The vast majority of institutional and private investors in the stock market have, over the years, developed a healthy scepticism for investment recommendations published by stockbrokers' research departments.
Typically, investment analysts in the various stockbroking houses split the stocks that they cover into three or four categories. Whilst the precise language used may vary from one investment house to another, these categories can generally be defined as buy, accumulate, hold and sell.
Buy recommendations tend to proliferate and will generally outnumber sell recommendations by a factor of eight or nine to one.
More experienced investors will read between the lines of investment reports in order to determine what a specialist investment analyst really thinks about a particular company. Therefore, a healthy dose of scepticism must form part of all investors analytical armoury.
This lack of sell recommendations is merely the tip of an iceberg involving big conflicts of interest, which pervade the investment industry. The core conflict arises from the fact that investment banking and stockbroking businesses now generally are grouped under one roof. The large banks now provide fully integrated services across the full range of the financial spectrum.
It is a well-known fact that, in the world of investment banking, the really big money is generated within the corporate finance divisions.
Bringing new companies to the stock markets through initial public offerings, and providing corporate finance advice to companies that are engaging in merger and acquisition activity generate enormous fees.
In most integrated financial institutions, commissions generated from trading equities will generally pale when compared with the fees generated from successfully raising capital for corporates.
In this environment, the publication of a research note that is critical of a company may damage the prospects of the sister corporate finance department in securing further corporate finance work from the relevant company.
Going even further and issuing a sell recommendation on a company that is also a corporate finance client of the relevant investment bank could result in the loss of a lucrative company brokership.
This implicit conflict of interest has always been a feature of stock markets but the technology boom of the 1990s generated excesses that are now being thrown into sharp relief in the aftermath of the bursting of the technology stock market bubble.
Investors in all markets were, to some degree, caught up in what can now be seen as the irrational exuberance associated with the valuations afforded to technology and telecom companies.
In the Republic, the sale of Eircom by the Government to a hugely enthusiastic investment community and the public at large was part of this global process. Despite company share prices having lost touch with reality when assessed on conventional investment valuation measures, the vast majority of professional investment analysts continued to issue buy recommendations.
Of course, when it comes to dealing in shares, the maxim "the buyer beware" holds sway. However, this hasn't prevented investors from initiating litigation against investment banks that were issuing strong buy recommendations even at the peak of the market. This is particularly the case in the US market, where investors that have lost heavily from following analyst recommendations are feeling particularly sore.
Regulators and politicians have also been very critical of the part the industry played in fostering what has proved to be a valuation bubble in technology and telecom stocks.
There are some signs that the investment industry is trying to respond to these inherent weaknesses. Some large fund management groups have been beefing up their in-house research departments in order to reduce their reliance on broker research. Prudential in Britain and Irish Life in the Republic have been pursuing this strategy.
Clearly, private investors must continue to rely on the research published by the stockbroking community. Several of the large international banks have been trying to respond to this crescendo of criticism. In London, the large HSBC banking group recently announced a radical restructuring of its investment research. The bank's analysts will be required to publish as many sell recommendations as buy recommendations, and hold recommendations will be virtually eliminated. In addition, HSBC will invest some of its own money in a fund that will follow its analysts best tips.
Although the industry is responding to pressure, the fundamental fact is that the conflicts of interest that are an integral feature of investment banking will remain.
As such, many of the changes being implemented will probably prove cosmetic rather than fundamental. Therefore, critically assessing brokers' investment recommendations before buying or selling shares is more important than ever.
