So I want to do equity research. I know that there is sell-side and buy-side and, so far, I have a few distinctive arguments for both (see below). What I would really appreciate to find out is your views in terms of the experience quality that both offer.
P.S.: Not trying to touch on things such as pay, promotion chances, job security, etc. Just arguments pro- and con- for someone that just wants to do genuine equity research. Obviously those count, but trying to leave them aside for now.
sell side vs buy side ER
There are numerous differences between working on the sell side and buyside of equity research. Sell side equity researchers must always consider their relationships with company management and buyside researchers must put an intense level of thought into their models in order to continue to receive business or to make money for their funds. Our users shared their experiences below:
What is the Job of Sellside Equity Researchers?
- Work for an investment bank or a shop. Job consists of analyzing companies and selling detailed research and investment recommendations to the buy-side (i.e. AM, HF).
- Job involves spending huge amounts of time writing reports and making nice looking charts. The commercial aspect is often in conflict with the research process itself. Sell side researchers are often tasked with constantly marketing ideas and looking for ideas that are commercial rather than purely fundamental.
- Sell-side researchers tend to focus on a more limited number of companies so this could lead to a more in-depth analysis which is a good educational field for someone who is starting out.
What Do Buy Side Research Analysts Do?
- Work for HF or a AM fund. Analyze companies from two sources: independently and by talking to the sell-side researchers. Generate actionable ideas and communicate them to the Portfolio Managers who actually invest.
- The research process is more genuine - there is no commercial aspect involved and all the effort is on finding investment opportunities. Intellectually more rewarding as the idea generation process involves independent research but also access to many views from the sell-sides (trick being to disseminate them from value-add vs noise).
- Job security is lower than it is at a sell side bank research position due to the fact that you will be judged by the performance of your research.
Read More About Equity Research on WSO
- Sell Side ER vs. Buy Side Ops (special circumstances)
- Equity Research sell side: how do you think the buyside should do better to interact with you?
- Sell side equity research->Hedge fund
- Does all Buy Side ER (Long Only) pay less than Sell Side ER?
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Before we get to which is better or any pro/con list, just know that it is overwhelmingly difficult/border-line impossible to come out of undergrad with a FT offer at a reputable BS shop. There are people who have done it but they are the exception not the rule, 9.99 times out of 10.00 you do your SS stint for a couple years then make the jump. Just something to keep in mind as you begin contemplating your future career path.
To your actual question, it honestly depends on what you feel best aligns with your interests and skill set.
Plenty of people stay on the SS to be senior analysts with your own coverage. That being said, SS has a sales component to it and that ramps quickly once you hit the senior level as you begin marketing/establishing your brand. There are also multiple different avenues one can take to become a successful SS senior. There are people in my firm who put out very little product and prefer to spend all 12 ish hours of their day on the phone, smiling and dialing and not caring about valuation or stock picking. And you know what? They get paid well for it. So there are various approaches to the SS but it is a pro that once you hit senior level, you can more or less run your business in a way that suits you best.
I don't know as much about the BS given I personally am SS. I have been told the sales component is much less for analysts at HF/LOs. I find the BS to be incredibly interesting as you are taking the research, developing your thesis and eventually putting it to work by establishing positions in the fund. Teams are generally leaner so you are expected to contribute in a meaningful way in a shortened time frame and have the opportunity to learn from some truly gifted and fiercely intelligent people who are driven and passionate. The challenge of being a successful investor is something I look forward to meeting should I be fortunate enough to make the jump myself.
In no way is this a comprehensive overview to SS/BS research but hopefully it gives you some clarity.
