Cheapskate Investment Analysts & The Financial Crisis

From time to time over the years, I’ve had various investment analysts want to talk to me about my thoughts on how a particular search company might do. What cracks me up is that invariably, they think I should provide such advice for free. I have peers in the search space and other areas who also are in the same situation.

My gripe isn’t about not earning money, however. Rather, it’s more about how being so cheap perhaps reflects the “quality” of the work these analysts are supposed to do. Since few of them seem to pay for quality advice, is it any wonder we get things like the financial meltdown we’re going through now?

An email I got yesterday is a wonderful case in point and got me thinking about this post. I won’t name the companies involved, but this is what I received:

I work with a private investment company in New York. We’re currently kicking the tires on a potential investment in [removed]. An important part of our research process is to speak with customers, competitors and other industry experts in order to better understand the company’s strengths and weakness and the industry dynamics. As one of the foremost experts on search. you clearly have a valuable perspective to share.

If you are willing to share your thoughts, I promise not to take up too much of your time. Also, rest assured that any conversation would be entirely confidential, with its sole purpose to help us make a smarter investment decision. We are not looking for any non-public information, nor are we seeking any investment recommendations. We are solely interested in having a high level conversation about the key issues. Simply put, we are trying to do our homework on this potential investment we’e considering.

Let me know if you can help. If so, we’d be happy to circle back with you after our exhaustive research process is complete and share with you our conclusions.

Notice there’s no mention of paying me for this time. And I promise, having done a number of these, it does take up time. Easily an hour. So what’s my incentive here, when I’ve got plenty of things to do? I’ll get the conclusions of their research [helpful if I want to invest in a search company I guess, except I don’t to avoid conflicts of interest].

OK, there is value in such research reports, even if you’re not an investor. I have talked to many financial analysts freely because the exchange of information can indeed be valuable. I’ll call out one particular analyst, Mark Mahaney of Citigroup, who is always in this category with me. He does a lot of homework, gets out to trade shows (I’ll come back to this in a bit) talks to tons of people, publishes investor notes that often mention the people he’s spoken with or shows he’s attended — it’s well worth my time to talk with him. I learn back.

But bumpkiss private investment company I’ve never heard of, that it if publishes notes, I’ve never seen them? No, that’s not worth my time. So I replied that I’d be happy to talk, but that’s a service they’d have to pay for. That got me back this in return:

While many do, we typically do not pay for this type of research. In addition, since I haven’t spoken with you before, it is especially hard to know how valuable the conversation might be to gauge whether its worth paying for. I propose the following: lets set up a 45 minute chat at no cost. If I find that conversations valuable, I will be happy to pay for future conversations. In addition, I have peers that are more inclined to pay for their research and I would be happy to point them in your direction if I find the conversation productive. Lastly, I would be willing to share the conclusions of our in-depth research when we are finished. While we don’t publish our work, I would be happy to exchange it with you verbally. Let me know how that sounds…

It didn’t sound good at all. In fact, it went to undermine how much faith I thought anyone should have in this person’s research, when concluded. To detail:

  • No, most firms do NOT pay for this type of research, part of the problem, I think.
  • How did I go from being “one of the foremost experts on search” to “since I haven’t spoken with you before, it is especially hard to know how valuable the conversation might be to gauge whether its worth paying for.” Remember, this person came to me. I’m just sitting here minding my own business, get approached about a conversation, then get told that my time might not be valuable at all?
  • A 45 minute “chat” is about how long a typical phone consultation goes.
  • Yeah, tell me who your peers are that pay for research. Perhaps I’ll want their reports as being more valuable.

Bottom line, we’re not talking. So this person will do their report without an expert they originally thought it was important to include, because they don’t want to pay for advice.

I’m not saying I have the best advice in the world. I’m not saying that they can’t find others that will give them a solid report. But it’s absurd. They’re making a financial investment. Or others like them are recommending investments. Spend the money for the right advice, because if you’re not, what kind of advice are you getting?

