The most important skillsets for fundamental analysis

SECTION 1: WHAT MY PM TAUGHT ME

I recently had a pretty interesting conversation with my PM on skillsets that are critical for the job. I am on the fence as to what he stated, so it would be interesting to hear some opinions. Leaving aside obvious skillsets e.g. fast learner, comfortable with numbers, etc. he presented the following:

What can be taught:

• Digging i.e. deep research skills
• Time management i.e. how to quickly say no

What cannot be taught:

• Data interpretation/Decision making skills

As he felt that I was taking too long to say no or yes, he spent time teaching me the following approach:

How to Quickly Say No (not for life science)

• DAY-1: Gain a general understanding of what a company does and figure out where future growth will come from
  • Read relevant sections of the 2 most recent 10Ks and at the very least annual transcripts for the last 15 yrs
  • Also note down any red flags e.g. J&J's talc liabilities
  • Analysis should also include management
• DAY-2: Figure out growth based on your general understanding, quickly build out a simple model and judge the valuation and if the company is cheap, use your own judgement to decide whether it is worth looking at further
  • If possible, adjust the valuation for any of the red flags you noted (not always easy/possible in just a few hours) e.g. high leverage/default risk
  • If the company for example is facing litigation, figure out quickly how much this could be, or if it is even worth to do any of this based on the valuation
•  DAY-3/5: Build a very detailed understanding of the primary revenue generating divisions, including competitors. If any red flags pop up, ask yourself again whether you should go further
  • You should be carrying out deeper research into growth drivers as well as what could go wrong
  • For competitors, get their Income Statements for >10yrs on Excel to analyse margins/trends, as well as major keypoints from their BS and CF statements e.g. leverage ratio etc. 
• DAY-6/7: Analyse other divisions of the company, getting a general understanding of drivers for past/present/future market conditions as well as competitors. For competitors, get their Income Statements for 5yrs on Excel, as well as major keypoints from their BS and CF statements e.g. leverage ratio etc. If any red flags pop up, ask yourself again whether you should go further
• DAY-8/9: Build out detailed financials on Excel for the target company and a more accurate valuation
• DAY-10: Write your report (2 pages) and be ready to present your idea

SECTION 2: WHY MY PM TAUGHT ME THE ABOVE

I have a clinical research background. The great thing about about clinical research is that you are taught what it truly means to understand something. When faced with completely new products, paradigms, etc. you therefore become really proficient at asking yourself whether you truly understand what is in front of you and if not, what level of depth would be required. However, in life science, every detail counts and you therefore cannot say "Well, this drug has an 80% chance of working/being approved, but there is a 5% chance it might cause cancer. The 5% is so small that I won't spend additional time analsying this risk for the time being. I have a general/superficial understanding of this risk, which should suffice. I will therefore adjust my research budget allocation to account for that risk and proceed with the drug". No, in clinical research this approach does not work, that "5%" would be researched just as deeply as any other aspect of the clinical asset. Why? Because you are not paid for taking risk.

In relation to this, my PM argued that the approach used in clinical research is likely transferable to family offices and maybe PE, as they typically target stable/highly predictable cashflows. However, it would not work in HF and AM, especially not in his strategy. For context, he likes targeting large-caps and sometimes mid-caps, aiming to generate >15% yearly. As large companies often don't grow that fast, finding these opportunities is challenging, which means having to increase the number of companies you analyse to hopefully identify a viable target. As I have been asked more and more frequently to analyse some of his targets, he noticed I was taking longer than expected (I personally target a completely different set of opportunities). Using my approach, a company like Mitsubishi Chemical Group would take 3-4 weeks, as I would aim to develop a deep understanding of each product class, each industry, market shares by product category and competitors whether private or public. In his strategy this does not work, as I could only deeply analyse 12 companies at best each year.

SECTION 3: MY QUESTION

Do you guys agree that my original approach wouldn't be deemed transferable at other AMs? I was aware it would not work in HFs, but I thought it could work in an AM where I am contributing 3-5 ideas to a portfolio of 15-20 ideas