This is for guys at long / short funds who are familiar with the fundamental value investing due diligence.
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How long does / should it take you to perform the due diligence process from knowing nothing about the stock to deciding to buy the stock. How many hours are we talking about here?
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How many work hours does / should it take to write up a stock pitch once you have formulated your long / short thesis? How many words would be a good pitch?
I don't work in long / short but do practice fundamental investing so I'm trying to hone my analysis and pitch writing skills on the side... Always been curious on the time frame and man-hours involved in such endeavor. Personally, I've been frustrated in the past, performing due diligence over a course of a week or two while seeing the stock going from a undervalued level to my target / higher levels that renders the margin of safety too small to be actionable... Wondering how the pros actually deal with time urgency and time frames thanks.
Also interested in this. Not at a hedge fund, but try to invest on my own over the weekends / late nights after work in value / special sits (normally small cap).
It usually takes me 2-3 weekends of work (working Sat and Sun 8-10 hours each) to be minimally comfortable with my analysis and decision - so 16-30h. If I was managing large sums of money, these hours would surely go up a lot.
As a comparison, I am currently at the PE practice of an MBB and it takes us ~2-3 weeks (i.e. 120-250h per person) to fully cover competitive landscape, market attractiveness and topline growth prospects of a target. However, these are typically extremely niche companies and we go into a lot of detail.
Hi I was wondering how you go about analyzing new markets in order to understand the competitive landscape, market attractiveness, etc. More specifically, where do you usually go for information? I find it very hard to get a good understanding, especially in the case that the industry itself does not have a ton of public players and is very fragmented.
We usually use one or more of these sources:
People at the firm with previous experience in the industry
Industry reports - there are some firms (e.g. Gartner, Nielsen) that make these and sometimes they have useful info (e.g. bottom-up market sizing through private company financials) - they run in the €0.5K-5K (it is important it is not one of those Indian firms, that is all BS)
Expert interviews - by far most useful to understand very niche industries; we reach out to former CEOs, etc from these industries via expert networks and interview them
Lit search & triangulation - no matter how niche the industry, there will always be some news article or individual data points in trade journals; we combine those with assumptions and data coming from experts to triangulate the industry drivers we are looking to forecast, and then validate again with people from the industry on the conclusions.
2 and 3 are expensive if you are an individual investor, but in that case you can always try to source experts on your own by reaching out to friends, people on LinkedIn, etc. In my experience, the insights you get from speaking with people on the field (or clients / suppliers) are priceless.
How do you find time on the weekends? 8-10 hours per day? Do you do anything in your free time besides work? Just wondering not hating. Very impressed rather.
I usually do not have actual work to do on the weekends, so this still leaves me some time to hit the gym and relax. I also see it as an investment in myself - more than generating high returns, I am looking to improve my investing abilities so I can eventually do this at a professional level.
What size transactions?
For the ranges I gave above, we are talking about middle market transactions (100M - 1B). If +1B, the team will be larger and probably bring together different offices, but the time frame will be the same.
bump
A few hours or a day or two to layout everything and quickly catch up on understanding the business/industry and recent developments of the company. If it looks interesting then maybe spend some time (in some cases maybe a few more days or in some cases something much shorter) looking at why it is at the level it is at and what could actually be interesting here. Discuss with bosses and see if it makes sense to go ahead and spend more time. If it does then the time spent on each opportunity varies from a case to case basis - some opportunities might take a lot of time, some might take anywhere from a few days to maybe a week, really depends on how complex the opportunity is as you can imagine. Once that's done, maybe another day/two discussing your recommendation with bosses and then they make a call on what to do.
Some opportunities might just take a few days or a week, some might take a lot more. Really depends on how complex the opportunity is.
