What An Analyst Does

Today's Wall Street Journal features a section on "star" equity analysts.

As I read the first page of the section, seeking to understand the bases on which analysts were evaluated, I learned the following. Analysts are apparently judged on their ability to produce a best "buy" or "sell" recommendation, in terms of total return.

At first glance, this might seem appropriate. But it seems to me to run counter to what I have been led to believe analysts are supposed to do.

First, measuring an analyst on their one best recommendation seems akin to awarding a batting title in baseball to the hitter with the single longest home run. It doesn't count the other recommendations, or the average performance of all recommendations, etc. Or adjust the best recommendation for some sort of riskiness of the analyst's worst recommendation. How anyone is supposed to make use of such information stymies me. Which one, of many recommendations, should I have followed from each analyst?

Wouldn't it make more sense to reward the analyst with the best overall average return on recommendations? But, wait....that would make the analyst sort of like a portfolio manager, wouldn't it?

So, maybe the notion of rewarding analysts for something investment managers are paid to do is rather awkward.

My understanding, from years in the financial services industry, was that analysts were supposed to be uniquely able to understand specific companies in depth. And that the hallmark of this was to have the least error in predicting things like earnings, or earnings per share, for companies the analysts covered. What happened to this criterion? Has it just vanished, as we admit analysts are really just junior money managers?

Of course, there's the question of how one would weight a single best recommendation from an analyst. At the same time the WSJ features articles which counsel risk management for individual and institutional portfolios, they devote an entire section to lauding analysts who made a single "best" equity buy/sell call.

Confusing, isn't it? How our largest daily business newspaper, the Wall Street Journal, can be so schizophrenic with respect to what it seems to value as good financial advice to its readers.