Comments (86)

Feb 17, 2014

Awesome thread. I have several questions.

1. How did you "network" into SS ER? I'm interested in that;
2. Can you help us understand the idea generation process for the products you support? On a statistical basis, what is garp to you? Forward P/E/G 3. If you're comfortable talking about comp, that'd be cool;
4. What is the current opportunity set like for you guys, are you having any trouble finding opportunities;
5. What was the interview process like; and,
6. Lifestyle and hours?

Book recommendations for someone interested in a value oriented strategy? I've read "Intelligent Investor," and , "Margin of Safety."

Awesome thread, looking forward to responses.

My posts will be fraught with grammatical errors since I post from my phone. I will try my best not to post an incoherent babble.

Feb 17, 2014
One2Three:

Awesome thread. I have several questions.

1. How did you "network" into SS ER? I'm interested in that;

2. Can you help us understand the idea generation process for the products you support? On a statistical basis, what is garp to you? Forward P/E/G <1;

3. If you're comfortable talking about comp, that'd be cool;

4. What is the current opportunity set like for you guys, are you having any trouble finding opportunities;

5. What was the interview process like; and,

6. Lifestyle and hours?

Book recommendations for someone interested in a value oriented strategy? I've read "Intelligent Investor," and , "Margin of Safety."

Awesome thread, looking forward to responses.

1. Back in college, I reached out to alumni who were in SS ER. We hit it off and they kept me in mind whenever opportunities came out. But I ended up finally landing a job through OCR. I had interviewed with said midwestern bank (MB) during my junior year and didn't get the job. Mind you I was looking for an internship for the summer of 2009 and looking for full-time in the fall of 2009. The MB recruiter liked me and get bringing me back until I found a team I clicked with. Took 3 separate interviews over about 6-months.

The one other thing I'll add about networking is keep in touch with everyone. 4-years later, I still talk to the guys who were helping me out when I was in undergrad.

2. As I said in the OP, I'm a generalist so my ideas can be almost anything, barring some crazy fliers, such as TSLA. Typically, about 1/3 of my names get passed to me from a PM, 1/3 come from my watch list (name I've done work on in the past) and 1/3 are new ideas. New ideas are actually pretty simple: read everything and meet with tons of people. Then you look for certain flags, such as valuation or competitive advantage, that tell you to dig deeper.

For our L/S, I tend to look at stuff with a normalized FCF yield near 10%. I'll go lower if I feel like the growth is sustainable for 3+ years. Never look at PEG. Only other traditional metric I look at is EV/EBIT. EBITDA is bullshit.

3. When I was on the sell-side, I started out at 55K with 10k+ raises each year. Bonuses were about 25% of base. I'm going to be more generic about compensation on the buyside. Much more discretionary at this point since the first year you're building trust with PMs. I'd say 1st year total comp ranges between $100K-$200K for most people I know.

4. What has been harder in this market is finding ideas before they runaway from you. Specifically, I don't struggle sourcing new ideas, but my research process takes me between 1 and 2-weeks to get the point where I feel comfortable making a recommendation. The story of the last 12-months has been my ideas running 20% during my research process.

5. Pretty simple. I actually met with the PMs (who were alumni) in late 2012 to tell them I was looking to make the transition to the BS. I explained to them what kinda shop I was looking for and they thought I'd fit in pretty well with them. Second rounds were mostly behavioral. Third round was me submitting 10 one-pages on actionable ideas. That was a real bitch, but I did a good job so they gave me the job.

6. I get in between 7:00am-7:30am and leave around 5:30pm-6:00pm. I can sometimes go a week without talking to my PMs b.c. so much of the work in independent. I don't do much mandatory weekend work.

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Feb 17, 2014
KarateBoy:

3. When I was on the sell-side, I started out at 55K with 10k+ raises each year. Bonuses were about 25% of base. I'm going to be more generic about compensation on the buyside. Much more discretionary at this point since the first year you're building trust with PMs. I'd say 1st year total comp ranges between $100K-$200K for most people I know.

Thanks for the follow-up. 100-200k for a HF analyst four years out of school seems a bit low - I assume this scales as your L/S strategy's AUM scales?

Feb 17, 2014

mind sharing your reasons for your distaste of ebitda but not ebit?

Feb 17, 2014

How do you view the new "alternatives" strategy? Namely, will shorting be primarily used as a hedging tactic or is the portfolio looking to identify and execute so-called alpha shorts? Given the differences in investment approach, how do you think you will be able to translate your long-only skillset to a long-short skillset?

Feb 17, 2014
valueisoverrated:

How do you view the new "alternatives" strategy? Namely, will shorting be primarily used as a hedging tactic or is the portfolio looking to identify and execute so-called alpha shorts? Given the differences in investment approach, how do you think you will be able to translate your long-only skillset to a long-short skillset?

Love it. The PM is one of best I've ever met at finding at "pain points" of any investment thesis I have so I'm learning a ton from him.

All of our short are "alpha shorts" meaning that we don't target a specific level of gross short exposure. My PM hates pair trades - wants ideas to generate return from a standalone perspective.