It reminds me of a situation that happened ahead of our first SMX West search marketing conference last year (the next one happens this Feb. 10-12 in Santa Clara, by the way — check out the agenda!). We had a financial analyst request a press pass, which we denied.

Look, there’s no such thing as a “free” conference pass. Every ticket we give out, there’s like $250 or more in food costs alone associated with it. I kid you not — we provide good food at our shows, and it costs a ton. Hotels are a giant rip-off, as any conference organizer will tell you. So we have to be pretty selective with who gets passes. Places with broad circulation make the cut, because of the exposure they bring. Small trade publications often make the cut, because of the targeted audience they reach. Some live bloggers make the cut because we think it’s a valuable way to spread knowledge from the shows to people who simply cannot afford to attend.

But a financial analyst? We need to subsidize the cost of a financial analyst to attend? No offense, but shouldn’t they be able to buy a ticket?

The person came back to us saying we’d get visibility in their reports that go out to institutional investors (people unlikely to come to a show or if they do, might request free passes themselves). They added that everyone else gives them passes and then tossed in this closing part:

Please note that we will be attending your conf only if we do get free passes because we do not have budgets to pay for the industry conference (in other words you will not cannibalize your revenue by giving us free passes).

As I said, we do cannibalize our revenues by giving a “free” pass that has lots of associated costs to it. But more important, a financial analyst firm that advises institutional investors should have a conference budget – at least if they find the information at conferences to be good “feet on the ground” information about what’s happening in the trenches. If they don’t attend, because they can’t get a freebie, then aren’t they potentially missing out on key information? And isn’t that pretty cheap, for companies that influence the spending for so many others?

Of course, even gathering all the information in the world doesn’t mean anyone can predict anything. I remember going in once to talk to a large banking firm, with about 20 analysts gathered in the room (naturally, it was a free gig — but I thought it would be interesting to do). One of them was semi-hostile when after telling me about how he’d plotted out the number of ads on Google over time, he then thought he could project what their revenue was going to be. My response was you can’t predict anything about Google.

I then ran through factors he wasn’t considering. Number of ads doesn’t mean how much revenue each ad is generating. And what if Google shifted to a new payment model (as it turned out, soon after they did add CPA ads). And what if Google added more ads to the page (they did later). Or decide to take some of them away (further down the line, they did that too). Or the founders decide to do one of the unpredictable founder things and launch some new product no one is thinking of.

He was pretty frustrated, but I didn’t know what else to say. I still don’t know how anyone can project what Google’s going to do. Indeed, I remember seeing Jim Cramer for the first time on TV a few years ago. Since I lived outside the US at the time, I hadn’t really realized who he was. Here I watched a guy making predictions that sounded OK about lots of different companies, all at once. And later on at a future point, I saw him make a prediction about Google.

Woah. I pretty much eat and breathe Google, right? It’s my full-time job. Meanwhile, here’s Jim Cramer who I cannot believe knows the company much beyond its published financials, since he also has to cover a million other companies. There’s just no way he can have a high level of expertise about Google from a product level. But if you don’t know the products of a company, what do you know about a company? Financials only tell part of the story. But he can make recommendations off of that?

It’s insanity. But hey, maybe that’s just my astrological sign, Libra. You know, the scales. I rarely feel I can say something is absolutely one way or the other. I think Google’s got a bright future ahead of it, but who knows. And from an investment standpoint, I guess I wish maybe some of these recommendations were more wishy-washy, so braindead investors might wake up and do their own homework (newsflash Yahoo investors — you’re Pepsi, Microsoft is RC Cola, so when RC Cola says it wants to buy Pepsi, you’ve got a good stock until you stupidly question its own value). And I certainly think any firm that’s supposed to do research might actually pay to talk to real experts, to ensure they have good research. Not for me — I could give a toss for myself. It’s just that it’s the right thing to do.

And if you are an investor getting a report? Go ask for a list of all the experts that were considered — those that were actually consulted — who wasn’t consulted and why — and how much was spent on obtaining external research. Bet you find it surprising.