The Blogotariat is up in arms on the subject of Goldmans latest evilness-itude. Goldman Sachs, apparently, blatantly favours clients that pay them more money. Baruch is shocked. And so we should all be. The tone of the original article on the subject in the WSJ is strongly disapproving; here the tagline:
Critics say Goldman Sachs gives key trading tips only to its own traders and favored clients, hurting others who aren’t given the opportunity to profit from the information.
Apparently, GS analysts go into “huddles” with their salesguys, come up with short term stock ideas that may or may not totally chime with their formal ratings on the stocks. They may, in the case of Janus as cited in the article, sort of front-run ratings changes when the analyst says something like, “I like it more now” or “it may go up into numbers” or something. This stuff gets sent out in calls to high rolling punters like the big hedgies. According to a lot of bloggers (none of whom I note actually run any money, unlike Baruch) and those holier than thou twerps, the CFA brigade, this is a Bad Thing.
One can perform a reductio ad absurdiam on the more disapproving of the reactions: clearly Goldman Squid should be sending out every twinge every analyst feels on every stock under coverage all the time to everyone who pays GS any amount of money at all as well as those who don’t. This would mean everyone would be able to make lots of money all the time, in a completely fair and transparent way. Wouldn’t it.
Of course not. Actually, what GS is doing here really makes very little difference at all.
Baruch is a client of The Squid, and strictly tier 2. He can call the analysts, and they pick up and are civil and tell him stuff. But they rarely call him. No way does he get the “huddle” calls. But know what? He doesn’t actually mind because if he did, it probably wouldn’t help him very much. That stuff the GS flack was saying about it not being useful for all their clients, is, amazingly for a flack, true! I don’t want 5 day shelf-life trades; that’s the minimum length of my investment horizon (although my record is 15 minutes). It would annoy the crap out of me. Sure it is good to know when an analyst is about to change his mind, but it is more relevant for stocks I am in already, or thinking about taking a position in anyway. I would hurry up and get in, or stick around longer than I might have otherwise. I wouldn’t buy a stock only because I know some Squid hack was going to say it was suddenly good.
Another thing: it may shock you to know that GS analysts are not the best ones. Some are good and others are not so good. Their common strength is that they tend towards the more intelligent end of the spectrum, but note that this does not mean they are the most commercial, and will not necessarily make you more money. They do tend to talk lots to clients, and can tell you better than most what everyone else is thinking. This is often very useful. But for stock picking in the sectors Baruch looks at, for coming up with real money-making ideas, he finds someone like JPM does consistently better.
In fact some of the best analysts, with the strongest command of their briefs, with the best money-making ideas, are to be found in the smaller houses, ones where they have been able to carve out niches for themselves and analyse stuff the way they want to. Bulge bracket banks tend to force analysts to conform to house formats. MS forces their stockpickers to do this spectacularly crap “upside-, base-, and downside case” analysis which more often than not only goes to tell you that their stocks may go up, down or stay flat. A very expensive statement of the bleeding obvious.
Baruch knows his favoured stockpickers for each sector, subsector and big stock he looks at. If he had to pick the axe in each one, he honestly doesn’t think any of them would be from GS.
What he would get with GS “huddle” calls would be a large amount of noise by only averagely good stockpickers. It would likely distract more than it would help. I would feel smug getting the calls, knowing you don’t, and this alone would probably make it worthwhile in the minds of many of the punters. I would fancy I would be “in the flow”, and I would feel more confident about the positions I was taking. Again, managers would pay up just for this. It would be a struggle to prove that getting “huddle calls” actually made you more money, however.
It could also have the regrettable side effect of shoving you into the consensus, bein-pensant hedge-fund heavy positions which so spectacularly sucked in the back half of 2008. Just one last thought to leave you with. . .