The job between a long-only shop and a HF aren't that different. I think WSO makes the distinction too broad. Specifically, I often recommend the same long names to both the PM who runs the L/S and the PM who runs the long-only. I think I benefit from working at the HF by being exposed to the shorting process - I was told its hard to break into certain funds with short-selling experience so I'm happy to have it. Shorting is definitely not the same thing as selling a long.

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Feb 17, 2014

Let me expand on this because the L/S and the long-only analyst roles are different but its because of the difference in the PMs and not our compensation structure.

The L/S fund has a lot more latitude in terms of what we can buy (or short) and my PM will listen to anything I believe will make us money. Only semi-real limitation is that I need to have a clear catalyst in mind that will make us money in a 12-month period of time. That said, we've done simple trades that we are right in front of the quarter and we've owned names we really like nearly 2-years at this point, but the game-plan is to make money sooner rather than later.

In the long-only product, we plan on holding things 3-5 years and we buy pretty big stakes in small and mid cap companies, Its pretty common for us to be a top 5 shareholder and for it to take a few months for us to acquire our entire position. On top of that, we are very valuation sensitive and we our focus is on finding companies that are asset rich. In many ways, the hurdles to get a name into our core product is higher.

I wanted to make that distinction because many people on here view HFs as the "superior" investment vehicle, when the difference is more about who the PM is. Berkowitz and Yacktman run circles around 99% of L/S funds.

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Feb 17, 2014

Thanks for the response. What is your research process like? I presume you have a checklist to ensure the process is consistent. What are some items on the checklist.

Read x 10ks?
Read a year's worth of transcripts?
How detailed are the models you are building?

Thanks!

My posts will be fraught with grammatical errors since I post from my phone. I will try my best not to post an incoherent babble.

Feb 17, 2014

Typically,

I'll read 1-2 years worth of Ks
3-7 quarters worth of transcripts
1-3 conference transcripts
Set-up 1-2 calls with management
occasionally talk with the Street if I see that one of the SS analyst is saying something different than the others

The length of the process varies by how complicated the industry is. As an example, I was recently doing work on the onshore drilling industry and I realized it couldn't get all my questions answered by the process above so I decided to read the 10-Ks all of the competitors as well as some of the transcripts.

I like to find out who is the industry leader and compare how they talk about the space vs. everyone else. Sometimes, the distinction is stark.

Models are shockingly simple most of the time. We are definitely a model-light firm on the long-only side. We'll dive deep into the company and value its assets or on a SOTP basis and just stay on top of our thesis. For the L/S product I'll make a quarterly model, but its as not much of an input for me as it was when I worked on the SS.

I use the model to be able to better understand the economic life cycle of a dollar for the company and to avoid any seasonal surprises. It also helps me develop a say vs. do checklist for the management team. The goal is to avoid being a model monkey and trying to pick up "pennies" in front of the quarter.

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Feb 17, 2014
One2Three:

Thanks for the response. What is your research process like? I presume you have a checklist to ensure the process is consistent. What are some items on the checklist.

Read x 10ks?

Read a year's worth of transcripts?

How detailed are the models you are building?

Thanks!

Nothing personal to the checklist crowd (if such a thing exists anyway), but I really, really hope this isn't something people are assuming.

Feb 17, 2014
BlackHat:
One2Three:

Thanks for the response. What is your research process like? I presume you have a checklist to ensure the process is consistent. What are some items on the checklist.

Read x 10ks?

Read a year's worth of transcripts?

How detailed are the models you are building?

Thanks!

Nothing personal to the checklist crowd (if such a thing exists anyway), but I really, really hope this isn't something people are assuming.

I should have called that out earlier. The research process is dynamic and you never know which rabbit hole you'll need to go down to get the answers you need.

Feb 17, 2014

To be clear, when I meant "checklist," I meant things you do before you *really* delve into the research process (speaking to management, a bearish analyst, etc).

I did not mean methodically going through a list then reaching a conclusion. I understand the process is dynamic and no two investments are exactly identical.

Mohnish Pabrai of Pabrai Funds is a proponent of checklist. Then again, I am not over his shoulder as he goes through the research process exercise.

I appreciate all of the responses, I am learning a lot.

My posts will be fraught with grammatical errors since I post from my phone. I will try my best not to post an incoherent babble.

Feb 17, 2014

Hi Karate - Thanks for doing this! Three questions:

1. Can you touch on why you think FCF yield is the best metric to use... why is PEG and EBITDA bs?
2. I will be a S&T SA this upcoming summer... I eventually want to work on the buyside. What is your opinion on going from S&T to the buyside? What do you like/dislike about SS S&T?
3. Any favorite long/short picks you could share the story on?

Thanks!

Because the only thing that motivates me is money

Feb 17, 2014
mstearns11:

Hi Karate - Thanks for doing this! Three questions:

1. Can you touch on why you think FCF yield is the best metric to use... why is PEG and EBITDA bs?

2. I will be a S&T SA this upcoming summer... I eventually want to work on the buyside. What is your opinion on going from S&T to the buyside? What do you like/dislike about SS S&T?

