I’m assuming most professional research analysts (sellside and buyside) believe in active management. But I was wondering if there is anyone out there who has made a career out of picking stocks but doesn’t believe anyone (including themselves) can actually deliver alpha over the long term?
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Hey urboy, I think you deserve a response...heck, everyone does. We're listening, sorry about the delay ...my best guess at places on WSO that could help:
More suggestions...
I hope those threads give you a bit more insight.
Haha good q
Your job on the sell side is not to pick stocks so there ya go
How does that comment get MS'ed?
No one. Because there are literally people who have delivered alpha over the long term - Warren Buffett, Jim Simons, Bill Gross. It's just that the entire investment management industry thinks that they can become that person
Despite the very helpful comment from the intern about how the world has Warren Buffet in it, I am with you, urboy. This is something I've thought a lot about. I'm an EMH believer with 100% of my invested net worth in index funds and I've enjoyed the hell out of six years in this job anyways.
Is there a better seat from which to be an industry analyst? Even if you don't like or believe in the financial analyst aspect of this job, there's the industry analyst side of it too, and we are paid far better and have more access than industry analysts to smart regulators, consultants, and vendors. You have a big brand name on your resume, so when you call the CEO of the regional specialist construction firm he will probably answer and tell you whether your mega-cap is telling the whole story (they're not). Without giving myself up completely, I'm in the second most stereotypically boring sector there is (only short of utilities), and in any given quarter I have channel checks, proprietary and licensed alternative data, regulatory experts, consultants on the speaking circuit, and pie-in-the-sky futurists, some of whom are really smart and impactful and some of whom are so lost they don't even know what they don't know. The WSJ is the best of the press and it does a pretty bad job of covering what actually happens in my (huge!) sector, and the dedicated trade press is abjectly terrible (pay peanuts, get monkeys). Actually knowing what's really going on in the 5% of the economy that I cover is really interesting and really gratifying for me.
Does accepting the efficient market hypothesis mean this job has no value or interest? For me, no. For one thing, the sell side is part of the information discovery that lets information come into the market and be incorporated into prices. For all the shit-talking about how the purpose of the job is to goal seek a DCF to say 10% more than your large-cap's current trading price once a quarter, done well there is a lot more to it than that. Depending on sector, much of a company's quarterly results may be known or knowable by the day they actually report, but the actual drops of app downloads, credit card data, and other key alt data are how that information gets into the market, and having a good filter for what matters and doesn't matter is key. I think the top 4-5 analysts in my sector have that, the next 10 don't, and the trade press sure as shit does not.
Moreover, to the extent that you're into a weaker-form EMH, you might find that even if the large caps in your space are informationally efficient or damn near it, the small caps could be a huge opportunity. There are weird one-of-one investments without close peers like billboard REITs or category killer vertical software companies, or just tiny small caps in a big sector like software that are badly covered by five juniors who spend most of their day working on their senior analyst's megacaps and don't really have time to care about an $800M market cap regional carwash. If there is any 'alpha' out there, and you don't think it can be found covering Microsoft, maybe you can find it in small caps just by showing up and doing the work diligently and carefully. That's been my experience in my space.
Great take. I’ve recently started as an associate in the ER world and I’ve been grappling with the same issue. Your idea makes sense and it is definitely very interesting to uncover new things especially in under covered names or industries.
However, I do understand that most of the revenue source from a sell side perspective comes from short-term thinking hedge funds and indirectly from the trading side… and when I see senior analyst spending so much of their time catering to all these short-term ideas that clients ask for, it really is off putting and makes me rethink if being in the industry long-term despite it being massively interesting because at the end of the day if you don’t please these clients then you’re not really producing.
Any thoughts on this? Maybe I am oversimplifying and maybe clients put more weight on long-term new ideas than I think. Still pretty new to the industry so trying to figure it out.
You're right, there is a lot of short term-ism, and that bugged me a lot the first couple years on the job. What I would say is that if you've got a short-term item really pushing the value of a stock around, it's not really just a short-term item.
Is more growth coming from price and less from subscribers than management hoped when they gave the annual outlook two quarters ago? Is it 'just one bad quarter', but there's no such thing as one bad quarter, and the 10-Q footnotes tell you management was pulling all the earnings management tricks to deliver even this disappointing number and they've got to squeeze vendors and customers, which comes back to roost in 1Q of next year? A lot of the hedge fund game is buying M Science data and pushing the sell side around with it, but that game wouldn't even matter if it didn't speak to long-term debates about the stock and the trajectory of the company.
Think back to the formula for the value of a perpetuity with growth. If the stock price is moving, something in the quarter speaks to the terminal year earnings/perpetuity growth rate/what cost of capital its investors will demand. If you can focus on what the really important things to the story are, and try and focus on how this quarter's earnings or this month's industry data drop updates your priors on those debates, it's a little easier to care than just 'more opex, investors sad, stock down 8%'.
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