Franz Kafka & Hanging Your Own Shingle

mikesswimn's picture
Rank: Neanderthal | 2,302

Anyone here a fan of Franz Kafka? He wrote a great story called "The Metamorphosis" and the story's main character, Gergor Samsa is in quite a pickle, work-wise, and fears for his livelihood:

I will get dressed immediately, pack my samples, and be on my way. Will you all, will you let me go catch my train? Now you see, sir, I'm not stubborn and I'm happy to work; traveling is difficult but I couldn't live without it. Where are you going, sir? To the office? Yes? Will you report on everything truthfully? A man can suddenly be incapable of working, but this is the precise moment to remember his past performance and to consider that later, after resolving his difficulties, he would work all the harder and more diligently.

The passage goes on for a while with Gregor pleading for his job, citing family difficulties among other hardships. What strikes me as peculiar, is that Gregor is a salesman, someone who presumably has some business contacts and perhaps a book of business. Why doesn't he go out on his own? It's a very Kafkaesque situation from a professional standpoint.

This got me thinking about what it would take to go out on your own in one of the industries commonly discussed here on WSO. In particular, what would it take to start your own research firm?

I've been thinking about what I like to call the tragedy of Andy Zaky, the young man who went out and started his "only Apple" hedge fund and got his ass handed to him. This is not what I consider to be the actual tragedy, the hedge fund world is a tough one and hedge funds fail regularly. What's tragic is that Zaky appears to have been an immensely successful equity researcher covering a single company. At his peak, he was collecting $200 a month from 700 subscribers, probably with little overhead. Grossing nearly $1.7 million annually covering a single company (albeit quite adeptly) is nothing to sneeze at. Giving this up to pursue a hedge fund, to me at least, is an absolute tragedy that would make even Shakespeare cringe.

It goes without saying that starting your own business is incredibly difficult. But, this applies to opening your own bar, your own landscaping company, or even setting up shop as a personal trainer. The challenges that come with hanging your own shingle are not unique to finance. You need to develop a track record, produce results that benefit clients, build your infrastructure, advertise, and many other difficult tasks that all small business owners face. So, what would this look like from the perspective of an independent equity research firm? Some of the experienced equity researchers can probably shed some better light than I can, but here's how I would see it:

  1. Developing a track record by posting on Seeking Alpha, Yahoo! Finance, and WSO for that matter.
  2. Make sure you get in with the companies you follow so that you can provide information people can't easily get from the internet (this is almost certainly harder than it seems). If you lack industry contacts, make sure to have a robust model that can shed light on aspects of a covered company's business that can't be easily ascertained.
  3. Build out your infrastructure by having great models, useful contacts at your companies, and perhaps access third party research that adds to your own.
  4. Advertise, issue press releases, do whatever it takes to get your name out there
  5. Repeat

It goes without saying that this list is wildly glib and incomplete, but from a high level, I'm struggling to see any unique challenges to starting an equity research firm over any other small business. Has anyone considered this as a possibility? If so, what have you found while looking into the idea of starting your own firm? Admittedly, while I don't doubt that I've missed several key wrinkles specific to the business of equity research, I fail to see a major roadblock that doesn't exist for every small business venture.

Gregor Samsa's concern for his job is one that many of us feel, but what makes The Metamorphosis Kafkaesque (beyond being literally written by Kafka) is that Gregor has, overnight, turned into a giant cockroach like creature, and yet, his livelihood is what primarily concerns him in the earlier passage. Maybe, just maybe, if Gregor was working for himself, the issue of being a giant insect would take a higher priority over getting to work on time.

Comments (9)

Sep 4, 2013

I hate to be the one to say this, but AAPL was a bubble. It was a dumb money trade. This guy was in the right place at the right time. He is not an immensely skilled research analyst.

To your question, sell side research is a commodity. Research from most major brokerage firms is as conflicted as ever but there is not a lot of demand for independent pay research because there is so much of it for free now on sites like SeekingAlpha, SumZero, VIC, etc. Even if most of the research on those sites is bad (and it is mostly bad, although VIC is clearly the best of the three), it's much harder today to convince people to pay you for your work. You're also probably underestimating how much most management teams actively try to manipulate the sell side, which means that if your "edge" is talking to management, you might only be rehashing some garbage PR and nothing of value.

