and analyses of the apparent payoffs from trading on issued stock recommendations,2 are less than encouraging about the value of professional counsel. Passive investments in the popular market indexes would seem to be about as worthwhile. Within the mass of these findings, there nonetheless have been occasional instances of detectable differences in acumen across organizations as judged by the observed ex post returns associated with the investment suggestions of those organization^.^ We provided, in an earlier paper, such evidence on the securities recommendations of one of the nation's largest retail brokerage houses, for a seven-year period ending with 1970; intimations of superior overall returns therefrom were found.4 Our purpose here is to carry the investigation the logical one step further: to examine the performances of the individual securities analysts within the firm, and address the matter of differential expertise at that level as well.