More matter with less art

The Aphria $APHA Scotia post this morning results in an interesting conversation…

…via DM with a person who will remain nameless, but it’s fair to say that this person is not my peer when it comes to Canadian capital markets; This person is waaaay ahead of me and has forgotten more than I know about the subject (yes, I know I’m lucky to get to have conversations with these people, no need to point it out). I’m going to call my friend “VEP” (very experienced person).
Anyway, it turned into an interesting exchange and as I’ve been given permission to share right here, that’s what you get. It was a DM conversation so I’ve brushed up the grammar and tightened the words very slightly, but changes are few and there’s no meaningful difference to conversation we had (apart from at the very end where I have left off the bye-bye bits). I’ll indent my bits and put them in italics, to keep your eyes on the important person’s words in the exchange (hint: not mine). Read on:
Very Experienced Person
Saw your note tearing the Scotia guys a new one. To be fair, the
problem is systemic and relates as much to the buy side as to the
sell side analysts. The fundamental problem is that sell side firms no
longer get paid to do research.  It wasn’t always the case. In the days
of fixed commissions there was money enough for guys to do the work,
kick the tires, do site visits and sincerely appreciate opinions as to
their “top pick”. Then fixed commissions went the way of the dodo and there
was less money.  Then tech came along and lowered transactions costs. Then discount brokers came along and broadened access. Then DMA came
along and cut out brokers altogether. Then ETFs and algos came along
and made stock picking irrelevant altogether.
each turn money for research went down a notch and at each turn,
research looked to banking to make up the difference. Nowadays, banking
funds research. This is technically illegal but utterly ubiquitous. Those guys picked Aphria because that’s where they thought they’d get the most banking fees. Everyone
knows this, yet no one talks about it.
I’m not sure what the solution is, but
sunlight, as they say, is the best disinfectant. Research
should be labelled advertising, because that’s what it is. Don’t bury
it in the disclaimers in fine print, put it right up front in 48pt
font. Anyway, that’s my two cents.
Thanks. Much
to agree with there. I see this shit going on all the time, but I think
the point here is that this one is an egregious example. You pull your own
research note after just 6 weeks? And key word there is “example”; An example has to be set, so this blatant nasty is a good place to start. To be honest, I think the whole brokerage system is going the way of the dodo, but that’s a larger story.

thing; nobody talks about it in public, you say? Well why not start!
I’d love this DM conversation to be out there and in the public realm,
just your screed above would make for a great post on the blog. I could do it with your name, or go anonymous route. Waddya say?
Feel free to pull the pin on the exchange but please keep my name out, thanks.
Okey dokey.
more thing: Regarding the dodo, I think we are all worse off with the
current state of affairs. Superior investment returns come with the
efficient allocation of capital, yet the efficient allocation of
capital is predicated, or at least strengthened, by a free and
honest exchange of ideas. Now
that equity research is largely banking-driven, investment decisions
are made on the basis of a conversation that resembles a collection of
used car salesmen pounding hoods and wearing funny hats. Who wins? Certainly not the investor, yet these inferior returns are masked insofar as the impact is market-wide, a market that is largely gone passive anyway.
root of the evil is brokerages skipping over their fiduciary duty to
clients and cozying up to the sources of 8% placement commissions.
I don’t disagree. But these clients are getting exactly what they pay for, namely, not that much.
There is that. Brokerages
are businesses and will follow the money.
Which is only to say that there
is much blame to go around. It is everyone’s fault and no one’s fault,
all at the same time.
We’re back to your 48pt banner comment.
the root of all evil here is Bogle (IKN note: This refers to Jack Bogle, founder of Vanguard and normally understood to be the father of the passive investment model). It was his great insight to say, “Why try to pick an active manager when you can buy all of them and not
pay for any of them!” Hence the start of passive investing, freeloading at its finest.
And here we are in 2018, it’s turtles all the way down these days.
worked well when passive was a small component (even if immoral), but
now that just about everything is passive (or passive-esque, as index
hugging is); the whole thing is on autopilot. No one is driving the
bus and no one even knows the difference. We are all frogs boiled slowly.
It’s sub-primey.
Can’t stop dancing while the music plays on, eh?
You see other sectors, I just look at miners. And I look at GDX(J) for examples, propped up by holding 10%+ in All-Them-Miners.
Yes indeed (and then the conversation ends).

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