3. Any favorite long/short picks you could share the story on?

Thanks!

1. Let me flip the question around on you. What determines value? What is the relationship between value and EBITDA? When doesn't EBITDA result in value creation? What is the relationship between value and growth? When doesn't growth result in value creation?

2. Not sure. You should ask someone with a similar background to you to help you out.

3. Can't talk about current portfolio positions. But, I own GME in my PA and I occasionally tweet about some of my ideas.

Feb 26, 2014

I have been trying to make sense of this question and would really like your input in answering your own questions:

"1. Let me flip the question around on you. What determines value? What is the relationship between value and EBITDA? When doesn't EBITDA result in value creation? What is the relationship between value and growth? When doesn't growth result in value creation?"

I would very much appreciate it, if you could walk me down what you mean here. I am very new to this but am learning. Thank you.

Feb 17, 2014

Hey- cool write up. Thanks for taking the time.

What do you feel is the most effective use of time for someone that wants to spend their career in investment management? I'm working with a colleague now that's a former investment analyst to run screens, vet ideas, and prepare reports similar to what you folks do. However, I remember Buffet stating how important reading all the S&P industry guides were for him (at least the simple industries that do not have 100 intricacies). So, aside from this, reading investment books, and joining VIC (I'm particularly interested in value) how should someone be allocating their time; it's scarce with the CFA. Thanks again!

Best Response
Feb 17, 2014
pktkid10:

Hey- cool write up. Thanks for taking the time.

What do you feel is the most effective use of time for someone that wants to spend their career in investment management? I'm working with a colleague now that's a former investment analyst to run screens, vet ideas, and prepare reports similar to what you folks do. However, I remember Buffet stating how important reading all the S&P industry guides were for him (at least the simple industries that do not have 100 intricacies). So, aside from this, reading investment books, and joining VIC (I'm particularly interested in value) how should someone be allocating their time; it's scarce with the CFA. Thanks again!

The best thing you can do is know how to analyze companies in order to determine the sustainability of their competitive advantage because that determines the sustainability of their economic profit.

Read lots of Ks of both good and bad businesses to understand why they are what they are.

Also, keep in touch with people who are as passionate about this as you. I love talking shop and talking shit with @"BlackHat" @"WhiteHat" @"Simple As..."

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Feb 17, 2014

I just realized I forgot to email that stuff from a couple weeks ago. I'll get it to you tonight.

Feb 17, 2014

Many people feel that EBITDA is BS (vs. EBIT) because depreciation (to a lesser extent amortization) is an actual economic expense. You have to replace the depreciating asset eventually. Imagine you have two companies, each with $1B in EBITDA, but one company's assets are depreciating by $500M per year and the other's are depreciating by $200M per year. Which would you pay more for? Answer: the latter, because you will only have to kick in ~200M per year to replenish the asset stock.

That said:

a) Plenty of empirical studies have shown that EV/EBITDA is a very good predictor of returns. In fact a better predictor than the grand-daddy of value metrics P/B. I haven't seen any studies directly comparing EV/EBITDA vs. EV/EBIT vs. EV/EBITD

b) FCF is not without problems either, due to all the noise associated with WC changes and capex, which can be misleadingly lumpy

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Feb 17, 2014
Enrico Pallazzo:

Many people feel that EBITDA is BS (vs. EBIT) because depreciation (to a lesser extent amortization) is an actual economic expense. You have to replace the depreciating asset eventually. Imagine you have two companies, each with $1B in EBITDA, but one company's assets are depreciating by $500M per year and the other's are depreciating by $200M per year. Which would you pay more for? Answer: the latter, because you will only have to kick in ~200M per year to replenish the asset stock.

That said:

a) Plenty of empirical studies have shown that EV/EBITDA is a very good predictor of returns. In fact a better predictor than the grand-daddy of value metrics P/B. I haven't seen any studies directly comparing EV/EBITDA vs. EV/EBIT vs. EV/EBITD

b) FCF is not without problems either, due to all the noise associated with WC changes and capex, which can be misleadingly lumpy

Generally, agree with everything said above.

But I want to point out a couple of things -

1) I've never seen a study that shows EV/EBITDA is a better predictor of returns than ROIC. Economic profit is the blood of intrinsic value. There are plenty of bad biz managers that grow EBITDA without regard for cost of capital.

2) Changes in working capital is a true investment in every sense of the world, just like capex. And if there a company out there with wild swings in FCF BC of working capital than its either the nature of the biz (which you should account for) or poor management (which you should account for).

3) Figuring out what normalized capex is as much art as science. Companies always understate their maintenance capex.

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Feb 17, 2014

Damn, I am going to give GME a hard look. 9xTTM P/E (net cash) seems too cheap. 20% FCF yield (quick numbers) is crazy, too.

You're right, Berkowitz is an amazing manager that shits on some HF managers with comparable strategies (value priented).

