The relationship between the buy-side and the sell-side is self-reinforcing in certain ways. People want to hear what they want to hear, or so I hear. More often than not, portfolio managers want their advisers to tell them to buy the successful, attractive company whose stock has been doing so well. And they give more of their business to these advisers.
From the other perspective, sell-side analysts prefer to recommend successful, attractive companies whose shares have been doing well. And not just because of their clients. Good fundamentals, sharp management, price momentum these make for a good story and a strong sales pitch.
The buy-side and the sell-side are the ones who establish the consensus. By definition, what they like as a group is popular, and what they avoid is unpopular. The professional pressures to be part of this crowd should not be underestimated. The few analysts who choose to argue against the Street's malaise or enthusiasm, to recommend an unpopular course of action, learn the truth of Anthony Gaubis's comment: "If you warn 100 men of possible forthcoming bad news, eighty will dislike you right away. If you are right, the other twenty will as well."
And then there's ego. On Wall Street, we tell ourselves so often in so many subtle ways that, yes, we are smart. And more we are smarter. And if the facts don't always fit our theory, then to hell with the facts. Because we are smart, and therefore we should be right. We trumpet our correct plays and allow our mistakes to slip into the fog. We often confuse motion with progress and we too easily dismiss bad judgment as bad luck.
All of which is good news for the individual investor. If you thought that the deck was stacked, recognize now that if it is, it's stacked in your favor. In a sense, it is the institutional investment community's short-term focus on performance and commissions that has helped to make long-term value investors rich.
We may pay tribute to these value players, and to contrarians as well, but we dance to the frenetic tune played out on the Quotrons in front of us. And that offers quite an advantage for you, if you're willing to use some discipline and common sense.