I have been an ER analyst at a BB for the last 3 years... I am now moving to the buy side, starting in 2 weeks' time. I have always found these threads useful so thought would create one myself in case anyone wants to ask about sell side (or buy side) equity research, and I will do my best to help. Cheers.
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No problem. Yes, that was the plan from the start but this also became more and more the case the longer I was on the sell side (I can discuss why in more detail, but there are distinct changes needed in sell side ER capacity requirements and business model in my personal opinion).
I read the "classics" before university (Ben Graham, Phil Fisher, etc) as a lot of people do (and should), and started doing my own PA early... so it has been a big interest since I was 18. Since then though yes I have read a lot of books (would recommend the Manual of Ideas and Investment Valuation)- and these were definitely discussed in interview (as was the PA trading by the way).
How well do I think it has prepared me? I think there's advantages and disadvantages of starting on the sell side vs. starting on the buy side. The advantages? You speak to a lot of clients, both hedge and long funds, and you listen to what they are asking – which is very useful – and once you have more experience you debate these things with them and bounce ideas off them. You also get to know a lot of people in the sector very quickly, and know exactly what is going on at a sell side shop. The disadvantages? You get no experience being involved in the investment process.
In answer to your question on can I come up with ideas independently – definitely. Is that as a result of having worked on the sell side? No. But it helps- because (a) you observe the thought process of clients and what they are asking as per the above paragraph, and (b) you also get ideas off your boss/ colleagues. So it definitely gives you more to think about for sure in terms of what questions you could/should be asking.
The buy side role is big AM – BlackRock/Welllington/Fidedlity/TRowe/CG/MFS.
On the last question - I think ER is a great place to start in finance, and personally think it is an equally good stepping stone to either a HF or AM. You get a lot of responsibility early on (client contact, plenty of access to management, travel), you learn how to write, you learn how to present an argument, you get good modelling experience. And you learn how to sell. ER is a sales job, and it's very important to be able to communicate your view to others - as it is on the buy side, by the way.
Great stuff, +3 SBs. Since you've touched on this lightly. Could you name the books that you have personally got the most out of when it comes to adding to your ability as an investments professional?
Separately, did you have a mentor along the way or was your mentor your boss at the same time?
No problem. I would recommend Investment Valuation by Damadoran because it is comprehensive in terms of of various valuation models (FCFF, FCFE, EVA, relative), suggested accounting adjustments (e.g. capitalising R&D, etc etc) which should be best practice to enable apples-to-apples comparisons between companies… I like Damadoran in general because he always has scepticism and reminds you that you cannot just have full blind confidence in your valuation….
Then I also like the Manual of Ideas as I mentioned… I think it's a very underrated value investing book and deserves more popularity than it has… The Market Wizard books by Jack Schwager I think are very good… especially the most recent one because a lot of the interviews concern the financial crisis. The books are quite long and are not chock-full of l insights, but every now and again you definitely stumble upon a little nugget of advice that you keep in mind going forward…
Fooling some of the people all of the time I like, because it reminds you that fundamental research of publicly-available information has value, even if the analysis seems basic does not mean that everyone has done it (see my point above about being one of 5 analysts covering a company, you would be surprised at the insight you can get vs. others after just a few hours of diligent research)…
If you have ER interviews coming up or are going to start as an intern or graduate, read Best Practices for Equity Research Analysts by Jim Valentine. It's a very useful little book of best practices, ranging from note-taking and personal effectiveness to how to think about writing differentiated product… it's been several years since I've read it but remember thinking it was a useful $20 investment.
These are some I have found useful, but I would emphasise that I think what is important is the breadth and quantity of what you read… read books on China (e.g. China shakes the world), macroeconomcis (e.e. The Age of Turbelnce), and once you are in a sector read books about it- you can often actually find 1000-page textbooks on valuation / financial analysis in a particular sector. Also, academic articles- on for example accounting, valuation, politics and economics. On the internet there is a massive amount of useful material, for example David Einhorn's presentations on Green Mountain Coffee/ the iPrefs suggestion. Great insight into his thought process.
i.e., just read as much as possible… in doing so, you pick up a lot of nuggets of information over time on a broad range of subjects which turn out to be useful at various unanticipated points.