I am working on a pitch for my school investment club, when I'm done, can I run it by you? I know you're busy.

Thanks.

My posts will be fraught with grammatical errors since I post from my phone. I will try my best not to post an incoherent babble.

Feb 17, 2014
One2Three:

Damn, I am going to give GME a hard look. 9xTTM P/E (net cash) seems too cheap. 20% FCF yield (quick numbers) is crazy, too.

You're right, Berkowitz is an amazing manager that shits on some HF managers with comparable strategies (value priented).

I am working on a pitch for my school investment club, when I'm done, can I run it by you? I know you're busy.

Thanks.

Sure, just message me.

Feb 17, 2014

In an ideal world, a position would be:

Cheap
Well managed
Durable competitive advantage (high historical ROIC)
Actionable (catalyst on the horizon, activist investor, etc)

Where are you willing to capitulate since it is almost impossible to have an idea that hits all of these points.

Also, do you calculate ROIC like greenblatt (Ebit/NWC + Net PPE)?

My posts will be fraught with grammatical errors since I post from my phone. I will try my best not to post an incoherent babble.

Feb 17, 2014
One2Three:

In an ideal world, a position would be:

Cheap

Well managed

Durable competitive advantage (high historical ROIC)

Actionable (catalyst on thw horizon, actovist investor, etc)

Where are you willing to capitulate since it is almost impossible to have an idea that hits all of these points.

Also, do you calculate roic like greenblatt (Ebit/NWC + Net PPE)?

I love the AM/HF AMA threads, they're so awesome. Thanks, OP.

Easiest, for me, to pass-up on "actionable". I think that is one of the most over-rated concepts. A great management team will always surprise you to the upside with something "un-model-able".

There's typically a sliding scale between "cheap" or "margin of safety" and "quality".

Don't think I would ever "invest" in a company with poor management, unless I could institute a change (maybe).

Nope, I include goodwill. I think he's wrong on that because it's a result of a capital allocation decision and I reward/penalize accordingly. The simplest way for me to do it is either:

1) NOPAT/ (NWC + long-term assets), or
2) NOPAT(Equity + total debt)

Feb 17, 2014

SB to you, sir. Certainly will do. Thanks again.

Feb 17, 2014
pktkid10:

SB to you, sir. Certainly will do. Thanks again.

Happy to help.

Feb 17, 2014

Nice profile. Good job on building your career.

Feb 17, 2014
TraderDaily:

Nice profile. Good job on building your career.

Thanks - still working on it! Thinking about an MBA or trying to become the youngest senior analyst in my firm's history.

Feb 17, 2014

Thanks for doing this. I am also at a buyside long-only fund, but with a momentum-driven growth focus. I have more of a value/GARP mindedness so it's been difficult at times getting my ideas into the portfolio. In this respect, I have also had a tough time learning from the senior analysts/PMs as they lean more towards buying the story rather than the financials. Would your firm or others similar be against bringing on someone who came from a pure growth background? I've only been here a year and am looking to change due to various reasons.

Also, you mentioned that there are times you don't speak to your PMs sometimes weeks at a time. Has this always been the case or did your PM teach you more of a firm process when you first joined?

Feb 17, 2014
JobHopeful:

Thanks for doing this. I am also at a buyside long-only fund, but with a momentum-driven growth focus. I have more of a value/GARP mindedness so it's been difficult at times getting my ideas into the portfolio. In this respect, I have also had a tough time learning from the senior analysts/PMs as they lean more towards buying the story rather than the financials. Would your firm or others similar be against bringing on someone who came from a pure growth background? I've only been here a year and am looking to change due to various reasons.

Also, you mentioned that there are times you don't speak to your PMs sometimes weeks at a time. Has this always been the case or did your PM teach you more of a firm process when you first joined?

Sure, when I was on the SS we had a growth focus. I think lack of "style fit" is pretty common on the buy side so people make the switch with a reasonable level of frequency. Just have a good pitch.

I didn't mean to write "weekS", but its not uncommon for us to only exchange a few words during a week (singular) when I have my head down and I'm grinding through filings.

My exposure to their training was unusually. I was told it was very common for new hires to spend a few months inside the office of a PM to learn the process. I never had that experience.

I joined and they asked me to look at a company. I just did it in a way I thought made most sense...and they thought it was great work. There were some learnings pains here and there as some of my ideas didn't fit their framework, such as GME.

Speaking with my peers, the vast majority have a similar experience of having been thrown into the deep end and learning how to swim (AKA invest) by themselves. Maybe PMs today are just too busy to give the level of training they got themselves?

So that should be a big takeaway for all: mentorship is important but, in my experience, most of the knowledge comes from your own efforts.

    • 1
Feb 17, 2014

Does having a $10B fund or any particular charters preclude you guys from investing in spin offs or different parts of the capital structure (debt, for instance)?

What is the most interesting thing you have done so far?

My posts will be fraught with grammatical errors since I post from my phone. I will try my best not to post an incoherent babble.

