Friday, May 31, 2013

Confessions of a Wall Street Analyst By Dan Reingold

Confessions of a Wall Street Analyst is the story of the rise of a prominent analyst on wall street during the telecom boom that paved the way for the information age as we know it.  I'm still a little skeptical about the 'facts' in this book as the story felt a little one sided.  I actually looked up some of the other people in the book and realized that just about everyone in the book has their own book and a version of what happened.  None the less, I think this book is the most popular out of all of them.  He was also one of the few people that didn't have charges brought against him so that's got to say something about the validity of his story.  Anyway, my take away is below:
  He talks about how corrupt the market truly is when getting good news or bad news on an authentic lead.  For example, "They'd flood our phone lines, and we simply say that Morris had been going over his mode and increased it 'That seemed okay to us', we'd say.  They then revised their estimates, and the boost to our stock price cause by Morris's earlier update held firm.  If you were among the largest institutional money managers, you had it made.  If you were an individual investor, you were inevitably too late to the party;  the stock had already risen and you'd missed its move.
    On the other hand, if the news was bad, we might also call a few of the most influential analysts, but, more often, we would pack up and, with minimal notice, fly to Boston for a day of meetings.  Boston was where the largest and most powerful mutual funds were located, companies such as Fidelity, Putnam and many others.  We always booked Fidelity first...The meetings were almost always the same:  with a group of 15 or so Fidelity portfolio managers...Fidelity's portfolio managers paid attention to every word we spoke, every number that left our lips, even our tones of voice and facial expressions.  Eventually it would dawn on someone that we were guiding down our earnings estimates, at which point the Fidelity portfolio managers would suddenly bolt out of the room, whistle down to Fidelity trading floor, and tell their in-house traders to sell MCI shares when the market opened at 9:30 AM. Brilliant again."
    On a secondary offering of Level3 stock (you'd need more context but this is a good example of why individual investors don't have a chance in hell of making any money on an IPO or most other market offerings.
    "The Wall Street Journal, his (Jack Grubman) target price increase caused the stock to jump from $51.75 to $54 a share...With such a strong demand, Jim Crowe decided to up the number of shares offered by 25 percent, to 25 million.  By my calculations, without Jack's report, Level 3 shares normally would have traded down to roughly $50 per share.  So in effect, Jack netted Level 3 a cool $100 million because Level 3 was able to sell its 25 million shares at a price of $54 each, approximately four dollars higher than it would have otherwise."
    On "No action" letters (no action):  "The SEC responded with its "No-Action Letter which is not a formal approval but rather an assurance that should Merrill do what it proposed, the SEC would not take any punitive action.  The SEC wasn't say that doing this was right or wrong, but rather that the commission would not interfere if Merrill or , indeed, any investment bank did issue some recommendations"
    I found the above to be a little shocking.  Banks can pretty much notify the SEC that they want the SEC to look the other way because what they're trying to do is pretty much illegal.  At this point the SEC can give the bank a nod to go ahead and the banks can act with impunity.  School bully with an extended hall pass to wreak havoc on the market.
  On insider trading involving Sprint.  The nemesis Jack Grubman had details on the exact (stock price) ratio of a merger between Sprint and Worldcom.
    "How could Jack know the exact ratio of the deal?  Had he been over the Wall and decided to share what he'd heard?...But the two stocks had already moved and some investors had already profited: in the sixteen days before the Journal's "scoop", Sprint shares had risen by a total of $5.4 billion...and  WorldCom shares had dropped by $1.9 billion, or 93 cents per share...Together, that added up to a total of $13.7 billion of shareholder value that had changed hands, with some investors winning thanks to their side information and others losing thanks to their lack of it.  If you or your mutual fund sold shares of Sprint during that time (1999) the buyer of your shares may have been armed with an unfair edge... You'd be cheated without knowing it"  
    You can find more about this here (scandals section): MCI
    During the first fall out of the dotcom boom, Dan describes a throttled back conference...
    "In the meantime, we had a show to put on...our budget for the conference had been bumped by almost 40 percent, to $2.3 million.  We considered a lot of big names for our special entertainment, people like Sting and Seinfeld....The going rate for these guys was as inflated as the stock of the executives they were performing for.  Sting, for example, charged between $600,000 and $1.1 million, plus six first-class and nine coach round-trip plane tickets, 14 hotel rooms, ground transportation and production.  Seinfeld required a $550,000 few, along with a private aircraft or two first-class round trip airfares, one hotel suite and one single room.  We ultimately chose Harry Connick Jr. at a bargain cost of $375,000 plus two first-class and 18 coach-class round trip airfares, two suites and 18 rooms along with ground transportation and production costs..."
  There is, of course, a lot more gluttony in the book.  The audacity of the 1% that run the financial industry is really what got me.  There is no limit to human greed.  The single most important thing I got out of this book is that I no longer look at the market as a real investment opportunity.  You can try to go big on a risky stock but there are just far too many people that know more than you and not because they're smarter than you, but simply because they have access to way more information than the individual investor.  It makes perfect sense for investors to buy and hold because you can't tell when anything is going to pop because that information isn't available to you.  You can only hope that you can tough it out through the bad times and still be around for a stock's good times and cash out.  Its a little hard to accurately quote the important parts of this book because so much of it is implied by Dan's collection of ups and downs throughout his career.

I wish I had time to write more about the book but I had to return it before finishing my summary.  

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