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I was motivated to make this thread after reading a lot of the other threads in this forum, about why certain top analysts are still on the sell-side. It appears that almost everyone who doesn't work on the buy-side or sell-side, or even a remotely close front office position fails to understand how equity research works, and what purpose it serves.

Let me start off by giving you some information on my background. I've been working in equity research at BB for close to 7 months now for a high ranked analyst in the consumer sector.

1) Content wise, 90% of sell-side equity research is crap, late and just a way for the analyst to stay visible

I don't argue this fact, and I don't think anyone else does. But just because it is crap doesn't mean it is useless. Sell-side equity research content from the average analyst does one thing for buy-siders: it makes their life easier.

Sell-side teams (including mine) do a lot of the mundane analysis that buy-siders can't be bothered with, but nonetheless find valuable. As an example, buy-siders will often just use the sell-siders model as a template to work off of rather than create their own, thereby saving hours of work. So creating detailed, well structured models are adored by the buy-side, regardless of how meaningless the assumptions are.

The 10% of the sell-siders that are very good at their job, and are phenomenal analysts are the ones that buy-siders actually care for their opinion about. For example, one of our biggest competitors at another firm put out a very detailed, well thought, and original pitch for a company of ours to break up or go through a significant restructuring. This piece garnered a lot of attention for him, and every buy-sider interested in the stock cared about what this guy had to say.

So the conclusion to my first point is, even though most analysts suck, their work is still useful to the buy-side, and there are a few really good analysts that everyone listens to what their research has to say.

2) Corporate access

The biggest value add for the 90% of crappy analysts on the street, and the reason why they keep their job despite putting out crappy reports.

I work along side an analyst who is barely ranked in his sector, doesn't issue any reports besides the earnings review and occasional pieces, and not much of original content. But there is one thing that he does that he does good: corporate access. He covers 20 companies, and he has very good relationship with the management team of at least half of them. He is able to set up non-deal roadshows etc that clients love him for and he is a huge value add for them.

If you think an analyst can only be good by creating good reports, than you don't understand equity research. There are two ways for analysts to build their research franchise: 1) content or 2) marketing.

As I already mentioned, only a handful of analysts are good at the content part. The marketing part is where the strength for the rest of them is. Generally if they aren't good at one of these two, they won't be an analyst for very long.

3) Ability to move over to the buy-side...

This is the topic that everyone outside of the industry thinks they know but have absolutely no idea. It was so painful for me to read the other thread that I was referring to earlier and have people say "well just go read what Einhorn and Ackman think about these guys". Let me give you a newsflash EINHORN AND ACKMAN ARE 0.0000000001% of the buy-side....THEY ARE NOT REPRESENTATIVE OF HOW THE BUY-SIDE WORKS ON AVERAGE

With that said, MANY people from research move over from the sell-side to the buy-side. And they are preferred at the average fund over bankers because research guys have a much better understanding of how the markets work and what moves the stock than the bankers who covered the same sector and same companies.

I must note that the people who usually move over from research to buy-side are associates and not the analysts. And there are several reasons for this, but I'm going to first cover the associates.

Associates have 3 options when it comes to career progression: 1) become an analyst covering their own sector, 2) go to corp finance/investor relations/some other career, 3) go to the buy-side

Believe it or not, I would say most associates go the 2/3 route over the more obvious choice of becoming an analyst. I think the reasons for this are as follows: 1) they realize the skills that are necessary to be a top 10 analyst and don't feel they posses them, 2) they enjoy the pure analytical aspect of the industry and don't want to deal with the marketing or 3) some buy-sider approached them first and becoming a sell-side analyst is still a few years down the road. Some also just go into IR/corporate finance/other because they are just sick of the wall street lifestyle.

Analysts, on the other hand, are much less likely to go to the buy-side (imo). The reasons include a dramatic lifestyle change or they just aren't good stock pickers but are good marketers instead.

I think the reason the best analysts on the sell-side do not leave for the buy-side is the change in lifestyle. Buy-side life is a lot more stressful than being a successful sell-side analyst. My analyst works 30 hours a week, works from home mostly so he sees his family a lot, and when he travels, it is usually for marketing events where there is a lot of socializing and fun. And by doing all this, he easily clears over a million a year, more than enough to live a very comfortable life.

Now he could move over to the buy-side and get paid more, but he probably won't see his family as much, he will probably work more hours, from the office rather than home, he won't be able to sleep if he makes a bad bet on earnings, he will wake up in the middle of the night and check is BB for the Asian markets are doing.