The unique challenges of specifically starting a research firm versus some other small business are that research is a commodity on the Street, few customers are willing to pay much or anything for it, and the market is saturated. It's a business in structural decline.

Sep 4, 2013
Ravenous:

I hate to be the one to say this, but AAPL was a bubble. It was a dumb money trade. This guy was in the right place at the right time. He is not an immensely skilled research analyst.

Yes, AAPL was absolutely a bubble but he was doing something right when he beat the snot out of Wall Street during his hey day. This guy wasn't just tossing around "buy, sell, hold" either, he was making extremely accurate predictions, too. He really seemed to work his ass off trying to figure it all out. But, perhaps "immensely skilled" was something of an overstatement, haha.

Ravenous:

To your question, sell side research is a commodity. Research from most major brokerage firms is as conflicted as ever but there is not a lot of demand for independent pay research because there is so much of it for free now on sites like SeekingAlpha, SumZero, VIC, etc. Even if most of the research on those sites is bad (and it is mostly bad, although VIC is clearly the best of the three), it's much harder today to convince people to pay you for your work. You're also probably underestimating how much most management teams actively try to manipulate the sell side, which means that if your "edge" is talking to management, you might only be rehashing some garbage PR and nothing of value.

I'm not actually estimating what degree management teams manipulate sell-side research at all. I have no idea. However, I would argue that this particular roadblock isn't terribly unique to research. If you think about "company management" as part of a normal small business's supply chain (i.e. if your business is information, information from management is part of what you'll need) having a sales guy blow smoke up your ass is pretty much an everyday occurrence no matter what you do.

Ravenous:

The unique challenges of specifically starting a research firm versus some other small business are that research is a commodity on the Street, few customers are willing to pay much or anything for it, and the market is saturated. It's a business in structural decline.

Your point about how much customers are willing to pay for research is well noted, but is in no way unique to research. If having a saturated market of free and available information killed a business, there would be no personal trainers, tutors, financial advisors, car salesmen, or really, consultants, among many others.

It's obvious that you know quite a bit more than I do about the business of research. But, I have to disagree, I don't see how any of the challenges that you've noted (and to be clear, I agree that they're real problems for someone starting out) are particularly unique to research.

"My caddie's chauffeur informs me that a bank is a place where people put money that isn't properly invested."

    • 1
Sep 4, 2013
mikesswimn:
Ravenous:

I hate to be the one to say this, but AAPL was a bubble. It was a dumb money trade. This guy was in the right place at the right time. He is not an immensely skilled research analyst.

Yes, AAPL was absolutely a bubble but he was doing something right when he beat the snot out of Wall Street during his hey day. This guy wasn't just tossing around "buy, sell, hold" either, he was making extremely accurate predictions, too. He really seemed to work his ass off trying to figure it all out. But, perhaps "immensely skilled" was something of an overstatement, haha.

Ravenous:

To your question, sell side research is a commodity. Research from most major brokerage firms is as conflicted as ever but there is not a lot of demand for independent pay research because there is so much of it for free now on sites like SeekingAlpha, SumZero, VIC, etc. Even if most of the research on those sites is bad (and it is mostly bad, although VIC is clearly the best of the three), it's much harder today to convince people to pay you for your work. You're also probably underestimating how much most management teams actively try to manipulate the sell side, which means that if your "edge" is talking to management, you might only be rehashing some garbage PR and nothing of value.

I'm not actually estimating what degree management teams manipulate sell-side research at all. I have no idea. However, I would argue that this particular roadblock isn't terribly unique to research. If you think about "company management" as part of a normal small business's supply chain (i.e. if your business is information, information from management is part of what you'll need) having a sales guy blow smoke up your ass is pretty much an everyday occurrence no matter what you do.

