IN A PLACE called Wall Street, a certain group of high priests - known as stock analysts - have been anointed with the heady task of judging America's corporations. Their pronouncements, spread far and wide with the 1990s' financial bubble, moved money and markets - and too often were blindly followed by the newest believers, known as the little guy.
For the chosen, it was profitable work; some even got their kids into New York City's toniest preschools. Trouble is, free advice is just that. Their analyses often were grounded in gossamer, dedicated to sustaining the stocks of their firms' corporate clients. Most rarely uttered the profanity "sell." Some even mocked their public advice in crude, private e-mails.
If badly fallen markets haven't deflated analysts' power enough, then at least their game might be markedly changed by two events of last week.
The most publicized was the settlement of a lawsuit by New York state and other regulators with the 10 largest securities firms that hit each with fines of $50 million to $325 million and forced them to collectively spend $450 million on independent analyses to be offered to investors with their in-house research. The brokerages also must shore up the walls between their conflicting businesses of touting initial stock offerings and selling supposedly high-quality stocks to investors.
Incidentally, this settlement included a lifetime ban from the industry for Jack Grubman, former Citigroup star telecommunications analyst and among the most visible symbols of the Street's late-'90s excesses - if only for allegations he skewed his rating of AT&T; to help his twins get into a prestigious preschool.
The second threshold last week was Coca- Cola's announcement it no longer will give analysts earnings guidance. If others follow suit, thus would end a corrupt ritual in which firms provide analysts estimates of their earnings and then manipulate their numbers to meet or exceed these expectations - to maintain their stock prices.
Under pressure from its largest shareholder, renowned value investor Warren Buffett, Coke is trying to draw investors' focus to its long-term prospects, not its short-term gyrations. One of the Street's many contradictions is thatwhile amateurs are urged to invest for the long haul, many professionals thrive on markets' day-to-day ups and downs, which in turn only magnifies that volatility. Now, at least for Coke, analysts will have to do a bit more work on their own from the ground up.
Together, these moves may be beneficial for small investors. But they still miss a key point: Studies show the track records of most analysts, independent or not, are hardly trustworthy. That's among the reasons that index funds - funds tracking whole markets - tend to beat funds of stocks picked by professionals. Investors who blindly place bets on the free advice of the Street's sages - without their own due diligence - still deserve the returns they get. In other words, caveat emptor.