Investing Like a Wall Street Professional

With almost as many investment strategies as market participants, how can we possibly identify the ideal strategy for our situation and goals? Some investors turn to value investing -- buying beat-down stocks with a positive outlook -- in the hopes of outperforming the market and minimizing risk. Others, as we'll explore today, try to emulate the professionals or "experts." Still others, as we'll discuss next time, would rather follow the wisdom of the masses, since market sentiment can be a self-fulfilling prophecy.

First, let's put Wall Street equity research analysts in context. You know these guys by their "Buy-Sell-Hold" recommendations. Typically, they have a business relationship with the company they are analyzing. They've met and interviewed the executives, spent time with the staff, and poured over financials, reports, news, and future project details, investing hours numbering in the hundreds. If an analyst wants to be received positively (and receive helpful information) the next time he returns, he would benefit from concluding with a buy rating. This bias alone is enough to take published analyst work with a grain of salt.

Second, many independent investment research firms provide their own recommendations or ratings for a broad range of equities based on widely varying factors. Morningstar has a 5-star rating system, TheStreet uses an academic grading scale (A+ to F), MSN Money uses StockScouter's 1-10 bell curve, and countless other proprietary rating systems exist.

Investors can use these systems to create their own portfolios (i.e. long the top-rated stocks, short the bottom-rated stocks), which, depending on your allocation and time frame, can be profitable. However, sometimes there are serious discrepancies, and you would be hard-pressed to find a ratings company that would call its overall system "investable." That alone begs the question, "Why bother?"

Some investors look to the famous investment gurus to see what they're holding and align their portfolio to match their favorites. On Websites like GuruFocus.com, you can see the most recent publicly available holdings information for your favorite money manager. Obviously, if it was as simple as following the experts, we'd all be millionaires, so there has to be a catch.

The main problem with this type of tracking is that there is a substantial reporting lag (45 days on average) that proves costly to the tune of almost a 10% annualized loss over the last 10 years (according to a Starmine study). This means you could lose a substantial amount of money by trading 45 days behind a top-performing manager. It seems the best way to track the experts is to study their science and learn their art -- uncover what makes them excel, and implement that X-factor in your own decision-making.

Starmine recognized this pattern and presents its solution in a new product called "Smart Holdings," which tracks some of the factors common to institutional investors. It functions as a trend identifier to highlight which descriptors (sectors, countries, cap size, value/growth, etc.) will likely see increased demand from institutions, so that the investor might have the opportunity to get in front of that buying pressure. Wouldn't that be ironic if the institutions implemented the very system that tracked them? I wouldn't be surprised to see it.

How do you use the opinions and research of others to help you make investment decisions? What tools do you like? Which ones do you loathe? Share your strategies on the message board below.