I get regular emails pointing out how bad broker recommendations have been in hindsight. Most of the finger pointing is simply an investor attempting to transfer the blame to someone else of course, but if the investor is ever going to learn from their mistakes they need to take responsibility, not pass it on to some Machiavellian stock market plot orchestrated by the "smart money", the company and the brokers. To deflect the blame is to learn nothing. So here is the lesson.
Yes broker research and broker recommendations might appear to trick you but that's all part of the game, a game you need to understand and adjust for.
![The sharemarket doesn't exist to let you invest, but so companies can raise capital.](/web/20170224121536im_/http://www.canberratimes.com.au/content/dam/images/g/r/k/o/e/u/image.related.articleLeadwide.620x349.gugdhs.png/1487537221163.jpg)
There are a myriad of reasons a broker might say "buy" and a lot of the time it's not because they are trying to make you money, it's because they want you to buy the stock because they want the share price to go up. Why? Because the big bucks for big brokers come from corporate fees rather than getting stock recommendations right for small investors. They are commercially more interested in getting paid a lot to issue shares and raise capital than they are in telling people who do not deal with them or pay them a commission whether a stock is going up or down.
Raising capital from people prepared to take more risk than the bank is, after all, the core reason the sharemarket exists. And to think you thought the market was there so you could invest. No, it is there so companies can access your money for a corporate purpose and, for the company's broker, representing the company's interests for fees means they will put the company ahead of your return.
For many brokers the corporate purpose is paramount and you need to understand that. All you have to do is look at the litany of disastrous private equity IPOs, all of which had big broker fees attached and were sold on the back of universally positive broker research and commentary.
Dick Smith and Myer should have taught you by now, the small investor is at the bottom of the food chain not the top.
So with corporate fees the focus every company research note should be treated as quasi marketing by a broker who is representing, or hoping to represent, the company in corporate deals with fees attached.
I remember the broking firm I worked at in the UK 30 years ago losing the number one rated media analyst because he wrote a piece of research on Maxwell Communications entitled "Can't Recommend a Purchase" (get it?). We were Maxwell's broker and the analyst was trying to tell our valuable client base to sell, with good reason as it turned out. But it cut across the primary directive. To promote the company for fees.
Robert Maxwell rang up and insisted he be sacked. He was. Even though he was right. Robert Maxwell later fell off the back of his boat and his sons picked up the flak for a massive misappropriation of funds from the Maxwell companies. The analyst was swiftly employed by another broker on a bigger salary and remained the number one media analyst.
So how do you find out if you are reading independent research or a marketing document for the company? Go and look at the bottom of the research for the rather laughable disclosures and disclaimers.
There is excessive compliance on the bottom of every bit of research. Some of the international brokers let it run to 10 pages, and the more they write the more they camouflage the one thing you want to know, whether the research is biased by a corporate connection with the company, or not.
Some brokers, Patersons for example, have been known to put it in red on the front page. I wish they all did that, I wish ASIC insisted all broker research was stamped with a big red Skull and Crossbones whenever the broker had any connection with the company at all, now, in the past or hopes for one in the future.
Instead you have to read up to 10 pages of guff at the bottom of most research which often doesn't actually tell you.
In the end just assume company research is marketing until proven otherwise, because most of it is. Especially in smaller companies. It's the game, not a war. Understand it, don't fight it, because it's been happening since the first entrepreneur that ever appealed to investors for capital.
Marcus Padley is a director of financial services company MTIS Pty Ltd and the author of sharemarket newsletter Marcus Today. For a free trial please go to marcustoday.com.au.
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