The client exposure is definitely the big networking resource in my opinion. The key thing is from my point of view is they have a direct way of seeing your work and way of thinking, via (a) published research (b) speaking to them via phone on in a one-on-one meeting and (c) models you have sent them. I will be doing the same sector as I currently do, working directly with someone I have spoken to as a client for the last three years. He knows me well, and how I think (and vice-versa). That I think is the key networking opportunity as your work is directly visible… plus of course you will know the calibre of the people you will be working with.
On the direct route vs. ER route question… tough one, as I say there are pros and cons of each (as per the answer to the famous trader). Honestly though, I think despite all the advantages I mentioned about sell side equity research being a great place to start I think if I had been offered a graduate associate position at a big AM shop I would have taken that. If you have been out of school for 3 years and have passed the 3 CFA exams as per your question, I would definitely be getting into AM/HF as soon as possible. It is a common point of view that it is becoming harder and harder to move over to the buy side.
I wrote a post a while back on there being 3 types of top-ranked analyst which I will find and paste into this thread. Essentially being a top ranked analyst does not necessarily mean you are the most insightful, it may mean you are providing better corporate access or you are a better salesperson. I know I am probably in the minority, but I would rather work for a very diligent analyst who is not top ranked but I would learn a lot from than an analyst who is top ranked for providing more corporate access. It's an important distinction to make in my view.
Yes, the buy side role is in the same sector I have covered for the last three years. Worried about being pidgeonholed? Personally, not really. (a) because ex-financials, most sectors are really not that different once you have looked at them for a couple of months – a widget business will produce something at a cost and sell it (b) at many buy side places you will cover various sectors even if you are not technically a generalist (c) I know plenty of people who have done one sector for 3+ years and changed.
Answer to final question – quality of research becoming really important. It's a common theme, and I think there will be a big shakeout of brokers which aren't adding anything of value. I think as a junior at a BB you are still arguably in the best position to move over to the buy side, but the boutiques providing more insightful research are gaining ground very fast – especially as regulators tighten the screw in terms of clients only being allowed to pay for "substantive research".
I would break down the progression from the start date like this:
First three months or so: Getting to know the ropes, (a) in terms of the industry and companies in it , but (b) also your role as an ER analyst. So getting used to modelling, getting on top of the accounting, knowing what key drivers are, etc. You will help out the rest of the team mostly ad-hoc, i.e. this could be gathering data for client requests, helping write notes, and doing data analysis. Basic stuff, but essential. What is good about this (as with the rest of ER in my view) is you get out of it what you put into it. If you get your head down you can get through this stage as quickly as possible.
Next nine months: Building on the above – i.e. you now know the basics of the industry through a combination of your own reading, listening to your boss and people on your team, etc. You don’t have the in-depth knowledge of the rest of your team, but you will be surprised how quickly you get up to speed on a large portion of what you need to know industry-wise. What you don’t have is a sense of perspective because you have no prior experience and have nothing to compare the present moment against.
Next year: Your contact with clients will increase a lot. As per my first paragraph, how quickly you get through these stages depends on you. Could be longer, could be quicker. Your personality will have a lot to do with it- do you communicate with confidence and are you being proactive in going above and beyond what you are technically supposed to be doing. I have generally found that as long as you do what is required of you, you have quick a free reign in terms of taking on extra stuff if you can make the time to do it. If you have the initiative to spend a couple of extra hours per evening re-doing models, doing scenario analyses, constructing neat excel files that you can send to clients, creating data bases etc, that will definitely be noticed. If you can show you are a good communicator and have good rapport with clients, you will have a lot of client contact by this stage- you will have your own client base of small accounts which you will contact via email and phone, and you will also go with your boss to meetings with larger accounts – if you’re lucky, after a year you could be taken on marketing trips to Europe / US.
Once you’ve been there 18 months you can probably look at taking your own coverage, likely smaller stocks in the sector. Common misconception is small = bad. Not true. 40+ analysts cover the big blue chip companies. If you initiate on a small