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Thursday, 10 May, 2001, 07:56 GMT 08:56 UK
When not to believe the experts

By BBC News Online's Orla Ryan

Looking for stock market advice? Ask an expert.

This conventional logic has been turned on its head by the boom and collapse in technology shares over the past year.

Many of those who followed financial analyst stock recommendations have seen their investments plummet and are looking for someone to blame.

Merrill Lynch's Henry Blodget is now being sued by a New York doctor, who lost the $800,000 he invested for his children's education after following Blodget's stock recommendations.


One must bear in mind that recommendations are exactly that, recommendations

Merrill Lynch spokesman
The doctor alleges that the high-profile analyst recommended stocks in which the US investment bank had a financial interest.

Merrill Lynch is set to file an answer to these charges on 22 June and the case is scheduled for trial in February next year.

Lost money

Dr Kanjalil bought shares in Infospace on the recommendation of his Merrill Lynch broker, who relied on Mr Blodget's recommendation.

His lawyers allege that Mr Blodget did not disclose a conflict of interest, namely that Merrill Lynch represented a company that was being acquired by Infospace.

The issue at stake is whether Mr Blodget - or indeed other analysts at different banks - are recommending shares for the wrong reasons.

The fear is that analysts issue strong buy recommendations because they could result in more business for the bank from the company whose shares they recommend.

"It is a ground breaking case, which seeks for the first time to hold a major firm's analyst responsible for misleading by recommendation on an internet stock," Jacob Zamansky, a lawyer at Zamanksy & Associates, told BBC News Online.


The heyday of the analyst as a celebrity... has passed

David Schwartz, stock market historian
Dr Kanjalil wants $10m in punitive damages from Mr Blodget to "send a signal to the industry that analysts much be held accountable for their recommendations", Mr Zamansky said.

However, Merrill Lynch are quick to dismiss the "meritless claim made by sophisticated, experienced investors who sought high risk investments and made their own decisions."

A spokesman told BBC News Online: "Mr Blodgets' research has not been compromised. One must bear in mind that recommendations are exactly that, recommendations. Mr Blodget is a professional of absolute integrity. Merrill Lynch's compliance process is rigorous and designed to prevent the kind of conflict of interest falsely alleged."

Whatever the outcome of the case, the issue has become a hot one in the US, with Congress to hold hearings on analyst conflict of interest in June.

Analyst liability

The Blodget case may centre on conflict of interest - but analysts on both sides of the Atlantic are coming under fire for their patchy success rate when it comes to forecasting share prices.

In particular, analysts face criticism for sticking doggedly to recommendations to buy or hold shares whose price is falling.

Analyse this: Many investors lost money as tech stocks plunged
Analyse this: Many investors lost money as tech stocks plunged
One example is that of US technology firm Rhythms NetConnections. Analysts were still telling people to buy their shares even when the share price had fallen to under $3 from a previous peak of more than $93.13 in April 1999.

Some investors also question the methodology used by some analysts to make recommendations.

Those who track the performance of analyst recommendations - such as website marketperform.com - can unearth some interesting results.

CSFB, for example, has recommended 500 technology stocks since 2 February 1999. Prices increased for 194 of those stocks, but fell for 288 of them, according to marketperform.com.

Several other banks have a similarly patchy track record.

Salomon Smith Barney has recommended 243 internet stocks since April 1999. Prices have only increased for 68 of them, according to the same website.

Glory days

What is becoming clear is that the glory days of the analyst appear to be nearing their end.

In truth, these heady days were shortlived.

Stock market historian David Schwartz points out that the rise of the analyst is a relatively recent phenomonen.

Stock analysts traditionally provided through research, insight and a guide to the future prospects of a company.

"Analysts were an underpaid segment of the investment community for a long time," Mr Schwartz said.

But the bull market in the 1990 heralded a rush of new companies to market and created an opportunity for some "expert" advice.


The situation as pertained to last year was you were damned if you did and damned if you didn't

Brian Mairs, Apcims
The phenomenen was driven first by the demand for shares, then for financial information and then for media pundits to fill airtime on channels such as CNBC and Bloomberg. A high-profile analyst also provided an investment bank with a public face, which could help them win business.

"The heyday of an analyst as a celebrity who is one of the public faces of the company out there talking up shares and selling shares and trying to build the company's profile, has passed," Schwartz said.

Just a punchbag?

But there is only so much blame that can be attributed to analysts for individual decisions to buy shares.

In many ways, last year's stock market boom and bust was so illogical and frenzied that investors want to find some to blame.

"The only people visible here, apart from investor stupidity, was the analysts who were making the recommendations," Schwartz admitted.

The only people taken in by analyst recommendations were people who didn't know what they were doing, says Brian Mairs of the Association of Private Client Investment Managers and Stockbrokers.

"The situation as pertained to last year was you were damned if you did and damned if you didn't," he said. "If you weren't investing in these stocks, your clients would want to find out why not. If you were, you were exposing yourself to a very volatile market."

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