Most top analysts do not want this, and this is why they choose to stay where they are.

4) ER as an industry

ER will always be around...and anyone who thinks that it is not is crazy. Aside from the content, ER is the liaison between investors and corporations...and there will always be the need for the liaison. Big institutional guys pay hundreds of millions of dollars each year just for the industry to perform its duty as a liaison, content aside. And that isn't going anywhere. You can talk about equity volumes all you want, you can believe ER is a cost center all you want (which is not true), but the industry is going no where. Will it shrink? I don't know..maybe, but it it will still be here because there is still a lot of money left for clients to spend to access the services ER offers.

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Comments (101)

  • Illuminate's picture

    Wow, fantastic write-up. Bookmarked.

    "My dear, descended from the apes! Let us hope it is not true, but if it is, let us pray that it will not become generally known."

  • newfirstyear's picture

    As someone who works for an II ranked analyst, everything that has been said is 100% accurate from my EXPERIENCE (not from what I heard)

  • Aston Gekko's picture

    Buy Side more stressful than sell-side analyst role? That's a bit of a stretch don't you think? I think there is much less job security for the buy-side, but they get the sell-side report in their hands in the morning by 8:30 am ET, who do you think is doing that write up? Some guy on the sell-side who got nailed with an announcement at 8 pm the night before...and another one at 6 am from a different company the next morning...then there's earnings crap 4 times a year that buy-siders do not have to do as much plug and chug on...Buy-siders seem to have it pretty good when it comes to hours.

  • eagleye1's picture

    Buy-siders only have it good if they're right. That might be less work-intensive than sell-side, but it's an objective metric--either you outperform or you don't. Sell-side can be bad stockpickers but still successful due to the aforementioned "soft skills" ie relationships and marketing.

  • Bearcat's picture
  • In reply to Aston Gekko
    IamObama's picture

    Aston Gekko:
    Buy Side more stressful than sell-side analyst role? That's a bit of a stretch don't you think? I think there is much less job security for the buy-side, but they get the sell-side report in their hands in the morning by 8:30 am ET, who do you think is doing that write up? Some guy on the sell-side who got nailed with an announcement at 8 pm the night before...and another one at 6 am from a different company the next morning...then there's earnings crap 4 times a year that buy-siders do not have to do as much plug and chug on...Buy-siders seem to have it pretty good when it comes to hours.

    I was actually referring to a top ranked sell side analyst vs their pm/senior buyside analyst counterpart. In terms of hours, they both work about the same with the buysiders working market hours at a minimum, while the top ranked analyst usually has a rock star associate who gets hit with the write up from the 8pm announcement, not the analyst.

    One other thing that sell-siders have going for them is this: if you are a buy sider and you just made apple your number one position when it was at 700 vs you are a top sell side analyst who made apple a buy when it was at 700... Which one do you think sleeps better at night? Unless you have church and Dwight in your portfolio as your number 1 position, I would say a pm/senior research analyst has more to worry about on a daily basis versus a top ranked analyst who already has his system established and doesn't have to worry to much about losing his job.

  • BlackHat's picture

    This is pretty much 100% accurate. It's all about access to management for us in terms of getting with a sell sider. And if we can't get access to management for some reason, we'll be more than happy to hear what your thoughts are on *objective* things about management. And maybe even some subjective if you're in that 10% OP mentioned. +1

    I hate victims who respect their executioners

  • Champs46's picture

    Great post. In your experience, how prevalent is the CFA in the ER world? Do most people you work with have it or are working towards the designation?

  • In reply to Aston Gekko
    meabric's picture

    Aston Gekko:
    Buy Side more stressful than sell-side analyst role? That's a bit of a stretch don't you think? I think there is much less job security for the buy-side, but they get the sell-side report in their hands in the morning by 8:30 am ET, who do you think is doing that write up? Some guy on the sell-side who got nailed with an announcement at 8 pm the night before...and another one at 6 am from a different company the next morning...then there's earnings crap 4 times a year that buy-siders do not have to do as much plug and chug on...Buy-siders seem to have it pretty good when it comes to hours.

    90% of the time the analyst won't look at it. Which is why said morning note is shit. And every good fund covers earnings for positions in the fund and investments they are considering at least as closely as the buyside. Which means unless its a tiger cub, that 25-50 positions for 3-5 junior guys. Earnings season is busy.