Feb 17, 2014
One2Three:

Does having a $10B fund or any particular charters preclude you guys from investing in spin offs or different parts of the capital structure (debt, for instance)?

What is the most interesting thing you have done so far?

We are an equity shop so we never invest in debt instruments. Size is only an issue if the company has a small float. We are, uniquely, an absolute return focused long-only asset manager and we look at every spin-off/spin-out/IPO/bankruptcy/etc...

Tough question. I like to dive deep into my portfolio companies and develop relationships with management teams. One of our largest position in our L/S fund is a small-cap company and me and the CFO get along really well. It was a great experience for me to have him reach out and get my advice on how to pitch the story to the rest of the Street and how to structure their guidance.

I hope to have an experience of being an part of an activist campaign in the next 12-months.

Feb 17, 2014

What is your view on the economy and markets (going forward)? Do you feel we are going to experience a severe correction?

My posts will be fraught with grammatical errors since I post from my phone. I will try my best not to post an incoherent babble.

Feb 17, 2014
One2Three:

What is your view on the economy and markets (going forward)? Do you feel we are going to experience a severe correction?

Don't have one. I believe economics is a dismal science.

I hope for a big contraction - it would help out our short book and I'm ready to buy some great companies at lower prices.

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Feb 17, 2014

Aside from networking, do you have any advice on how to get into SS Research (which I presume to be equity research) from a top Masters in Accounting program?

Feb 17, 2014
danin650:

Aside from networking, do you have any advice on how to get into SS Research (which I presume to be equity research) from a top Masters in Accounting program?

Just have a good pitch ready, explain why you want the job, mention you have writing abilities (notes are the product of ER), and show passion.

    • 1
Feb 18, 2014

Thanks! Any recommendations on books or blogs/websites I should read?

Feb 17, 2014

@"KarateBoy", were you always passionate about equity investing? For example, did you know early on in college that this is what you wanted to do for the rest of your life?

Also, why do you think macroeconomics is a "dismal science"?

Feb 18, 2014
hankyfootball:

@KarateBoy, were you always passionate about equity investing? For example, did you know early on in college that this is what you wanted to do for the rest of your life?

Also, why do you think macroeconomics is a "dismal science"?

Yea, I've been interested in investing for a long time. I was called "Stock Boy" in 5th grade (before I really knew what it meant) and I started trading my own PA when I was a junior in high school. Can't imagine doing anything else.

Because its too hard to be right and make money. The industry has an awful batting average. Look at someone like the guys at ECRI - amazing track record - and they now look like idiots b.c. of their recession call. Every time I've worried about the macro, I've missed out on a chance to make $.

Feb 17, 2014

Great thread, +1. Got a few questions:

1) Were there any instances when your thesis bombed? What went wrong?
2) Also interested in knowing how you developed the skill set/thinking required for BS as a sell side analyst.
3) Assuming you're already at a decently well-known fund ($10B is no chump change), you must be already having a strong enough network, besides brand value. So why MBA? What value add are you hoping to get from it?

Thanks a lot for doing this!

Feb 18, 2014
CAinPE:

Great thread, +1. Got a few questions:

1) Were there any instances when your thesis bombed? What went wrong?

2) Also interested in knowing how you developed the skill set/thinking required for BS as a sell side analyst.

3) Assuming you're already at a decently well-known fund ($10B is no chump change), you must be already having a strong enough network, besides brand value. So why MBA? What value add are you hoping to get from it?

Thanks a lot for doing this!

1) One of my first long ideas to the L/S was a company with a binary event dependent on a EPA ruling. I thought I had a edge, but I was wrong. We ended-up getting out for break even.

Most of the time, in a market like this, my "misses" are a result of not being bullish enough on a stock rather than getting the long-thesis wrong.

2) Whenever I did work on my coverage list, I always asked myself what would I need to know to buy this stock in my own PA? That type of mind set develops your risk management and critical thinking skills. I would say that's the biggest difference, for me, between SS and BS - how much time you spend analyzing the risk to the investments.

The most significant chance from an financial statement analysis perspective is being able to quickly understand what type of business is this? Is it a spread business like a refinery? Is it depending on growing its sales force? Is it branch based? Is it financial engineering? etc...

Finally, as mentioned above, I've been investing my PA even before I started college. I lost a lot of money doing that - but I believe I also learned a lot while paying my "market tuition".

3) That's the debate I've been having with myself for the last 2-3 years, and half the people I talk to tell me not to go because I'll be competing with my peers for the job I already have. The flip side is pedigree/branding and an opportunity to get out of the Midwest for at least 2-years. As a result, I've decided that I probably only apply to Harvard and Stanford.

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Feb 19, 2014

Thanks for the response, loved the bit about developing the skill set, +1!

Feb 18, 2014

@KarateBoy thanks for doing this! Regarding recruitment, I've seen a number of funds here in Europe asking that candidates should ideally be ACA qualified. Is that also the case in the US? I can see the connection (being able to connect the dots, maybe find tricky stuff in Financial Statements) but would you or other asset managers consider this qualification valuable for a position similar to yours?

Colourful TV, colourless Life.

