Mod (Andy) note: This thread is from December '11, but Flake said he is still up for answering questions, so fire away
Given the holiday season, I'm in a relatively good mood and feel the need to give back a little. I've seen a bunch of these "fielding questions" threads and I thought they were extremely helpful.
I am a week away from hitting my one year anniversary of being in a BB research role and I figured this would be a good time to do an entry-level Q&A session on ER. I will do my best to answer any questions and PM's. It might take me some time to get back to you with all the family crap going on this weekend.
Quick disclaimer: there are a few things I will not feel comfortable discussing given my relatively short time in ER, as I don't want to spread misinformation and will note when I'm not 100% sure. Sometimes, I will simply respond with an "I don't know" to questions that are out of my league. Additionally, I came from a back/middle-office job (also spent a year there) and will answer any questions that have to do with that.
Mods, if there is not enough interest or if this was done before, please delete the thread and I will attempt to do this again next year.
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I wouldn't focus on any single sector as a means of preparing for an ER job ahead of time, unless you are going into an interview and you already know what sector you are being interview for. Even if you do know that you are being interviewed by an analyst covering technology stocks well ahead of time, you should still stay away from pitching a technology stock to him/her. Odds are, given your lack of industry exposure, you will be torn apart and will probably say something stupid.
I would stick to just following the broad based markets and understanding the impact of any current macro event on the economy or a specific sector (that you are interviewing for). Industry specific knowledge will come while you're on the job. It can take several months to ramp up your knowledge, if not longer.
Let's use the technology sector example. If I had an interview with a tech analyst I would do the following as an undergrad:
This is just my view but efficient markets are just a theory. I don't really believe the markets are efficient in practice. A lot of the investor sentiment can be driven by fear and irrational human behavior.
With that said, I think the existence of ER can be justified by the following few examples:
1) Providers of Information. I don't think most ot the buy side guys give a crap about our buy/sell ratings but I believe we save them a lot of time in their own stock picking process and analysis. I also think that our accounts like the attention they receive and the level of service a bank is willing to provide when they have access to a research analyst
2) Exploring and building relationships. Even though in today's world we don't technically benefit from banking fees, we play an important role in winning banking business. I know ER analyst's views should not be affected by IBD's dealings, but there are surveys (Greenwich in particular) that show the success rate of winning deals is approximately 4.5x higher for companies that are under that particular bank's research coverage. I believe that when a healthy company can demonstrate a great relationship between the ER analyst and its c-level management, that company might be more willing to hire your bankers for future capital raising needs, M&A, etc.
3) Going off of the point above, IB also enjoys an added layer of due diligence that ER can offer. It's not always that bankers want to put their firm's name on the tombstone of they think the deal will be shitty and tarnish their reputation. I've seen our guys pull their name after having discussions with an analyst who thought it was going to be a bad idea.
4) Marketing and non-deal related roadshows. ER analysts travel (usually with sales and/or coverage company's management) and promote their coverage and bring in account interest as well as trading activity.
5) Recent Greenwich survey showed that roughly 45% of buy side accounts pick their broker based on the research services that broker provides (vs. something like 20% and 25% that can be attributed to trading and sales, respectively). This is compared to a relatively low cost that's associated with having an ER department vs. paying S&T.
Just ran into this comment about efficient market. Having taken classes on efficient market and working in ER currently, I would say that you can think of equity analysts as the oil that keeps the efficient market wheel well greased. In other words, efficient market exists when information is fully communicated so that investors will invest in the right stock which causes the price to reflect the fundamentals of the company at all times. Who provide and communicate those information that keeps the market fairly priced? The equity analysts. However, without access to sound information such as analyst reports, the efficient market model cracks down - asymmetric information (which can never be fully eradicated) rules, and arbitrage opportunities arise. So your question is rather self-defeating. "What is the use of equity analysts when the market is efficient?" Well, it is because of the information work of equity analysts that the market can even approach any level of efficiency.