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  • overpaid_overworked's picture

    Normally I see a post where someone says "I have seven months experience" its pretty full of shit and poorly formed ideas, this is pretty acurate. There are lots of analysts out there that have no value add, you'd get as much from reading the press release as you do their research report. That said, there are some guys that are really good at the value add, which is the hard part, in addition to writing 'this happened' in your report, need to get some 'this is what it means', and 'this is why it's important'.

    You see so many companies with 12 guys covering them, how many are value add. A lot of times analysts pick up coverage names because the sales desk or bankers tell them to. If you have coverage on a name, you can trade it and you can bank it.

    Interesting math for all the aspiring ER monkeys, take the comp you want to earn, then divide it by 0.10. So $300,000/0.1= ~$3 million required top line revenue/year. Divided by 12: $250,000 top line revenue/month. Divide that by average comission, 1% for giggles: $25 million. That's how much stock your names under coverage have to trade each month for you to get paid $300k/year. OP covers 20 names, so his bank needs to trade at least $1.25 million on each of those names per month. More if they actually want to pay OP the associate.

  • In reply to meabric
    BlackHat's picture

    meabric:
    IamObama:
    Unless you have church and Dwight in your portfolio as your number 1 position

    That CEO is hilarious.

    Jim Craigie > all.

    On a related note, anybody remember that Deutsche Bank sell side guy who stole a ton of condoms at a conference CHD was presenting at a couple years back?

    I hate victims who respect their executioners

  • grosse's picture

    Sell side analysts long-term relationships with management are a big help too for buysiders like myself - they often have more insight into body language and the deeper meaning of phrasing (e.g., "trends look good" - mgmt may always say "good" or may never say "good" - that can be useful).

  • In reply to Aston Gekko
    bizucker's picture

    Aston Gekko:
    Buy Side more stressful than sell-side analyst role? That's a bit of a stretch don't you think? I think there is much less job security for the buy-side, but they get the sell-side report in their hands in the morning by 8:30 am ET, who do you think is doing that write up? Some guy on the sell-side who got nailed with an announcement at 8 pm the night before...and another one at 6 am from a different company the next morning...then there's earnings crap 4 times a year that buy-siders do not have to do as much plug and chug on...Buy-siders seem to have it pretty good when it comes to hours.
  • MeTheUniverse's picture

    I have to go make food for babies but I will come back to read.

    I am the universe looking back at itself

  • Amphipathic's picture

    OP, how much do you think ER reports are biased because the authors are afraid of pissing off management and getting their corporate access cut off? Are top analysts immune from this?

  • barbariansatthegates's picture

    great post. +1

    PE is the new black.

  • wolverine19x89's picture

    How often do those in ER go for MBAs? Or do they usually go for other types of graduate degrees? If they go for MBAs, do they have any luck getting into the top of the top schools? Also, are there any other exit opps that you've seen that aren't exactly in the top 3 you mentioned, but still, at least, slightly common?

    Oh yeah, is going from ER to actual trading fairly doable?

    If your dreams don't scare you, then they are not big enough.

    "There are two types of people in this world: People who say they pee in the shower, and dirty fucking liars."-Louis C.K.

  • samoanboy's picture

    Back when I was a junior buside analyst my main use for sell-side analysts (other than arranging meetings with management) was to double check I wasnt missing something. For example if I thought that there was a significant catalyst for Company X (divestiture of non-core business, new product launch, increased R&D spending etc) I would speak to all the analysts to ensure that I had all the possible information and hadnt missed a footnote somewhere, or an aside during an earnings call. Essentially I used them to challenge my assumptions before speaking with a PM.

    I dont think anyone actually reads the daily analyst notes though.

  • NYBC02's picture

    IamObama:

    I think the reason the best analysts on the sell-side do not leave for the buy-side is the change in lifestyle. Buy-side life is a lot more stressful than being a successful sell-side analyst. My analyst works 30 hours a week, works from home mostly so he sees his family a lot, and when he travels, it is usually for marketing events where there is a lot of socializing and fun. And by doing all this, he easily clears over a million a year, more than enough to live a very comfortable life.

    Is this really representative of all analysts or is your boss more of an outlier?

  • sonibubu's picture

    Outstanding stuff, and 100% accurate -- including the part about transitioning to buy-side. We typically hire ER guys, not IB guys (unless they went to another buyside shop afterwards) due to better understanding of the markets and specific drivers that move stock prices.

