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Some Wall Streeters work in Wall Street to earn high incomes and then develop their own jobs. Others, who are not as confident as the above-mentioned in terms of obtaining success, prefer to remain with short-term transactions than leave everything to start playing in the long run without guarantee of success. The compensation in Wall Street is so high that it can ensure financial security for life. There is a minority that maintained a long-term perspective. But the majority does not highlight clients' financial success. Short-term maximization of their income is the primary goal.
Many Wall Streeters, especially stockbrokers, have come to believe that their clients will normally leave them after a couple of years. This shows that nothing is for sure on Wall Street. Even the best-intentioned advice may not be profitable. It is highly common for clients to switch brokers when things are not going well. However, this is no excuse for those who think that client turnover is the norm and want to maximize commissions and fees.
Investors must never forget that Wall Street has a strong bullish bias, which is consistent with its self-interest. Firms working on Wall Street are able to complete more underwritings in good than in bad markets. The same happens with brokers, who work better and leave customers much happier when the market is doing well. But investors must be careful when brokers are extremely optimistic.
The bullish bias of Wall Street manifests itself in many ways.
It must be noticed that Wall Street is buy-oriented rather than sell-oriented. Perhaps this is the case because anyone with money is a candidate to buy a stock or bond, while only those who own are candidates to sell. There is more brokerage business when an optimistic research report is prepared.
In addition, analysts working on Wall Street do not generally encourage sales because they have to be optimistic and do not give negative recommendations. They do so even when they know they have the truth. This is specifically the case when these companies are corporate-finance clients of the firm.
There is a very good example of this situation. In 1990 Marvin Roffman, an analyst at Janney Montgomery Scott, Inc., apparently lost his job for writing a negative research report about the Atlantic City hotel/casinos owned by Donald Trump, a prospective client of Janney.
There are many who share Wall Street´s bullish bias. Investors prefer to see a rise in security prices rather than a fall thereon. It is also better to see an upward potential than a downward one. Companies also like to see their own shares rise in price. This involves confidence in management as a source of increase in the value of shares and stock options and a source of financial flexibility that enables the company to raise additional equity capital. Even government regulators of the securities markets have a stake in the markets' bullish bias.
Accordingly, there are certain market rules to boost the upward bias encouraged by Wall Street. One of them is the prohibition imposed on mutual funds, among other institutions, to sell stocks or bonds short. Selling short means selling borrowed stocks or bonds. Another rule is that although there are no restrictions on buying stock, short selling quoted stocks requires physically borrowing the desired number of shares and then executing a sell order on an “uptick” (an increasing fluctuation in price). This is an important limitation to the ability of investors to execute short-term sale transactions and the combination of these rules and the limited number of investors willing to accept the risk of short selling increases the chance of securities becoming overvalued. There are short-sellers who may want to participate and correct an overvaluation. Unfortunately they are few in number and significantly restricted to do so.
Factors contributing to this bullish bias cause an overvaluation of the financial markets. Indeed, changing such overvaluation is much more difficult than to solve an undervalued condition.
In 1987 after the stock market crisis the Stock Exchange introduced several “circuit breakers”. The purpose was to limit downward price swings on a given day. This also involved restricting the movement of stock prices and index futures. Their participation can mean a temporary halt in future trading or a complete market shutdown. There are two New York Stock Exchange circuit breakers that apply to market declines. If for instance, the Dow Jones Industrial Average falls 250 points vis-à-vis the day´s close, trading is stopped for an hour. If once the trading is resumed the stock falls another 150 points then, the trading is stopped for two hours. This process is not applicable to upward price movements, regardless of their extent. This means that rules favor bull markets over bear markets.
These rules show how the purchase and hold of overvalued securities is encouraged. There is an uneven application of circuit breakers. Regulation can make it easier for overvaluation to occur. It is much more difficult to correct market overvaluation than to remedy an undervalued condition. With an undervalued stock a value investor can purchase shares until control is achieved or even the whole company is owned at a bargain price.
By contrast, overvalued markets are not easily corrected; short-selling, as mentioned earlier, is not an effective antidote. In addition, investors, analysts, or managements do not always identify overvaluation. The prices of securities show what the investors think of reality than reality itself. That is why overvaluation may persist over a long time.
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