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 independentfirm? Some of the experienced equity researchers can probably shed some better light than I can, but here's how I would see it:
- Developing a track record by posting on Seeking Alpha, Yahoo! Finance, and WSO for that matter.
- 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.
- Build out your infrastructure by having great models, useful contacts at your companies, and perhaps access third party research that adds to your own.
- Advertise, issue press releases, do whatever it takes to get your name out there
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.