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Career Resources
Warren Buffet
I'm a generalist and run trades for both a global macro strategy and a long/short US equity strategy. My general strategy is to "bet" on economic outcomes. Sometimes, those economic outcomes will impact a sector or industry more than others. Within that sector or industry are companies that may be more or less sensitive to that outcome. I would then look to find the most efficient instrument to make that "bet"-- be it currency, rate, or equity (or equity derivative). My trades are typically market neutral, so my alpha is not "crazy high", though my returns can be very high (a la margin or derivatives). Pure alpha tends to benchmark against short-term rates anyway, so it's important to distinguish alpha from returns.
Typically, for any sector, there are 2-3 key drivers that will move a stock. In retail it might be LFL sales, for banks it might be NIM and loan growth. As a generalist your job is to (i) identify what those key drivers are, and (ii) take a view on those key drivers. A lot of your time is spent talking to the sell-side to understand different view points, and using your judgement to decide who on the sell-side is right.
I will give you an example. Going into 2018, most European sell-side banks analysts were projecting bank NIM's (net interest margins) to increase as the ECB announced the end of QE and core inflation started to creep up. The thinking was that interest rates might (finally) rise and banks would benefit from this. Fast forward to the end of 2018 and the SX7P is down 28% YTD as analysts have adjusted down their earnings estimates on the back of weak inflation numbers and no sign of rate hikes any time soon.
As a generalist, all you had to do (easier said than done) was understand what was driving consensus and fine a compelling view either for or against that consensus. A good generalist knows that he will never understand the sector as well as the specialist, but he adds value through superior assessment of risk/reward. If you're a generalist and you can't develop a good grasp of risk/reward analysis you won't last long in the business.
Good question. What I tend to find is that as a specialist you run a higher risk of missing the big picture and getting caught in paralysis by over-analysis. Also, there tends to be a high degree of group-think within the specialist community. As a generalist you are approaching a stock as an outsider so "in theory" you can look at a company without any pre-established bias. The other benefit you have as a generalist is you will have seen many different companies in other sectors so you will have a broader set of experiences to feed off when you approach a company.
One other advantage I find is that you don't feel the need to find value in a stock or sector as a generalist. Ask any specialist and he will always have a great long idea in his sector, even if his sector is overvalued. As a generalist I can avoid entire segments of the market if I don't see any value there.
I don't buy this argument of "over-analysis." More knowledge is never bad - and the idea that you know "too much" to make a good decision seems like a bit of a cop-out.
Also, a generalist is just as prone to the opposite issue of missing crucial pieces of information that isn't readily apparently to non-specialists who've followed the space closely, in the same way that a junior analyst in any sector/generalism is prone to missing things that an experienced PM or senior analyst can point out in 30 seconds.
Also, what prevents a sector specialist from straight up shorting his sector if he sees overvalue? Or pair trades? Relative long/shorts? Etc. etc.
"More knowledge is never bad" - Agree. This is why I originally said the OPs question is "weird". For the most part, generalists generate alpha the same way specialists do, so the question immediately turns into: "what do generalists do better than specialists", which is what Ovechkin08 tried to answer.
The best specialist in a space will tend to be better than any generalist. However, generalists can compensate for this, like Ovechkin implied, via increased flexibility. Being a genius in any one sector is useful when there is significant fundamentals based dispersion (I'm thinking from perspective of fundamental investors here, traders are a different story) in that sector. However, if there's nothing going on in your sector you're S.O.L.
In my experience the best investors are semi-generalist. They're good enough within 2-3 sectors to get 90% of what the specialists do but also flexible enough to switch sectors and pick up new coverage on the fly. If you're a medium - long termish investor the 90% is more than enough to generate real alpha. At any given time you might not know everything that's going on in the sectors you're not focused on, but if someone pitches you a compelling idea in one of those sectors you can quickly pick it up and evaluate.