I will say that if you want to learn to be a great stockpicker, I think the buyside is a much better training ground. Since there is no marketing component to the role, you are spending your time wherever you think it is most effective and likely to lead to actionable/differentiated ideas. You don't need to waste time formatting models except on names you are actively pitching. Instead you are able to take the time necessary to go extremely deep on an idea that you are pitching to PMs. This creates sort of a dual-track skillset... first you have to be very good at sifting through a lot of ideas, consuming tons of news flow, focusing on what actually matters and ignoring the rest. But at the same time, when you identify something that could potentially be an opportunity, you need to be able to switch gears and get deep on a name, fast. Travel to check out some assets, do the expert calls, talk to as many sellside guys as you can to get a sense for where "the Street is", talk to different layers of management/competitors etc, and spend a decent amount of time thinking about how different scenarios might unfold over whatever your relevant time horizon is. This is where I think most of the sellside is a bit weaker... they have to be prepared to answer questions on every company in their coverage so they will anchor on three or four "bullet points" for each stock that drive the thesis, but they are the same bullets that every other sell-side guy is emphasizing, and they rarely have the time to go deep on any of these and develop a non-consensus view.
I think the sellside is probably better if you like organizing events and connecting with people. Connect this hf guy to that long-only guy and see what sort of conversation develops around XYZ. Connect management teams to investors they may not be talking to. Organizing big conferences and generating buzz around a group. It takes more of a "sales" skillset to be honest. The analysts who are great at this are handsomely rewarded for it. For what it's worth I think a lot of the good SS analysts have the capability to be great researchers as well, but they just don't have time for it given all of the other demands on their time.
I haven't worked on the SS before but suspect that earnings season is a complete clusterf*ck. They have to publish on literally every company, and often will do a "preview" note, an "earnings flash" first reactions, and a more comprehensive review note after they've digested the quarter. That's 3 notes / co every quarter and just seems brutal to me. I guess this is why they have associates. On the buy side (at least in long-only land), you will usually publish a note on names that are owned in a portfolio, and/or 'buy'-rated names that you are trying to get on PMs radars. The rest you can just ignore. Yes, you have to keep up with the newsflow, but if it's not a name you care about, don't blow up PMs inbox with junk. Hell, I'm at the point where I don't even publish on owned names a lot of the time. If the q was in-line and the stock was +/- 1-2%, who cares...
I am in sell-side ER as an associate and I heard another analyst sum up the differences perfectly.
On the sell-side your job is to know every little spec of information, while on the buy-side your job is to know as little information as possible in order to make an investment decision.
I would also say that on the buy-side the "truth" matters more and on the sell-side how you talk about/skew the "truth" is more important. Basically do you want to be an information broker or treasure hunter. On the sell-side your strategy is deciding on how you are going to run your business/coverage/brand. Are you going to be a valuation/model guru (very rare), produce a lot of reports, always talking to clients, provide quality/value add information, how are you going to breakdown your coverage, what is your criteria for making a stock buy, neutral, underperform and so on. On the buy side strategy is purely based on investing and generating returns.
To me the main difference is thought process and differences in incentives.
A good sell-side analyst is looking to find data points or views about a stock that can be commercialized. It is about creating talking points and debates around stocks that creates more time with clients. Performance on your ratings means very little on the sell-side because if you provide good access to management and industry experts, provide commercial views and talking points, and have an in-depth knowledge of the coverage list you will be successful and get paid. My analyst is a top ranked sell-side analyst but I would never trust him investing my own money.
On the buy-side all that truly matters is performance. You are trying to find stocks that fit your fund's investment philosophy and offer a strong risk-reward skew. Often only a few ideas in your fund's invest-able universe will fit all the criteria and offer an attractive skew. Buysiders will lightly cover everything but only do a deep dive when catalysts form that could make this an investable idea. This is contrary to the sell-side where you are actively seeking to create debates to talk about your stocks even if not much is actually happening. Thus, sell-siders can often make a big deal about small changes in a business that don't drive the stock, but it is a talking point with clients. For an investor, alpha generating ideas almost always deviate from consensus. You make significant money if you have a differentiated view that the stock will outperform consensus expectations on the long side or significantly underperform on the short side and then your view turns out to be correct. The other way to drive performance is in portfolio allocation. Should you be overweight/underweight a sector or industries within a sector. Portfolio allocation is actually the largest contributor to returns.
