The Analyst as Rock Star: The Importance of Judgment in a Sea of Information

"Sure, there's an abundance of information out there about every company, but information and understanding are very different things. A good analyst turns information into understanding."

Gregory Slayton, CEO of MySoftware, Inc.
Quoted in Forbes ASAP, August 23, 1999 issue

Over the last few years, I have found myself increasingly stressing the role played by information in the teaching of corporate finance. In a financial market that is anything less than strong-form efficient, information asymmetries between shareholders and managers will affect the way the actions of the latter are viewed. (Think, for example, of the importance of dividend changes on share price . . . ) The quote above comes from an interesting article in latest issue of Forbes ASAP, and points up just one more way the world has changed in the last few years.

Until the advent of the Internet, real-time market information was available only to the chosen few -- specifically, money managers with very deep pockets. Similarly, access to firm financial filings required one to wait for publication, or even a trip to the local office of the Securities Exchange Commission. (For example, those of us seeking SEC filings were forced to travel to Chicago.)

Of course, today, market and firm information is available on one's desktop at little or no cost. Incredible! Today, the problem is not a dearth, but a plethora, of information. And therein lies the importance of the analyst. As noted by author Karen Southwick in the Forbes ASAP article "Shouting Stars," [w]hile the influence of the traditional brokerage house may be waning on other fronts, fresearch analysts are enjoying unprecedented celebrity. Indeed, a new phenomenon is emerging: the analyst as 'rock star.'"

And why is this the case? The importance of judgment - the ability to rapidly and effectively evaluate the flood of information available. "We're in a universe where the ability to get information out swiftly is unparalled: according to Margo Vignola, Director of Equity Research at Merrill Lynch. The effect has been, as Southwick notes, to "level the playing field" among investors, day traders, and journalist. To use a NASCAR analogy, the emphasis has shifted from "Who can buy the fastest car?" to "Who's the best driver?" And isn't that the way it should be?

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