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I say things on Twitter

12/5/18

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:

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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.

At 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.
IKN 
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.

Another 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?
VEP
Feel free to pull the pin on the exchange but please keep my name out, thanks.
IKN
Okey dokey.
VEP
One 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.
IKN
The root of the evil is brokerages skipping over their fiduciary duty to clients and cozying up to the sources of 8% placement commissions.
VEP
I don't disagree. But these clients are getting exactly what they pay for, namely, not that much.
IKN
There is that. Brokerages are businesses and will follow the money.
VEP
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.
IKN
We're back to your 48pt banner comment.
VEP
Actually, 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.
IKN
And here we are in 2018, it's turtles all the way down these days.
VEP
It 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.
IKN
It's sub-primey.
VEP
Can't stop dancing while the music plays on, eh?
IKN
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.
VEP
Yes indeed (and then the conversation ends).