We Make Money the Old-fashioned Way: Confidence Work


For years Smith Barney ran ads featuring gravel-voiced actors intoning "We make money the old-fashioned way: We EARN it". Some folks disagree. Charlie Munger, vice-chairman at Berkshire Hathaway one said in a speech:

"I asked the question 'Is there a functional equivalent to embezzlement?' I came up with a lot of wonderful alternatives. Some were in investment management. After all, I'm near investment management. I considered the billions of dollars totally wasted in the course of investing common stock portfolios for American owners. As long as the market goes up, the guy who's wasting all this money doesn't feel it, because he's look at these steadily rising values. And to the guy who is getting the money for investment advice, the money looks like well earned income, when he's really selling detriment for money, surely the functional equivalent of undisclosed embezzlement. You can see why I don't get invited to many lectures."

Of course, the market doesn't go up forever, and some of that expensive advice looks pretty outlandish in hindsight. In a recent paper entitled Rewriting History, three researchers found that between 2002 and 2004, the I/B/E/S database of research analyst stock recommendations underwent significant changes, specifically:

"The non-random removal of 19,904 analyst names from historic recommendations ("anonymizations"); 2) the addition of 19,204 new records that were not previously part of the database; 3) the removal of 4,923 records that had been in the database; and 4) alterations to 10,698 historical recommendations. In total, we document 54,729 ex post changes to a database originally containing 280,463 observations."

The owner of the data, Thompson Financial, claims that the anonymizations were caused by a series of software glitches, but the researchers beg to differ:

"Surprisingly, despite the seemingly random nature of this type of shock to the data, the resulting patterns have apparently systematic components, rather than appearing random. For instance, bolder recommendations are more likely to be anonymized, as are recommendations for more senior analysts and Institutional Investor "all-stars". The characteristics of the additions and deletions are similarly unusual. Additions disproportionately consist of holds and sells; indeed, in the case of one prominent brokerage firm, 91.5% of its 234 additions are sells, and these increase the number of sells the firm has on the 2002 tape by a factor of 20. Deletions, on the other hand, disproportionally consist of strong buys, while alterations disproportionally consist of buys and strong buys (which are typically revised down). Perhaps, most strikingly, all four types of changes correlate strongly with survival by both the brokerage firm and by the analyst."

The paper goes into specifics regarding the changes and the methods they used to research and classify them. As to why these changes happened, it's the classic case of "follow the money". For individual analysts, career advancement was higher for those with changes than those without (and there were virtually no changes for analysts who retired before 2003). For the all-stars, those anonymizations make them appear much more conservative than they really were. Ditto for the brokerage-level recommendations, which were altered even more dramatically. Of course, this wouldn't have anything to do with the fact that Elliot Spitzer was using the "exuberance" of recommendations as an impetus to investigate the firms at the time. No, no. Simple software glitches.

Content Marketing Sins and How to Avoid Them

I once met a man who spent a considerable amount of time at the horse track. He claimed to do pretty well, and I saw him make money on most of the races he bet. I asked him if he did any investing, and he answered "Never! There's no sure thing in horse racing, but at least you're not betting against the house!" And using the house's questionable tips to boot!

  • I keep CNBC on all the time and read the WSJ every day. I haven’t heard or seen anything about this scandal. Has it been widely reported?

  • I don’t watch a lot of TV. I saw it on several blogs, including Instapundit and The Big Picture, so I figured other media would have covered it.

  • At Barron’s, we’ve done a lot of reporting on this mess. Either our news judgement stinks or you can’t rely only on the WSJ and CNBC.

    Bill Alpert

  • Hi Bill,

    Good for you and your colleagues! I know Rob is partial to WSJ, but if they fumbled this story (particularly in light of the backtesting angle), that’s a no-no. Of course, since they’re mentioned in the paper, there could be other explanations.

    Thanks for commenting,


  • There are only so many hours in a day Bill. Are you saying I should switch my sources for business news? What do you recommend?

  • I have an article on my blog that deals with ethics. To see it go to:

  • bill alpert


    Should you pay attention to more than the WSJ and CNBC ? Well…everyone should subscribe to Barron’s — it costs something like $75 bucks in addition to the WSJ Online subscription, or some such price (I’ve never paid for it in my life, as they say). Yahoo and I think Google link to stories in Barron’s and other subscription sites, giving you a heads up, even if you have to pay to see stories. If a Barron’s story is suffiently influential on a stock price, it usually gets pasted by someone onto a message board (to the consternation of our copyright and reprint people).

    I pay attention to the WSJ, the DJ Newswires (costs money), Barron’s, the New York Times and less frequently Fortune, Forbes, Reuters, Bloomberg…

    Bill Alpert