On the sell-side, you will rarely get fired for following consensus because that is the popular view in the market and it is hard to be penalized for being wrong because if you are wrong, the whole street is also wrong. Since you are hyper focused on one sector coverage, portfolio allocation doesn't exist.
Bottomline Sell-side analysts are good at creating talking points and views that can be commercialized. They get paid by time with clients.
Investors are able to find strong ideas that fit a firm's investment philosophy and often have a nonconsensus view. They get paid based off of performance.
Does all Buy Side ER (Long Only) pay less than Sell Side ER? (Originally Posted: 02/15/2015)
-I have 4 years of experience doing Sell Side ER (currently at BB) and just cleared $175k all-in in my most recent year. -CFA Charterholder -I have been trying to make the move to the Buy Side for over a year now and just finally received an offer at a large, name brand Long Only (not in NYC) for an Associate role. -While excited about the offer, comp is well below expectations. I was offered $10k signing + base of $90k with a $20k guaranteed bonus. Yes, $120k all in. -I reached out to the hiring manager and HR and both said terms are non-negotiable. And apparently the bonus in the offer letter is what you end up actually getting. -During the entire, lengthy interview process, I viewed this as a dream job type of opportunity.But now, I can't imagine accepting and taking that kind of pay cut. I figure I'm better off to keep interviewing with Hedge Funds that will pay 100+% of this offer.
Is this type of pay the norm at Long Only's? If so, why would people ever work at them over Hedge Funds or even Sell Side? Am I crazy for considering turning this down?
Sell-side outperforms buy-side? (Originally Posted: 11/10/2012)
I found this working paper very interesting on the HBS working knowledge website so thought I'd share. The paper mentions that total $ spending is not too far apart on both sides: "In 2006, U.S. and U.K. investment firms spent $7.7 billion on buy-side research versus $7.1 billion on sell-side research. Further, as we discuss below, there are important differences between buy- and sell-side analysts that are likely to affect their behavior and performance."
Interestingly, the author uses bonus payouts to gauge the performance: "It focuses on a metric that is directly tied to the buy-side analysts’ bonus awards, indicating that portfolio managers consider their recommendations to be important. Fifty percent of the bonus awards for buy-side analysts at our sample firm is based on the performance of their Strong Buy and Buy recommendations. In contrast, the buy-side analysts receive no direct reward for issuing accurate earnings forecasts, potentially explaining the earlier finding of their forecast inaccuracy. Recommendation performance also appears to have little direct relation to sell-side analysts’ bonus awards or job mobility."
The paper talks about how buy-side recommendations are better for two key reasons:
It makes sense that buyside analysts covers a lot more stocks than sell-side. I'm guessing that is partially because that they don't have to invest a lot of time publishing research: "Interviews with managers at buy- and sell-side firms indicate that buy-side analysts typically cover more stocks than sell-side analysts, presumably reducing the depth and value of their analysis on any given stock. During the sample period, the buy-side firm employed 46 analysts who on average each recommended 17 stocks. In contrast, the average sell-side firm employed 86 analysts who issued recommendations for 12 stocks."
The paper goes into detail and talks about four factors which account for most of the difference in performance:
The even goes far enough to emphasize that sell side performance is better than buy side for buy / strong buy recommendations: "In summary, during the sample period Strong Buy/Buy recommendations for the average sell-side firm generated higher returns than those for the buy-side firm. This difference is both statistically and economically significant. Results of annual performance differences indicate that the sell-side returns beat those of the buy-side firm in six or seven of the eight sample years."
Even though the authors only considered larger buy-side firms and used extensive non-public data, these findings are still something to think about.
Download the working paper here: hbs.edu/item/6976.html">HBS