Here is How Equity Research Works
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) First of all, understand that 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) The final topic I want to hit on his ER as an industry going forward. 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.
Good read. Thanks.
Good read. Thanks.
Wow, fantastic write-up.
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."
As someone who works for an
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)
Buy Side more stressful than
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.
Buy-siders only have it good
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.
Thanks so much!
Thanks so much!
Great write-up, +1.
Great write-up, +1.
Aston Gekko: Buy Side more
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.
some related threads
some related threads
http://www.wallstreetoasis.com/forums/equity-resea...
http://www.wallstreetoasis.com/blog/equity-researc...
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This is pretty much 100%
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
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Great post. In your
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?
Really insightful, appreciate
Really insightful, appreciate it.
Aston Gekko: Buy Side more
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.
IamObama: Unless you have
Unless you have church and Dwight in your portfolio as your number 1 position
That CEO is hilarious.
Normally I see a post where
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.
meabric: IamObama: Unless
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Sell side analysts long-term
Aston Gekko: Buy Side more
I have to go make food for
saigo no getsuga tensho
OP, how much do you think ER
great post. +1
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How often do those in ER go
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Back when I was a junior
IamObama: I think the reason
Outstanding stuff, and 100%
I'm not OP but my opinon on
What's the pay progression
I love those 100+ page
started off in ER. much of
Capitalist
Amphipathic: OP, how much do
freemarketeer: Amphipathic:
Great read.....well done!
Excellent post--thanks for
Great post. Could you comment
overpaid_overworked: Interes
SV4lax: Great post. Could you
NYBC02: IamObama: I think
AQM: What's the pay
Initiation reports are
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Thank you for this great
saigo no getsuga tensho
Good post. I moved from the
Newfirstyear: FACT,
Excellent post
40 hours a week is slow
caseyng93: 40 hours a week is
Edit
OP; not related to ER, but I
"History doesn't repeat itself, but it does rhyme."
Great post - thanks! :)
Very informative for guys
Great write up, thanks for