Waheed Hassan hardly reminds anyone of Gordon Gekko. A
31-year-old stock analyst with a high, boyish voice, Hassan founded
his Potomac Falls, Virginia-based independent stock research firm
in May 2003, with two other partners. Hassan's firm, Investology,
remains tiny, with only one full-time employee. Unlike analysts at
big investment banking firms, Hassan doesn't appear on CNBC in
sharp suits, give frequent quotes to The Wall Street Journal
or expense fancy lunches. No, Investology toils in relative
obscurity, focusing on stocks of companies most Americans have
never heard of. "We do research on small capitalization
stocks," says Hassan. "Merrill Lynch, Morgan Stanley-they
don't cover small caps [today], so it's an opportunity for
us."
These days, there are more and more Waheed Hassans, and fewer
and fewer Gordon Gekkos. Over the past three years, as IT has made
it easier for entrepreneurs to sell stock research, and as scandals
involving Wall Street brokerages have sullied the image of the
largest firms, the market for independent stock research and
analysis has opened up. And savvy entrepreneurs like Hassan are
stepping into the breach, taking business from the financial
giants. Indeed, despite its hand-to-mouth existence,
Investology's independent research has already won the company
a relationship with one of the bigger U.S. pension funds.
The Scandal Effect
For decades, most stock research was handled by large firms that
employed reams of analysts to cover a wide range of stocks. But
they didn't just analyze stocks: The big boys also made money
with financial advisors, brokers and investment bankers.
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Since 2000, however, investigations by financial watchdogs have
revealed that some of the larger firms' stock research was not
truly independent. Corporate chiefs at the bigger investment houses
were pressuring analysts to rate certain stocks highly so their
brokers and investment bankers could sell more of the stock, and
the investment houses could then benefit from public offerings of
stocks they had touted.
Many individual investors-especially those who jumped into the
market in the go-go '90s-believed the analysts were independent
and lost billions betting on their recommendations. In the wake of
a multiyear investigation into the big firms' research, 10
large Wall Street firms admitted their wrongdoing and, in April
2003, paid a $1.4 billion fine.
These scandals have given entrepreneurs two historic
opportunities. First, as larger Wall Street investment houses faced
huge fines for their actions, they had to cut costs. Big Wall
Street houses laid off hundreds of stock analysts who had the
expertise needed to offer high-quality research, with several firms
cutting as much as 40 percent of their staff. Consequently, the big
firms simply stopped monitoring whole groups of stocks, like the
small caps that Investology focuses on.
David Riedel was one of those experts. In 2002, Riedel was laid
off as an analyst at Salomon Smith Barney. "I realized there
were huge opportunities [due to] the breakdown in certain types of
research by bigger firms," he says. With a strong background
in Asia-Riedel got a graduate degree in business from a Thai
university, speaks Thai and Chinese, and had analyzed Asian stocks
in the mid-'90s for Salomon Brothers-he decided that Asia would
be his niche. As the larger firms downsized, they cut most of their
independent research on the ground in Asian markets outside China
and Japan, Riedel says. Yet, in the past three years, he says,
these Asian markets have posted some of the strongest growth in the
world. Seeing that hole, in May 2003 Riedel started his own
company, Riedel Research Group Inc., out of his New York City
loft.
Riedel, 37, hired seven local analysts in three Southeast Asian
countries, and hit the ground fast, focusing on Indonesia, Malaysia
and Thailand. The internet made it even easier for him to get
started. After hiring Thai analysts through local word-of-mouth, he
turned to an Asian online job board to find his other analysts and
has been thrilled with the quality of their research.
With a niche in place, he started drawing on old connections,
emphasizing that he was offering services others didn't.
"I pitched my research to [mutual and pension] fund managers
who have holdings in Asia [and] are being poorly served by big
investment firms [that] don't have analysts on the
ground," Riedel says.
Six clients quickly signed up with Riedel, and he plans to have
30 by year's end. Riedel believes his on-the-ground
information, tailored to his customers, has paid off. He advised
clients not to pull out of holdings in Indonesia, despite the
country's recent political instability due to terrorist
attacks. This year, Indonesia quieted down, held a peaceful
presidential election, and watched its stocks soar.
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