For words, less is better. Obviously you can't writeup a bank or two in a page as you could with maybe some random clothes retailer but you want to be detailed and concise at the same time, and as long as you're concise in explaining stuff, you can take how many words as you want. This also depends on shops you work at. Some always want full detailed writeups but some just want a short writeup ready. Realistically, nobody will have the time to read a really long writeup so you always want to give a summary of your recommendation/opportunity and then attach a detailed writeup on your idea.
Personally i do around a week of research (usually an hour or two per day on my free time).
My own personal investment thesis varies a lot depending on the company/market i'm getting into but in general this is my process :
While at work, preliminary DD is done under 2 days (sometimes up to a week if its a niche company). Extensive DD in a perfect condition done in 7-10 days. Chances are we won't even go past extensive DD since either their main advantages broke down or there are some deal breakers we found along the way
This really depends on the complexity of the company (and the industry it operates in) you're looking at. If it's within an industry you cover and know really well, it shouldn't take more than a few days to get up to speed with the name. However, for a generalist like myself in my current job, learning about MCO, hospital, pharma, or med devices companies for example (which I've had to do in the last few months) can take a substantial amount of time, since I had to learn about the industry before even thinking about getting started on looking at the company itself. That would take about a few weeks. For me, gathering information takes the longest amount of time, and getting management on the phone can be a real bottleneck to getting all the information I need to move forward with a pitch. Modeling also greatly depends on the complexity of the company and your model.
I hate to keep saying "it depends" for everything, but writing up a pitch also depends on the volume of information you have gathered and how long it takes you to analyze all the data - formatting can also be a pain in the ass if you expect your research to be distributed externally.
Lastly, I wouldn't get get discouraged if an idea you've been sinking a lot of time in turns out to be a dud. Not pitching a bad name is a learning experience, so I wouldn't call that time wasted. It's always good to reflect critically and impartially on names you're currently working on and not to get too emotionally attached - ask yourself "is it worth my time to continue working on the name or start on another name that now sounds more interesting?"
This is what some people miss. Not all research will result in you finding a acceptable (let alone great) pitch. But i never thought any of my dud research is a waste of time, your obscure knowledge about a specific industry could be a Eureka moment for you/your team (thanks Panhandle B).
It's more difficult to do slow-paced research (which is my style) in a momentum-crowded sector (eg. a lot of TMT sectors), so I guess relatively you need to be a little bit faster in understanding the business and the situation at hand (as in why you think it's undervalued). Say, an Internet name is getting crushed because of self-inflicted issue, then it's fixed, the momentum guys will get in and driving up the stock price very quickly, eliminating the opportunity for you.
If you are looking at some deep-value asset-heavy industries, there is not much capital flowing into that sector any time soon, so you have a little more time to deep dive and understand the business at PE-diligence level (not sure at what point too much information is diminishing insight on the work put in).
Timely thread for me. Just started going through a company I may have an interview with and the PM's holdings. around 20 MedTech companies that I've never heard of and currently going through their 10k's as an initial overview (nod to BlackHat Anatomy of a 10k post). I think I may write up a 1 page primer on each to help retain the info.
Funny enough, I'm also currently digging through a medical device company, after having scoured the industry for interesting names. My overall impression is that most medical devices companies tend to engage in bad acquisitions - that much is obvious by their atrocious ROIC. The ones that are truly great businesses and are managed well tend to be priced as such, e.g. MTD.
Although there are times when you decide to abandon your due diligence after having sunk a week or more into a name, the vast majority of the time, it is an incredibly easy exercise to cross a stock off your watchlist. There are certain red-flags that I look for, such that if present would be enough for me to dismiss the name outright. The biggest one for me is ROIC - If an otherwise great business has single-digit ROIC, you're almost guaranteed to have horrible capital allocation, especially through shitty acquisitions. Another big red flag is horrible compensation structure - there is one big pharma company whose LTI payout ratio for the CEO is equal to 3-year stock price divided by grant date stock price, meaning if TSR is 0% for over 3 years, payout is 100%! While I'm a firm believer that there's a right price for any asset, it's simply not a good use of my time to vet a company that throws shareholder capital into the wind.