    We also use sell-side guys that don't provide good insights pretty much just for market research/surveys and access to management/conferences. Thanks for the great write-up. +1

  • overpaid_overworked's picture

    I'm not OP but my opinon on some of the questions asked:

    Ampithatic: Almost everyone is pressured in some way to be positive, if not by management, then by banking, or sales or history. If you call something your "Top Pick for 2013", it's awefully tough to go back and say that you were wrong and it's a dog.

    Wolverine: Interestingly, I went and got an MBA because I wanted to make a move from ER to IB. Depending on the school you apply for it might actually work out for the positive. MBA programs don't want all bankers or all lawyers, they like a balance, so coming from not-banking can improve the chances of getting it.

    NYB: I don't know that 30 hour weeks are representative. My Analyst is in for 40-45, depending on the load. We published 250 times last year, and so I was 65-70 hours a week. Granted, we cover juniors and have been activley culling our coverage list, re: new initiations and dropping coverage on old names.

    Sonibubu: From our point of view going Buy Side is when guys decide to settle down and work less, I've noticed that bankers tend to go to the issuer side. Depending on which firms we're talking to, some only use us for screening new companies to put on the radar, some check their assumptions against ours, and a few, very few actually care what we have to say.

  • AQM's picture

    What's the pay progression like in equity research? How much do junior associates, associates, and MD's at well known boutiques and BB's make?

  • ladubs111's picture

    I love those 100+ page industry primers or initial coverages when i'm starting to enter a new sector. Saves time and money since they use all the 3rd party $4k reports included in their forecast. So in my example, I did a lot of TMT so besides the headline stuff like PC, Smartphone, Tablets, etc. I would not be able to get my hands on IDC, Gartner forecasts for other markets unless I asked the PM to cough up 4.5k for every report that is usually bullshit anyway (but good place to start off to make my own assumptions and forecasts for my models).

  • esbanker's picture

    started off in ER. much of the commentary here is spot on.

    Capitalist

  • In reply to Amphipathic
    freemarketeer's picture

    Amphipathic:
    OP, how much do you think ER reports are biased because the authors are afraid of pissing off management and getting their corporate access cut off? Are top analysts immune from this?

    Every analyst thinks about it. The longest-tenured analysts might not have ever used an underperform rating. You could use such a rating and the company could potentially be sympathetic and still grant access (like if it's purely valuation driven).

  • In reply to freemarketeer
    Amphipathic's picture

    freemarketeer:
    Amphipathic:
    OP, how much do you think ER reports are biased because the authors are afraid of pissing off management and getting their corporate access cut off? Are top analysts immune from this?

    Every analyst thinks about it. The longest-tenured analysts might not have ever used an underperform rating. You could use such a rating and the company could potentially be sympathetic and still grant access (like if it's purely valuation driven).

    Gotcha, thanks for the insight!

  • Bismarck's picture

    Great read.....well done!

  • Hayek's picture

    Excellent post--thanks for sharing. Especially as someone seriously thinking about ER post-MBA, I really appreciate this.

  • SV4lax's picture

    Great post. Could you comment on how much the ER analysts/assoc. deals with the Institutional Traders, both sales-traders and sector guys? Is it just the morning meetings when they initiate a new view on the stock (buy, hold, sell) or do traders talk with them throughout the day when they initiate a different view

  • In reply to overpaid_overworked
    newfirstyear's picture

    overpaid_overworked:

    Interesting math for all the aspiring ER monkeys, take the comp you want to earn, then divide it by 0.10. So $300,000/0.1= ~$3 million required top line revenue/year. Divided by 12: $250,000 top line revenue/month. Divide that by average comission, 1% for giggles: $25 million. That's how much stock your names under coverage have to trade each month for you to get paid $300k/year. OP covers 20 names, so his bank needs to trade at least $1.25 million on each of those names per month. More if they actually want to pay OP the associate.

    This assumes research drives no IBD revenue, which is not true for a lot of banks. And allocating revenue to research from IBD is illegal.

  • In reply to SV4lax
    IamObama's picture

    SV4lax:
    Great post. Could you comment on how much the ER analysts/assoc. deals with the Institutional Traders, both sales-traders and sector guys? Is it just the morning meetings when they initiate a new view on the stock (buy, hold, sell) or do traders talk with them throughout the day when they initiate a different view

    We talk to our traders through out the day, whether it is following up on what is moving our stock that day to going over read thrus from other companies and news items that might be breaking through out the day. As an associate, I'm not in touch with sales a lot but my analyst is in constant touch and gets feedback on his idea from sales on what clients thought.

