Financial Times Editorial: Shoot all the analysts Published: March 19 2001 19:53GMT | Last Updated: March 19 2001 21:45GMT

Twenty years ago, investment analysis was a respectable if rather dull trade. Accountants, actuaries and other worthy citizens would be found in the dustier corners of the stockbroker's office working out the production costs of cement or the number of no-fault auto claims in Massachusetts. From this data, profits forecasts would be drawn and passed over to the sales force to be used as part of the pitch.

Then things changed. First, the broking firms were taken over by investment bankers, who found the analysts' special expertise in their sectors had much more value as a way of attracting corporate finance business than it did as a source of investment advice. You want a detailed but very positive appreciation of your business prospects to help you float your company's stock? Fine, we have just the person. Independent analysis became an endangered species: conflicts of interest multiplied.

Second, big companies found that analysts were a very useful way of managing market expectations. By subtle and not so subtle guidance, finance directors built a consensus view about their business prospects, which they aimed on most occasions to be just a little bit behind reality. There was no longer much point in checking out the cement kilns: a quick telephone call would usually do the job.

Third, as the great bull market roared ahead, analysts were turned by the media into far-sighted seers and sources of wisdom. The most articulate of them, by now extremely rich, would feature regularly on the business TV shows, wearing suits that were worth more than most of their clients' portfolios. They learnt a new trick: instead of forecasting earnings per share, they were now in the business of forecasting share prices themselves. And those prices were almost always very optimistic.

Now, at last, they have had their come-uppance. Much of what many of them have done in the past several years has turned out to be worthless. High-flying stocks that a year ago were going to be cheap at twice the price have halved or worse - and some analysts have been putting out buy recommendations all the way down. The speed of the setback in the US has made it impossible for companies to guide analysts down gently: profit warnings are two a penny.

There are four conclusions to be drawn. The media, including the Financial Times, should be much more chary about attributing wisdom to analysts. Investors should treat their written work with care: favoured clients can expect a private phone call that may be more frank. Companies should never take any action of any kind just to please the analysts.

And the analysts themselves? They should learn a little humility and get back to analysis.

http://markets.ft.com/ft/gx.cgi/ftc?pagename=View&c=Article&cid=FT3NDN5MIKC&live=true

-- Carl Jenkins (somewherepress@aol.com), March 20, 2001