Is Wall Street 'Full of Bull'?

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Institutional investors like big, heavily traded names even if, McClellan writes, "individuals can benefit by making an astute, early investment in smaller companies not already picked over by Wall Street."

Cherry-Picking

McClellan has proposals for how he would reform research on Wall Street. He would make analysts far more independent, so they're not "embedded in the bowels of a brokerage firm," with all the inherent conflicts of interest.

But McClellan's book's main purpose isn't to shame Wall Street into changing its ways. Rather, he says he wants to help individual investors profit despite their disadvantages. Research can be valuable because it gives investors lots of detail on companies and their industries. Absorb that information, McClellan says, but disregard analysts' conclusions and recommendations.

"The individual has advantages," McClellan says, especially the ability to see "the big picture trends." By contrast, he writes, analysts "may be good at evaluating the trees, but they fail to have enough vision to see the forest."

Size Up the Boss

McClellan says he has become a better investor since he retired from Wall Street. In his book, he offers investment advice based on his three decades as an analyst. For example, investors should closely evaluate a company's CEO before they invest, he says. He describes various types of executives he has met, from the "visionary leader" to "techy geeks who know their stuff" to "promotional hypesters without substance."

Since writing Full of Bull last year, McClellan says he's disturbed by the wave of trouble heading toward the U.S. economy. It's not just the credit crisis and the housing slowdown that worries him, but also the weak dollar, the government deficit, the decline in corporate earnings, the inflation, and a troubling Federal Reserve response to it all.

McClellan warns that stock market slumps often last two or three years. "This could be one of the biggest bear markets we've had in 30 or 40 years," he says. "Be cautious and careful."

Still, McClellan says, Wall Street remains "eternally bullish," predicting the economy and stock market could bounce back in the second half of the year. That's because analysts don't want to scare investors away from trading and building portfolios, no matter how frightening the news might be.

Steverman is a reporter for BusinessWeek's Investing channel.