Although technology now tends to blur the lines, and analysts tend to spe- cialize in much more focused ways than before, the analytic process itself falls into two broad general categories—fundamental analysis and technical analysis. Today’s market is too expansive and too specialized to reside heav- ily in one camp or another.
Thefundamentalanalyst deals primarily with the tangible information about a company—its facts and figures—the chemistry, if you will, of a company—to which is added an assessment of how management will con- tribute to that company’s success or failure.
The technician, or chartist,is concerned primarily not with the com- pany, but with the stock itself, almost as an abstraction. The technician believes that stocks behave in a particular pattern that reflects what is known about a company, and that the pattern may be charted to project their future behavior. This behavior is divined by considering such elements as the history of a stock’s movement, a statistical analysis of the market’s behavior, volume, and so forth. By charting a stock’s historical pattern, technicians believe they can project the pattern for the stock’s future.
Naturally, there’s a great deal of controversy among analysts and other observers of analysis about this approach. It can generate a great deal of heat.
There is, in fact, a great deal of peripheral viewing of fundamentals by technical analysts, deny it as they will, just as they tend to be persuaded by economic news. It is a battle of the witches of the East versus the witches of the West.
But there is a new factor now—the internet. As the computer, in its ear- lier years, altered the traditional methods of security analysis—massaging information—the internet has revolutionized the entire process. Essentially, with the internet, more can be known about a company by more people than ever before. As the internet has itself become more mature, and even institutionalized, it begins to put a new face on analysis, by both profes- sionals and the individual investor.
In the mid 1990s, as the computer came into common use, it gave us a new kind of analysis—modeling. Its practitioners are quantitative ana- lysts—orquants,as they’re known on the Street. They function by building a computer model that relates every factor they think can affect a stock price, and then using the model to predict a stock performance. They fre-
The Street 67
quently rely to a degree on classic fundamentals, but are more concerned with configurations and relationships of data. It enhanced the traditional analytic values espoused by Graham and Dodd in their classic book, and it brought the somewhat complex Modern Portfolio Theory (of which more further on), regression analysis, and even game theory, into the hands of even the mathematically challenged analyst and investor. All these theories, by the way, are a serious attempt to crack the code of whatever forces drive investors’ behavior in the grand auction market. What it does achieve, in fact, is to help reduce the number of variables used to assess the future mar- ket value of a stock.
And what it has done, as well, is to change the nature of the analysts themselves.
But analysts, of any school of thought, whatever theory they cherish, are people too. They can be moved as easily by emotional reaction to the events of the day as are the most rank novices. Perhaps that’s a good thing. If there were no diversity of opinion, there’d be no auction in the stock market.
It’s certainly true that with the internet, the analyst and investor today have more information to use in analysis than ever before, and aided by the computer, that analysis, will be done faster and with more complex config- urations and permutations than ever before. Moreover, the internet, by affording access to this information by the ordinary investor, an increasing number of investors have become their own analysts. Thus, the rise of the discount broker who need offer no service other than buying or selling stock. This is scarcely diminished by the fact that a number of investors, having stuck their toes in the waters of making their own decisions, are finding that it’s not as easy as it looks. Many discount brokers have begun to offer, as a separate entity, research help.
These factors have, in the past few years, substantially changed the nature of analysis and who does it. It has, as well, obviously changed the nature of investor relations. If the market has changed, so too must the product change. And if competition has increased, then certainly delivery and packaging mechanisms must change as well.
Traditionally, analysis of stocks was primarily the concern of the research analyst—the descendent of the statistician whose job it was to analyze infor- mation, to come to a conclusion about a stock or the market itself, and to supply it to brokers, money managers, and others. There were perhaps a few diligent and seasoned brokers who did their own research, but only a few.
But today, driven in part by new technology and in part by regulatory changes, the distinctions between one traditional Wall Street role and another have been blurred. There are many more hands grasping for infor- mation than in the past, and fewer analysts function solely in that capacity.
Aided by computers and other sources of information, people with many other roles to play in the market, as well as other needs for corporate invest- ing information, are all participating in massaging information to make investment decisions. This includes brokers, money managers, individual investors, traders, institutional investors, investment and commercial bankers, and even venture capitalists. Venture capitalists, for example, tend to work closely with groups of investors for whom they supply a broad spectrum of investment ideas, primarily about early stage companies. Full due diligence, in which management is required to justify itself on many lev- els for investors, brokers, lenders and others, now goes much farther than merely a recitation of financial information, and demands at least as much as the traditional security analyst once demanded.
It should be noted, too, that a large measure of the demand for infor- mation is a result of the efficacy of the investor relations professional, who fostered the taste for more intensive analysis and due diligence by offering more information, as part of the competitive process for investor attention.
Here, again, NIRI can take credit for educating both the investor relations professional, and the cast of characters on Wall Street.
One result of the changing dynamic of the Street is that where once the analyst analyzed and the broker sold, today many of both do both, and for a growing segment, the difference in their roles is represented more in shad- ing than in distinct coloration.
The investor relations professional would do well to remember, as well, that no matter how immersed the analyst or investment professional may be in the esoterica of the stock market, it’s all of the Wall Street cast that’s either directly involved in selling stock, or is indirectly involved in the process as an analyst or advisor. It is, after all, a market. In a market, peo- ple buy and people sell.
An analyst was once asked, “What’s the worst thing that could happen to an analyst who issues a research report? That nobody would buy the stock?”
“No,” was the reply. “The worst thing is that the stock goes down.”
What’s the second worst thing that could happen? “That we recom- mend the stock and nobody buys it—and then it goes up.”
The Street 69
For the investor relations professional, it’s important to understand this concept, because clearly, the investor relations professional is part of the dynamic; is part of the marketing effort.
To the degree that we can separate each of the characters on Wall Street in this new environment from the Street’s classic protective coloration, this essentially is what we find in each camp . . .