Feb 18, 2014
Bonus:

@KarateBoy thanks for doing this! Regarding recruitment, I've seen a number of funds here in Europe asking that candidates should ideally be ACA qualified. Is that also the case in the US? I can see the connection (being able to connect the dots, maybe find tricky stuff in Financial Statements) but would you or other asset managers consider this qualification valuable for a position similar to yours?

Never heard of this before now. But, I can imagine it being a useful credential if you're applying to a fund with a forensic accounting bent.

Feb 18, 2014

Great read, going to have to give you a follow on twitter!

Feb 18, 2014

Thank you, great post.

Given the generalist nature of your position, are their still industries that you prefer to source ideas from? It seems that the disparity between some industries could make it very difficult and time consuming to learn what a good business is and how to value them properly, e.g. P&C insurance vs industrial vs O&G.

Also, due to your background on the SS, do you think you prefer looking at opportunities in the sector you covered (if you did cover one specifically), given you might have a better long running understanding of their business models, etc?

Finally, are their any sectors that you typically stay away from given the nature of their business or lack of understanding given their complexity? (again, insurance comes to mind for me)

Feb 19, 2014
Anihilist:

Thank you, great post.

Given the generalist nature of your position, are their still industries that you prefer to source ideas from? It seems that the disparity between some industries could make it very difficult and time consuming to learn what a good business is and how to value them properly, e.g. P&C insurance vs industrial vs O&G.

Also, due to your background on the SS, do you think you prefer looking at opportunities in the sector you covered (if you did cover one specifically), given you might have a better long running understanding of their business models, etc?

Finally, are their any sectors that you typically stay away from given the nature of their business or lack of understanding given their complexity? (again, insurance comes to mind for me)

Good question.

So right upfront the most common advice I get is to pick 2-4 industries to develop an expertise in so that other rely on you. The areas that seem to interest me include

1) Industrial Distribution
2) Filtration
3) Restaurants
4) Business Services
5) Building Products
6) Transportation
7) Something in the commercial aerospace supply chain

I do leverage my expertise from my time on the SS but its not a defining opportunity for me. As an example, in our all-cap fund we recently picked up a company I used to cover, partially on my recommendation. But its likely to be the only company to make it into the fund given our concentrated nature.

The flip side of this framework: are there any sectors I purposefully stay away from. Yes and no.

We're fortunately big enough to have two guys that focus on financials and E&P (so I can and will learn from them). In the meantime, I stay away because its a poor use of the firm's time for me to get ramped up in a space someone else has a deep knowledge base and industry connections.

    • 1
Feb 19, 2014

Thanks man! Glad you're doing this

Feb 18, 2014
KarateBoy:

Here's a snapshot of my history:

  • Big 10 undergrad
  • Graduated with degrees in finance and accounting
  • With honors/distinction and 3.7 GPA
  • Started career in sell-side research at well-regarded Midwestern investment bank
  • While at the bank, I learned all the prerequisite financial statement and modeling skills
  • On my 2-year anniversary, got promoted from junior associate to associate
  • After about 3-years on the sell-side, moved to a the buy side as an equity analyst1
  • 10+ billion asset manager
  • I'm the only analyst that works on our long-only products as well as out newly seeded L/S fund
  • I source and research all my ideas. I speak directly to CFOs and CEOs.
  • Completed each level of CFA on my first try. Will get the charter in 4-months.

howd u buy all that preftige tho?

    • 1
Feb 19, 2014
WhiteHat:
KarateBoy:

Here's a snapshot of my history:

  • Big 10 undergrad
  • Graduated with degrees in finance and accounting
  • With honors/distinction and 3.7 GPA
  • Started career in sell-side research at well-regarded Midwestern investment bank
  • While at the bank, I learned all the prerequisite financial statement and modeling skills
  • On my 2-year anniversary, got promoted from junior associate to associate
  • After about 3-years on the sell-side, moved to a the buy side as an equity analyst1
  • 10+ billion asset manager
  • I'm the only analyst that works on our long-only products as well as out newly seeded L/S fund
  • I source and research all my ideas. I speak directly to CFOs and CEOs.
  • Completed each level of CFA on my first try. Will get the charter in 4-months.

howd u buy all that preftige tho?

Da preftige I haf cost nothin' more dan a stick of gum

Feb 18, 2014

Great read, thanks OP.

Feb 19, 2014

Thanks

Feb 19, 2014

You said that while working at SS you thought about whether you would want to invest there yourself - wasn't there political pressure from higher-ups to give a certain recommendation for certain clients, and how did you deal with that, or did you perhaps get lucky with who your boss was?

Feb 19, 2014
curiosity killed the cat:

You said that while working at SS you thought about whether you would want to invest there yourself - wasn't there political pressure from higher-ups to give a certain recommendation for certain clients, and how did you deal with that, or did you perhaps get lucky with who your boss was?

Sure, but i think you're over-emphasizing the point.

Asking the right questions to your senior analyst is instructive for developing the framework, even if the bear case doesn't get published.

