Investment analysts are useless

February 20, 2007

The big investment banks hire legions of analysts to generate reports and recommendations about investment opportunities, particularly in equities. They read financial reports, follow the news, interview company executives and more, in an effort to recommend to the banks’ wealthy clients what they should do with their portfolios. Of course, the bank wants to attract rich investors as clients, either for personal banking or brokerage & clearing. Here’s what I don’t understand: if an analyst is particularly good, then the bank would make more money investing its own money rather than giving away that information to collect small, steady fees. The fact that banks allow analysts to publish information means they don’t value the information much. If I’m a rich investor, why would I be interested in info that the bank wouldn’t bet its own money on? Furthermore, all mutual funds have access to approximately the same information (they get the same reports from banks), yet the majority still underperform the standard indexes. Regardless of the quality of their work, it does not appear likely that analysts produce anything of value. Why this whole business persists is a mystery to me.

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