Thinking about what’s happening in the market right now. I don’t want to wade into what the Treasury’s plan means for the market. Nor do I want to analyze the consolidation occurring in the Investment Banking industry.
I’d like just to put some thoughts down on how current events may impact investment research going forward and what that means for investors.
- Investment banks are currently the best we’ve got in terms of researching companies. I don’t mean to say that they are always (ever?) right, but my point here is that individual investors can never get as close to a company as does a sell-side equity analyst. As outsiders, we’re left frequently to decipher using shadow-puppetry what’s actually going on inside a company. Certainly, there are times and certain companies where analysts are equally outside but I’m just describing, not prescribing.
- Fewer banks mean less research. As investment banks consolidate into retail banks (as Merrill Lynch has with Bank America, for example), it ultimately means further consolidation in research departments as it doesn’t make sense to keep both brands separate and maintain separate teams. This means fewer stocks actually covered with research and fewer opinions on those stocks already covered. This is bad for investors as investors have proven that they, like many professionals, have an aversion to paying for research from independent research outfits.
- Importance of New Rules of Investing (NROI) grows: In order to compensate for the loss of research, investors are going to continue to flock towards free web resources (see my Top 5 Investment Sites) to make their own decisions. This is a huge opportunity for those competing in the Online Finance 2.0. In addition to expert communities and pickybacking sites, look for a flurry of new models in addition to incremental changes online with new charting technologies, blog aggregation, etc.
- Opportunity for Investor Relations firms who “get it”: As a buy-side analyst at a hedge fund, I always felt that Investor Relations firms were missing an opportunity. In a the Web 2.0 world, as investment banks continue to consolidate research ops and struggle with their business model, investor relations firms can really innovate here with new distribution models for disseminating information, new models for interfacing with company executives, etc. The old road show/press release model can be improved upon by those who get it. Firms who “get it” have an opportunity to compete against the i-banks, albeit coming at the game from a different perspective. Maybe, as the result of all of this, we’ll see the role of the IR firm change as well.
The investment industry has seen various modes of expansion/contraction throughout its lifecycle. I believe that this stage is natural in this evolution. This economic contraction for the industry happens to correspond to an expansionary period in web technologies so that when these firms emerge, they may be left behind in their research. This is a huge opportunity for other participants.