  • In reply to NYBC02
    IamObama's picture

    NYBC02:
    IamObama:

    I think the reason the best analysts on the sell-side do not leave for the buy-side is the change in lifestyle. Buy-side life is a lot more stressful than being a successful sell-side analyst. My analyst works 30 hours a week, works from home mostly so he sees his family a lot, and when he travels, it is usually for marketing events where there is a lot of socializing and fun. And by doing all this, he easily clears over a million a year, more than enough to live a very comfortable life.

    Is this really representative of all analysts or is your boss more of an outlier?

    This is pretty representative of established analysts who have a good system going and have very reliable associates. Hours may vary a little bit though depending on sector/time of year/activity in the market.
  • In reply to AQM
    IamObama's picture

    AQM:
    What's the pay progression like in equity research? How much do junior associates, associates, and MD's at well known boutiques and BB's make?

    I'm not really sure of the answer to this question. I know pay used to be a lot higher...back in 06/07 top associates were getting paid 50k bonuses so you could figure how much analysts were making. No idea about pay at boutiques make. But most MDs that are ranked in their sector will clear 1M or close to it. Most analysts who just start out probably won't even break 400k in their first 3-4 years as an analyst...Analyst pay is really based on merit and performance for the most part. There is an actual number that defines your quantitative contribution to the firm (the vote on fees from buy side analysts)

  • BlackHat's picture

    Initiation reports are definitely important to the buy side guys. Not that we won't read the annuals and everything we can get our hands on, but going through an initiation report before or after reading your first K can usually help answer questions you would be asking yourself during the entire time you're reading other material. It does a good job of presenting what the business is, what the issues are with it, and what the catalysts to growth or decline are... try not to get swayed by the analyst opinion but teasing out all the basic stuff is really helpful before diving in and seeing what your first impression of the company ends up being. I definitely read these every time I start a new name.

    I hate victims who respect their executioners

  • MeTheUniverse's picture

    Thank you for this great post!

    I am the universe looking back at itself

  • somebody's picture

    Good post. I moved from the buyside to the sellside (small firm, EM strategy) for work/life balance reasons a few years ago.

    I'm in the office 40 hours a week (sometimes from home) and don't worry about being wrong particularly any more, which has led to me being right considerably more often and stressing than when I was running $50m positions in Apple.

    I could earn considerably more on the buyside, but I'm quite happy writing whatever I like (I aim for 0 maintenance research, which you can do if you're a strategist) and meeting clients every week to chat about my ideas.

  • overpaid_overworked's picture

    Newfirstyear: FACT, allocating pay based on a direct drive system is against both CFA and the law in many countries. Most places have an indirect drive system where the salaries are pretty standard and bonuses are the only reason to get up in the morning, with bonuses being determined by how little they think they can give you in order to keep your revenue stream (indirectly).

  • johnwilkesproof's picture
  • In reply to somebody
    caseyng93's picture

    40 hours a week is slow season or in general? that's really relaxing in finance.

  • In reply to caseyng93
    IamObama's picture

    caseyng93:
    40 hours a week is slow season or in general? that's really relaxing in finance.

    In general but let me clarify, my boss is ALWAYS working, always thinking about ideas, things to do in te future, planning marketing trips, reviewing out drafts etc.. When I say 40 hours I mean 40 hours of actual work.. There is a lot of time in the day he does other stuff (take an hour nap with his 2 yr old at noon, go to the gym randomly, lunch meetings which I guess you can count work but I dont consider any in home/city lunche marketing to be "work"

    Usually on the days he's not traveling, he is spending his time with his family and responding to his emails and getting back to people who called. We (the associates) are working on the draft of a note and when we are done he will go through for an edit. Unless earnings, he usually checks out after 8pm as well

  • In reply to IamObama
    IamObama's picture
  • streetwannabe's picture

    OP; not related to ER, but I thought maybe you'd have some insight. What is the role of a credit research analyst (not credit risk)? Do you interact with anyone from this division? Please share any insight you may have, thanks!

    "History doesn't repeat itself, but it does rhyme."

  • Charles-perry's picture

    Great post - thanks! :)

  • eleutheros's picture

    Very informative for guys with ER interviews lined up

  • gso519's picture

    Great write up, thanks for the information.

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