Wednesday, October 25, 2006

Caveat Investor: “Confessions of a Wall Street Analyst” by Dan Reingold with Jennifer Reingold

Over the course of the past 10 years, I have watched with dismay the devolution of the telecommunications industry. My point of reference has been the anecdotal feedback I have received from numerous friends and acquaintances that were employed in a wide variety of telecom companies – AT&T, Lucent, MCI, Global Crossing, to name just a few. It has been a tale of woe, with elements of malfeasance, misfeasance, greed, incompetence and venality.

A friend who works in the world of investments suggested that I read Dan Reingold’s memoir, recently published by Collins, the Harper Collins imprint that produces most of their business titles. The full title of this fascinating and chilling book is, “Confessions of a Wall Street Analyst – A True Story of Inside Information and Corruption in the Stock Market.” From his vantage point as one of the most respected Wall Street analysts covering the telecom industry, Reingold tells the ultimate “caveat emptor” story that should give pause to all of us who make stock market investment decisions.

Reingold tells a very credible tale, mixing in enough elements of mea culpa to make his story believable and accessible. In hindsight, he wonders why he and other analysts did not uncover before it was too late the accounting duplicity and fraud that ultimately led to indictments of several key telecom executives, and that served as the straw that broke the camel’s back of the telecom industry.

In the first 300 pages, Reingold does an excellent job of walking the reader through the development of his role as an award-winning analyst, first within the fledgling MCI, and then on Wall Street with Morgan Stanley and finally with Credit Suisse First Boston. Reingold’s long-time rival and nemesis, analyst Jack Grubman of Salomon Smith Barney, serves as the perfect foil for exposing the abuses and excesses of an industry that continued to blur the line between the analyst side of the house and the investment banking side. The SEC emerges as an “unindicted co-conspirator” for its years of inaction and complacency in turning a blind eye to escalating levels of abuse.

The crucial take-aways for me in reading this book are Reingold’s strong words of warning to individual investors to open their eyes and realize that in many ways we are not competing on a level playing field.

“Last and most important, investors need to be aware that they’re playing a loser’s game. No matter what laws or rules are changed, the investment banking and brokerage businesses are fraught with inherent and inevitable conflicts, conflicts that can hurt even the biggest investors. Rather than trusting in the inherent fairness of the markets, individuals buying stocks should assume that they will never receive the same information as the professionals. It’s an insider’s world, and it always will be.” (Page 301)

“Individuals should not be buying individual stocks. I know this is a radical statement, especially coming from a guy who researched individual stocks for a living. But there are simply too many insiders with too many unfair advantages. Biased research or not, insider trading or not, the markets are, and will remain, rampant with uneven information flow. Some privileged and talented professionals will always receive or ferret out information earlier than everyone else. To be an investor in this environment is like being a drug-free athlete whose competitors are all juiced up on steroids.” (Page 313)

“Individual investors should assume that the information and advice they receive regarding individual stocks are stale and, to a large degree, already incorporated into stock prices. Even the majority of professional investors find the deck is stacked against them, since it is only a minority of well-connected, high-commission paying, deal-absorbing institutions that receive the favored information flow.” (Page 314)

Clearly, this book is one man’s opinion, but that man had a unique “seat at the table” for many years. I told a friend of mine, who is an investment professional, that I would be reviewing this book, and I offered him an opportunity to make his own comments. Look for these comments to be published the week of November 6, after I return from a much-anticipated vacation.


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