Non-exhaustive list of tips / mistakes to avoid that I think are fairly common for young analysts (i know i made plenty of these) - Would love other experienced folks to add in as well
- Good business does not mean a good stock/investment
- SOTP valuation (aka "get X segment for free") is not a pitch without a defined catalyst to crystalize at least part of that
- Don't try and make money French or Japanese listed names
- Tourism in sectors / strategies you don't traffic in often (biotech, energy, merger arb) will get you burned
- There's an inverse relationship b/t the complexity of your thesis and its liklihood of success
- Hedge Fund hotels work great until they don't - the stock will crack way worse than you ever believed (eg LW)
- If a name you own is down 10% on absolutely no idio news and you aren't a buyer, you probably shouldn't own it in the first place
- If the thesis isn't playing out, cut bait and get out of there - slugging percentage is way more important than batting average so you have to keep your losses small
On the 8th one, what if the market sentiment changed like what we’ve been seeing (mega cap tech-> smaller cap stocks) and you don’t think it’s the right time to buy? Do you just hold or sell and buy when you think the time is right?
Some stuff I struggle(d) with
1) Brevity and simplicity; should be able to state the crux of a thesis in 1-2 sentences or less MAXIMUM. If you can't explain the concept or "investment idea" simply and quickly there is something wrong usually
2) Having a pre-conceived belief and finding evidence to confirm it, rather than analyzing all of the raw data independent of a view. A very human instinct is that we look to confirm our beliefs of the world, not find new ones.
3) Thesis creep
4) Mistaking cyclical for secular and vice versa
For my interns - they are often so excited to finish their first real investment pitch that they really succumb to #2; just something I've noticed.
Solid. #4 especially important.
Some other things:
(1) do the work to find the "terminal year" in the "fundamental bet" or you won't understand the company's valuation; similar: don't get stuck with NFY or NTM multiples, a high NTM may actually be cheap if the terminal year is +3
(2) don't look at price or charts to confirm your view -- develop your view first, and then look at the chart to see if the market is giving you an opportunity or is catching on
(3) don't wait for the narrative, create it
(4) be laser focused on the critical factors that's driving dispersion in estimates at the terminal year .. e.g. INTC no one cares about NTM sales, but if you understand what's driving FY26 variance then you can develop scenarios that'll track +ve/-ve.
(5) just because a company is the best and is growing rapidly does not mean the stock will perform -- if the market is pricing in that growth then you need to work harder to determine if there's a legit upside case (don't get lazy with ideas -- a la thesis creep mentioned above)
(6) know the basic heuristics but don't make investment decisions based upon them -- e.g. beat and raise, next qtr story, wait and see, etc.
(7) no technicals lol, if you must, use OPX on a stock you cover and select the contract the soonest after earnings to determine which strikes have significant positioning. If you see big call clusters OTM then you know there's a strong expectation of higher thesis tracking, and you'll know what to pay attention to on the call and how the stock will trade post. Note: I spent time in s&t which helped me develop fluency in options/derivs, if you don't have the background leverage someone who does.
Want to get some clarification on this. Would the terminal year in the fundamental bet be something along the lines of “Co. XYZ has a 5yr target for 10% market share growth and product launches of ABC”
Super helpful when you mentioned to think about the price of the stock within a probability distribution of the terminal value.
So for the example above, an earnings estimate revision, or maybe the co. tracks much higher than guided, stock moves up/point estimate in the distribution of TV moves up meaning greater probability of reaching TV.
Using example above - if market share growth flows into NTM EPS growth of 5%, market will price this and the NTM theoretically reflects a discount (assuming NTM P/E, larger EPS denominator). For a co. which has a 5yr “fundamental bet” how do we think abt the multiple with regards to that TV?
Appreciate all your comments on the site btw
In 1 sentence or less? Okay there sorority girl (I really hope someone gets this reference)
Just some hyperbole!
Love jeff daniels but man that show was cringey - embarrassed to say I understand the reference
not focusing enough on the charts - broken charts cannot be bought and good charts tend to work
lol do you add any value to your pm?
If you grew a poneytail, you're probably qualified to be a CNBC commentator.
LW!
LW is a shit business lol…. I felt like I was taking crazy pills for the last two years now I feel so vindicated. idk how people got tricked into believing french fries are not a commodity, not to mention the overstated financials.
Haha i agree - was not involved and largely agree w/ you. I think the thesis was that industry consoldiation would lead to a more rational pricing environment and and overall better market structure - whoops!
Great adds above which reminded me of a few more:
Betraying my PM. When he had his back turned I went up to the central book and told him we needed to inverse his trades.
Are you Jim Cramer's former analyst lol?
Overused joke + his fund was very legit back in the day
Good thread, thanks Mancy.
Any reason you chose Energy specifically as an example in the above comment?
And typically, what characteristics does a company/stock have that lead it to become a hedge fund hotel?
1) When dynamics turn favorable for a sector, the large cap & quality name is often the first to bounce (even if smaller peers are a bit cheaper).
2) Know where the USD sits vs the basket. Don't bake in a more favorable FX rate but be aware if you have some optionality. Be careful of a potential headwind.
3) Before buying a stock, consider whether it will provide a sufficient return assuming the current multiple never changes. If the answer is no then it's not undervalued.
4) X% revenue growth, Y% operating income growth, where Y>X, is a short- or medium-term earnings algorithm only. Long term it's a mathematical impossibility.
5) Stock comp is a real expense. Obviously.
6) In cyclical industries (particularly materials/energy) the best way to fight off a downturn is run your assets as hard as possible and/or cherry-pick. What is best for the individual only exacerbates the industry downturn.
7) In materials/energy understand the difference between a mostly 'extracted' commodity vs a mostly 'processed' commodity, supply dynamics can be quite different
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