I guess we could say I was "lucky" that my boss valued my opinion was willing have the debate with me.

Feb 20, 2014

Guess I have been reading too many exaggerations about the sell side ER political side. Thanks for the answer and the whole thread, really interesting read!

Feb 19, 2014

How much of your comp is specifically tied to the stocks you directly source? How much is completely subjective? How will this mix change going forward?

Feb 19, 2014
username777:

How much of your comp is specifically tied to the stocks you directly source? How much is completely subjective? How will this mix change going forward?

No formula for compensation - but I wish there was one. I asked about it during the most recent review session and they're only in the early innings in implementing it for the senior analyst.

I'm working towards getting a sleeve in the L/S fund with an explicit formulaic comp structure. We'll see - long way to go.

I also worry how the other analyst would react if I got that - I'm youngest analyst at the firm by nearly a decade.

Feb 20, 2014

I think I have somewhat of a similar background to you, pre-FT.

1. Are there any disadvantages to going straight to the buyside, in a role like the one that you are currently in?
2. How do you go about pitching ideas to your PM? In other words, how do your ideas become reality?
3. Is pitching a short/sell/etc in recruiting a bad idea?

Feb 23, 2014
johnwayne7:

I think I have somewhat of a similar background to you, pre-FT.

1. Are there any disadvantages to going straight to the buyside, in a role like the one that you are currently in?

2. How do you go about pitching ideas to your PM? In other words, how do your ideas become reality?

3. Is pitching a short/sell/etc in recruiting a bad idea?

1. Could you clarify? I don't understand the questions. I went "straight to the buyside" from the sell-side.
2. We typically have a to write a memo for every single idea. So I do that and then we talk about it. I feel comfortable with the guys I work with so I talk to them as if they were my peers. No dog and pony show.
3. No, not for long-short. I would assume most long-short want to hear at least one short idea since its a harder discipline. But, I don't think a long-only would care for it because its not actionable.

Feb 24, 2014

Sorry, for #1, I meant straight to buyside out of undergrad. Thanks for taking the time.

Feb 20, 2014

is your watchlist a simple spreadsheet? how do you keep track of all your names and how often do you talk to management

Feb 23, 2014
bluegold:

is your watchlist a simple spreadsheet? how do you keep track of all your names and how often do you talk to management

1) No, we each have Factset on our computers and one of the tabs is my watchlist.
2) You keep track of them with the spreadsheet on a day-to-day basis and read the quarterly conference calls to get an update on current events.
3) Typically 1-3 times during my research process, depending on how much time they can give me per call, the number of questions I have, and my knowledge base prior to the call. Once a position makes it into the portfolio, 1-2 times a quarter.

Feb 20, 2014

1) How do you go about idea generation (where do you even start)? Do you take more of a top-down or bottom-up approach? Do you ever read SS research for idea generation?

2) Is CFA charter worth earning? How much of the CFA curriculum do incorporate into your research/model building?

Buy fear, sell cheer

Feb 23, 2014
crossfit55:

1) How do you go about idea generation (where do you even start)? Do you take more of a top-down or bottom-up approach? Do you ever read SS research for idea generation?

2) Is CFA charter worth earning? How much of the CFA curriculum do incorporate into your research/model building?

As I mentioned earlier, typically 1/3 of the ideas are passed down to me from the PMs, 1/3 of the ideas come from my watchlist (companies I've done work on), and 1/3 are sole sourced.

Sole sourced means "everywhere else"...talking with collegues...asking management teams who else is doing a good/bad job in the space...random articles I read about other random things...twitter...industry conferences...sell side can occasionally be helpful too.

I have the charter so I might be bias here but I will say that a) most job posting I've seen say CFA or MBA preferred, b) both of my employers supported my pursuit of it, c) almost everyone I've ever worked with had it. That said, 98% of the material is worthless/useless from a day-to-day perspective.

Feb 20, 2014

How many truly exceptional ideas have you developed in the last year? These would be ones that you have no problem risking 10% of your PA in at a time.

Feb 23, 2014
floppity:

How many truly exceptional ideas have you developed in the last year? These would be ones that you have no problem risking 10% of your PA in at a time.

Two great ideas I pitched GME long 3 times during my first 6-months but the PMs couldn't get over the digital disintermediation risk. Currently, GME is between 15%-20% position in my PA.

The other is a current long position so I won't disclose the name. But here's some info on it: small cap company that was up 200% in 2013. It was our #1 position, hitting 10% of our total AUM at one point. It is also about a 35% position in my PA.

Feb 24, 2014
KarateBoy:
floppity:

How many truly exceptional ideas have you developed in the last year? These would be ones that you have no problem risking 10% of your PA in at a time.

Two great ideas I pitched GME long 3 times during my first 6-months but the PMs couldn't get over the digital disintermediation risk. Currently, GME is between 15%-20% position in my PA.

The other is a current long position so I won't disclose the name. But here's some info on it: small cap company that was up 200% in 2013. It was our #1 position, hitting 10% of our total AUM at one point. It is also about a 35% position in my PA.

