Why Goldman gives big clients a peek at its research

Goldman Sachs Group (GS) has confirmed investors' worst fears about Wall Street analysts.

The banking company, whose shares have almost doubled this year, gives its big investment and trading clients such as Janus Capital Group their best tips and investment advice "sometimes days ahead of releasing their ratings and research reports publicly," The Wall Street Journal reports. This early access to potentially market-moving information could give these Goldman investors a huge advantage. Timing is everything in investing as in life.

Analysts' ratings are a marketing tool that give small, unsophisticated investors the illusion that their money means as much to Wall Street as the big guys. Of course, that's not true, as the Goldman revelations reveal. The Financial Industry Regulatory Authority and the Securities and Exchange Commission are looking into the matter, as well they should.
This type of sucking up to clients probably goes on all of the time Here's why: big investors want to get a leg up on their competitors -- the kind you can't get from a research note. Who can blame them? Millions, sometimes billions of dollars, are at stake. An investment manager won't inspire the confidence of his bosses if the best he can say is "I read in this Goldman analyst report" that this is a great stock. They would be laughed out of their firms.

None of the professional investors I have interviewed over the years has ever told me that they bought or sold a stock solely based on the word of a sell-side analyst. Of course, these masters of the universe never like to admit that they follow anyone. Many, though, have told me that they find "buy, sell, hold" ratings for equities to be useless. Sometimes, money managers calculate their own projected valuations of stocks. Others aggregate several analysts' forecasts. It all depends on their particular investing style.

At times like these, Wall Street reminds me of a line from George Orwell's Animal Farm: "All animals are equal, but some animals are more equal than others."

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