The Intelligent Investor_ The Definitive Book on Value Investing - Benjamin Graham [110]
The intelligent investor will not do his buying and selling solely on the basis of recommendations received from a financial service. Once this point is established, the role of the financial service then becomes the useful one of supplying information and offering suggestions.
Advice from Brokerage Houses
Probably the largest volume of information and advice to the security-owning public comes from stockbrokers. These are members of the New York Stock Exchange, and of other exchanges, who execute buying and selling orders for a standard commission. Practically all the houses that deal with the public maintain a “statistical” or analytical department, which answers inquiries and makes recommendations. A great deal of analytical literature, some of it elaborate and expensive, is distributed gratis to the firms’ customers—more impressively referred to as clients.
A great deal is at stake in the innocent-appearing question whether “customers” or “clients” is the more appropriate name. A business has customers; a professional person or organization has clients. The Wall Street brokerage fraternity has probably the highest ethical standards of any business, but it is still feeling its way toward the standards and standing of a true profession.*
In the past Wall Street has thrived mainly on speculation, and stock-market speculators as a class were almost certain to lose money. Hence it has been logically impossible for brokerage houses to operate on a thoroughly professional basis. To do that would have required them to direct their efforts toward reducing rather than increasing their business.
The farthest that certain brokerage houses have gone in that direction—and could have been expected to go—is to refrain from inducing or encouraging anyone to speculate. Such houses have confined themselves to executing orders given them, to supplying financial information and analyses, and to rendering opinions on the investment merits of securities. Thus, in theory at least, they are devoid of all responsibility for either the profits or the losses of their speculative customers.†
Most stock-exchange houses, however, still adhere to the old-time slogans that they are in business to make commissions and that the way to succeed in business is to give the customers what they want. Since the most profitable customers want speculative advice and suggestions, the thinking and activities of the typical firm are pretty closely geared to day-to-day trading in the market. Thus it tries hard to help its customers make money in a field where they are condemned almost by mathematical law to lose in the end.† By this we mean that the speculative part of their operations cannot be profitable over the long run for most brokeragehouse customers. But to the extent that their operations resemble true investing they may produce investment gains that more than offset the speculative losses.
The investor obtains advice and information from stock-exchange houses through two types of employees, now known officially as “customers’ brokers” (or “account executives”) and financial analysts.
The customer’s broker, also called a “registered representative,” formerly bore the less dignified title of “customer’s man.” Today he is for the most part an individual of good character and considerable knowledge of securities, who operates under a rigid code of right conduct. Nevertheless, since his business is to earn commissions, he can hardly avoid being speculation-minded. Thus the security buyer who wants to avoid being influenced by speculative considerations will ordinarily have to be careful and explicit in his dealing with his customer’s broker; he will have to show clearly, by word and deed, that he is not interested in anything faintly resembling