Generalist vs. Sector Specialist

RavenousThere are only a few industries (or really sub-industries) where this is even a real question. Most "specialists" in an industry follow 5-10 tickers and spend most of their time researching these efficiently priced stocks. And the barriers to entry for a skilled research analyst are pretty low anyway -- I call the sell side and talk to other buy side people all the time, and these "specialists" often know less than I know after anywhere from half a day to two days of research ("Sorry, I've only followed this stock for two quarters" -- GTFO). Sure, they know more about the puts and takes about the company's guidance, but most of the time they don't have enough insight into the industry to justify the amount of time they spend on it, and they generally focus on the wrong stuff anyway (can't see the forest through the trees -- you're an industry expert but mostly you're an expert on detailed quarterly projection models?). One obvious exception to this is financial services (which is a sector, not an industry). If you are a bank analyst, you will have better color on banks than a generalist hands down. But for any operating or service business, that is not the case.

Generalists are better investors 99% of the time. You learn how to spot value, when to put the position on, when to exit and how to rip apart a business from an analytical perspective very quickly. Some of the skilled investors I work with can tear something apart and have a good perspective within between about 10 minutes and an hour. Industry expert? No. But enough to know whether it is likely worth spending time on. The game is looking at a lot of stocks and trying to figure out which ones are mispriced, not spending oodles of time following the same handful of companies that are likely well priced. And there are attractive scale benefits to looking at a lot of names -- something happening in one industry might have a large and unexpected (to the Street) impact on another industry.

Being a generalist is better for a long-term career on the buy side (objectively speaking).

You've made some very good points that really got me thinking. But when you are referring to the buy-side, I can't help but think public equity investing shops or traditional MM PE firms focusing on conservative business models.

But with VC, I am going to have to respectfully disagree to some extent, where knowledge of the in's and out's of a sector is critical and specialization is so pivotal to long-term success (think, Steve Burrill with life sciences or Frank Quattrone with tech). Repetitive investments in the same space give extensive lessons in the ups and downs of that space and a real sense of how to make progress in detecting value.

I guess, answering this question really depends on your career goals at the end of the day.

I'm a specialist and I hate it, there are limited options aside from grad school

From a career point of view having a skill / expertise might get you employed and give you some traction early in your career, but if you have ambitions of being an owner / manager you have to become more of a generalist and be able to wear different hats.

Division of labour... a singular focus on specialisation is symptomatic of being labour, a tool of production. the proletariat. on the other hand, owners and the management / political class are generalists.

If you look at large financial corporations you can easily see the assembly line mentality of production and the economies of scope resulting from the division of labour. any finance labourer or group of labourers only has control & knowledge of one small part of the production process. The lower / mid level guys that actually do the grunt work are the specialists. The senior and managerial level guys are more generalist and political even if they may have risen through the ranks. Once you get to the C suite you have fewer specialists.

I would say generalist. I think it's harder, especially at the junior levels because your superiors still expect you to know everything about whatever industry you are looking at, but you will know so much about everything. The CIO at my firm was head of Lev Fin at a major firm for 10 years and never focused on a specific industry. The amount he knows about everything from trucking, to healthcare, to defense contractors is amazing. He's brilliant. If you want to start your own fund with no industry focus, generalist is the way to go IMO. May be tough to do in Equity Research though...