What is Investment Research And Why Is It Broken?
Investment research studies of the performance of stocks, bonds, metals, mutual funds, and other assets. This is done, most often, to influence investment decision making. It seeks to "produce a guide to what investments to make.”
With the capture of regulatory authorities (who are, supposedly, looking out of the public interest) by financial institutions, the number of investment "assets" has increased. There are now more than 5,000,000 different types of investment vehicles. Many have little actual value.
A new investment class with actual value may be cryptocurrencies. A cryptocurrency is a digital program or asset designed to work like currency. Bitcoin is a cryptocurrency.
What is Investment Research?
As we note in our online class, investing is "the process of spending money in order to increase the original dollar amount." Investment research provides timely information that, combined with expertise, provides advice." One goal is to reduce or eliminate information gaps and to reveal "potential issues and dangers associated with specific investments, known as risk." In other words, "investment research is designed to..make investors more profitable."
The current era of investment research started with "the Amsterdam Stock Exchange established in 1602.." Key issues included fraud, information validity and accuracy, and understanding true risk.
With the growth of the "market culture", in the 20th century, one set of investments, the stock market, "became a common way to invest, and because of longstanding issues investors have faced for centuries, banks began delivering equity research to their customers through private mail.
(While employed by Merrill Lynch, we had dinner with Michael Bloomberg in 1987. We discussed our research paper on the future of market information systems.)
Many "investors have accessed research through paid subscriptions. As of 2017, the aggregate size of the global investment research market is $16 billion, with more than 40,000 pieces of content delivered each week by bigger banks and brokerages."
Investment Research Is Broken
Our position with respect to capital markets regulation recognizes the primacy of protecting investors. Investor interests, broadly speaking' are not served by fraud and malfeasance. Securities laws and traditional investment research have failed both to protect investors and to promote efficiency, if efficiency is defined as lowering aggregate losses.
Investment analysts issue biased research reports to curry favor with management. Rating agencies, like Standard and Poor's, Moody's and research providers like Bloomberg and Morningstar, issue defective investment research reports. The former are supposed to “base their ratings largely on statistical calculations of a borrower's likelihood of default,” but one news report noted that:
“Dozens of current and former rating officials, financial advisers and Wall Street traders and investors interviewed by The Washington Post say the (NRSRO) rating system has proved vulnerable to subjective judgment, manipulation and pressure from borrowers. They say the big three are so dominant they can keep their rating processes secret, force clients to pay higher fees and fend off complaints about their mistakes.” (See: https://www.sec.gov/rules/proposed/s71005/wcunningham5867.pdf).
In response, the European Union (EU) "implemented new rules in 2018 requiring asset managers to pay directly for their own research." This is also an attempt to correct flaws in the investment research field: "a study from Bespoke Investment Group in 2015 examined 12,122 ratings in the broad market index. Just 6.67% had a 'sell' label, with the rest either being 'buy' or 'hold.' ” This is clearly indicative of a lack of objectivity.
Also, one study noted that, "in 2012, 49% of (Wall Street Investment) analyst ratings on Dow 30 stocks were incorrect..."
The industry has long been due for reform. Banks, large asset managers, hedge funds and others have controlled the investment research industry for their own benefit.
If you want to learn more about the most objective, insightful and independent research available for investors of any size or strategy, please see: https://www.creativeinvest.com/sitemap.html