Ravenous:

The unique challenges of specifically starting a research firm versus some other small business are that research is a commodity on the Street, few customers are willing to pay much or anything for it, and the market is saturated. It's a business in structural decline.

Your point about how much customers are willing to pay for research is well noted, but is in no way unique to research. If having a saturated market of free and available information killed a business, there would be no personal trainers, tutors, financial advisors, car salesmen, or really, consultants, among many others.

It's obvious that you know quite a bit more than I do about the business of research. But, I have to disagree, I don't see how any of the challenges that you've noted (and to be clear, I agree that they're real problems for someone starting out) are particularly unique to research.

There is a lot of wrong information in this post. But thanks for reminding me why I hardly ever read this site anymore. I just end up arguing with 20 year old kids who don't know what they are talking about. Good luck if you decide to start your own research boutique, but there are a lot of reasons why there is a 99% chance it will be an epic fail.

    • 1
Sep 4, 2013

I have actually read Kafka only recently- a few months ago ( My high school version of me wasn't that interested in reading when I should have). I was really positively surprised how good this short story was. Social interactions in this story are great, but what really astonished me is how well Kafka wrote about Gorge's taught process through the entire book/story.
As for the ER part of your post, I am not interested in that industry (I'm from SEE region) so I will leave that to other more experienced users, but if I remember correctly didn't Andy earn that money while AAPL was going upwards and he recommended going long for those few months only to lose it through his HF while going short AAPL (beginning of 2012 ?).

"When a defining moment comes along you define the moment or the moment defines you."

Best Response
Sep 4, 2013

The Kafka story most relevant for this board:

Poseidon sat at his desk, doing figures. The administration of all the waters gave him endless work. He could have had assistants, as many as he wanted -- and he did have very many -- but since he took his job very seriously, he would in the end go over all the figures and calculations himself, and thus his assistants were of little help to him. It cannot be said that he enjoyed his work; he did it only because it had been assigned to him; in fact, he had already filed many petitions for -- as he put it -- more cheerful work, but every time the offer of something different was made to him it would turn out that nothing suited him quite as well as his present position. And anyhow it was quite difficult to find something different for him. After all, it was impossible to assign him to a particular sea; aside from the fact that even then the work with figures would not become less but only pettier, the great Poseidon could in any case occupy only an executive position. And when a job away from the water was offered to him he would get sick at the very prospect, his divine breathing would become troubled and his brazen chest began to tremble. Besides, his complaints were not really taken seriously; when one of the mighty is vexatious the appearance of an effort must be made to placate him, even when the case is most hopeless. In actuality a shift of posts was unthinkable for Poseidon -- he had been appointed God of the Sea in the beginning, and that he had to remain.

What irritated him most -- and it was this that was chiefly responsible for his dissatisfaction with his job -- was to hear of the conceptions formed about him: how he was always riding about through the tides with his trident. When all the while he sat here in the depths of the world-ocean, doing figures uninterruptedly, with now and then a trip to Jupiter as the only break in the monotony -- a trip, moreover, from which he usually returned in a rage. Thus he had hardly seen the sea -- had seen it but fleetingly in the course of hurried ascents to Olympus, and he had never actually traveled around it. He was in the habit of saying that what he was waiting for was the fall of the world; then, probably, a quiet moment would be granted in which, just before the end and having checked the last row of figures, he would be able to make a quick little tour.

Poseidon became bored with the sea. He let fall his trident. Silently he sat on the rocky coast and a gull, dazed by his presence, described wavering circles around his head.

Translation from:
http://jlet.org/misc/poseidon.php

    • 3
Sep 4, 2013

Touche sir!

SB.

"My caddie's chauffeur informs me that a bank is a place where people put money that isn't properly invested."

Sep 4, 2013

Kafka is one of the most confusingly depressing writers I've ever had the pleasure of reading. Wish I only had the ability to better interpret his works on my own.

Sep 4, 2013

Well, bear in mind Mr. Samsa also hated being a salesman to begin with, so there's that...

Metal. Music. Life. www.headofmetal.com

Sep 4, 2013
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