My view, its more about how much time you have, and that depends on how diversified you're going to be. The more diversified, the more room for error and the less time you spend on each one.
Think of it this way - when does it make sense to buy a stock instead of the index. In theory, if you have any reason at all to believe the stock will outperform (even a small reason), it has higher expected return than the index. Of course, if you only have a small hunch, you're not going to want to pile all your money into 5 stocks. You might want 20-30 stocks if you're acting on a small hunch. OTOH, if you have huge conviction about 5 positions, you might be fine with all your money in only 5. I forgot how many holdings Pershing has right now, but its well under 10.
I'm in the latter category, ultra-concentrated. I only have a handful of positions (6 currently) and I expect each one to take ~2 years on average for the market to figure out true value. By that math, there will be about 3x per year when a position gets fully valued and needs to be sold. So if I'm replacing 3 positions a year, that gives me 4 months of time to do the work needed to replace the position with something else.
Now that doesn't mean 4 months on a single stock of course. In that time, need to look at several and many won't prove good enough. But you'd be surprised at how much of that 4 months is spent on a single stock. I'd say at least half of it. I try to be very discerning about which stock to even pursue in the first place; I'm only interested if I think there's a chance the market got it totally wrong.
Obviously many investors don't operate like that. If you have 20 positions and expect each position to take 1 year to materialize, then you're replacing a stock every two weeks. That means a lot less research and that's fine, but of course your returns will be lower than if you just made your best 5 picks.
Probably surprising to some that this is how I'd calculate the time needed. But to me, there's almost never a point where you run out of things you can learn about a company. I could stay busy for a year on some companies. So rather than 'how long do I need' its more a function of how deep you're going to go which is really a function of how diversified you'll be. Hope it makes sense.
if you spent less time on WSO you wouldn't need 4 months each to analyze US Foods or Macerich
Imagine being this obsessed with a stranger on WSO.
Oh I just realized you're that same guy who told me how I'm "stuck with my equities and no way out" right when I said I'm going full long and the market ripped for a week straight after that. No wonder you're so butthurt lol. Nice call man. Where are my event plays? Don't you have any? Its just an anonymous board man, let's hear a pick.
I’d recommend checking out Value Investors Club. It can be a great source to see what other professional investors analyze in their pitches. Once you know what kinds of things to look for and develop that fundamental perspective, it makes sourcing and evaluating companies much easier.
You take full advantage of the sell-side to get up to speed on a name.
1) You look to see if there is a recent full initiation report on the company or sector which will give you a great overview of the industry dynamics and competitors. Some brokers write fantastic 100+ page reports that you can read in a day.
2) You request a model from a few brokers and take the best one to use as your template.
3) You read the latest 10K and 10Q. The 10K will give you a good overview of the accounts and drivers and the last 10Q will give you a flavor of what recent issues people are focused on.
4) You read the last earnings transcript to get a feel for the key questions that other investors are asking so as to understand what events will drive the stock.
5) You hold a call with GLG, or some other expert network, around said key issues to get a better feel for those issues.
6) You compile consensus earnings and speak to the outlier analysts to understand why they are bullish/bearish.
7) You form a view on the key issues and take a position.
Whole process shouldn't take more than a few days.
A few days a bit aggressive but for multi-manager platforms for sure - could be 30 minutes start to finish on a new name.
agree w this post and will add:
8) industry report - sell side - search for (needle in a haystack, but you can find it)—if you or a friend has access to Bloomberg / Capital IQ to access it
9) Lender Presentation / CIM - if you or a friend has access to the LP (Public version) or CIM - this will have a detailed company and industry report. also get competitors LP and CIM too if you have it
10) earnings call - get transcript - Capital IQ (kind of already said)
work smarter not harder
Building on point 6. I'd highly reccommend that every Hf analyst check out Visible Alpha. Pre built models w/ consensus built in. Can save you hours.
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