Well that's interesting because GME was also a big call of mine (fall 2012) and the other one (which I think is the same one as this) I got into the portfolio at a little under $12 in 1H13 and is now about double that. I can't say I'm bullish about either of them now though.

I was more curious since my "high conviction/pound the table" ideas seem to have dried up completely within the last 6 months or so.

Also curious as to how you're able to hold fund positions in your PA. I've never been able to do that.

Feb 21, 2014

Great thread, thanks for posting!

1. I will be doing an SA this summer at a BB's ER division. Do you have any advice in terms of standing out, getting the FT offer, etc.

2. Can you talk about the career progression on the buy-side. How does the road to a PM happen at your shop/generally? And do you know the compensation jumps that go with that?

Feb 23, 2014
jjwork100:

Great thread, thanks for posting!

1. I will be doing an SA this summer at a BB's ER division. Do you have any advice in terms of standing out, getting the FT offer, etc.

2. Can you talk about the career progression on the buy-side. How does the road to a PM happen at your shop/generally? And do you know the compensation jumps that go with that?

1) Take initiative to add creative analysis to whatever projects they have you working on. A lot of the job on the SS is figuring out how to explain via charts/trend analysis/etc... so being able to add insight would be value-add.

2) I made it know that I want to be promoted to senior analyst this year and they told me its going to depend on the number of ideas I have and their performance. I have to assume moving from senior analyst to PM is a similar hurdle (but higher) + client interaction + being able to help raise AUM. Nope - I can only assume a PM makes low 7-figures but I don't have any PMs showing me their W-2s so its just wide speculation.

Feb 22, 2014

Thanks so much for doing this. I have several questions:

1. Did you start testing or preparing for the CFA in college? How did you balance the CFA with your IB job?

2. Before your IB career, how did you stand out from the competition in terms of knowledge when networking/interviewing? In other words, what did you do to deepen your knowledge in ways other than taking finance classes, trading your own portfolio, and reading sites like WSO?

3. Other than displaying passion/knowledge/competence/confidence to people, what are successful strategies you used for networking and breaking into the industry? What are some mistakes you learned from when you started, and how did you adapt?

Sorry if these are kind of trite, I know that answers for my questions are a dime a dozen, but I'm just interested in your version of these success stories because I'm currently in a similar position where you were, and I want to end up where you currently are.

Thanks!

Feb 23, 2014
sv7102:

Thanks so much for doing this. I have several questions:

1. Did you start testing or preparing for the CFA in college? How did you balance the CFA with your IB job?

2. Before your IB career, how did you stand out from the competition in terms of knowledge when networking/interviewing? In other words, what did you do to deepen your knowledge in ways other than taking finance classes, trading your own portfolio, and reading sites like WSO?

3. Other than displaying passion/knowledge/competence/confidence to people, what are successful strategies you used for networking and breaking into the industry? What are some mistakes you learned from when you started, and how did you adapt?

Sorry if these are kind of trite, I know that answers for my questions are a dime a dozen, but I'm just interested in your version of these success stories because I'm currently in a similar position where you were, and I want to end up where you currently are.

Thanks!

1. No, I started doing the CFA after I started on the SS. I wish I started in undergrad so that I could have finished sooner. The test is a real bitch.

Most of my studying was done after work and on weekends. Life sucks for those 4-5 months. Towards exam time, my bosses always let me take a few days off to squeeze in one last cram session.

2. As I mentioned earlier, I was always a stock market junkie but that didn't help me. I always got the impression that recruiters thought I was a little cocky b.c. they underestimated my passion for it. In retrospect, being a blank slate would have helped me with recruiting. That said, once I did land a spot, I was one of the best associates because I wasn't a blank slate. Go figure: the skill sets that made me qualified for the job hurt me during recruiting. Life isn't fair lol.

But let me give you a more helpful answer: Technical skills will never get you the job. The people on the other side of the table have to like you/want to work with you because you'll end up spending more time with them than they do with their own family. In many ways, recruitment is like a lottery, unless you know how to become more likable lol.

3. My best advice for kids who are trying to break in via networking is to stay persistent and don't be afraid to reach out. When I was in school, the teachers talked up the alumni on the street "as incredibly busy" and I was scared to email them and say something stupid and burn the bridge. Now that I'm on the other side, I will say "BE PERSISTENT and KEEP IN TOUCH.

Just because I can be incredibly busy doesn't mean I'm an asshole. I know that college kids don't know everything so I'll go out of my way to give constructive criticism...and you won't burn a bridge with me. Moreover, I always reply to alumni emails, even if it takes me 1-2 weeks to get to it. Most of us don't forget. If you email someone and they're an asshole back, screw them. You don't want to work there anyways.

Feb 25, 2014

GME is having an awesome day.

Feb 28, 2014

What kind of questions do you usually ask management teams? If you have the time, can you break it out by introductory call and then follow up?

Also, how many K's and Q's do you read on each company? Do you read the entire thing? Do you read the competitor's?

Sep 20, 2014
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