On the importance of accounting

Fundamentals are all we have with certainty. Technicals need "guessing," not matter how sophisticated your "guess" work is (using full-blown real analysis), it's a guess. Recently the bond markets don't seem to care about the fundamentals at all. Mis?(depending on your school of economic thought)guided intervention of the central banks has had a high impact. The equity markets however are more or less ok (except some regions). I can talk about other asset classes but let's move onto a real topic, the importance of accounting or abilities to read between the lines and interpret the financial statements.

Traditionally analysts have been specialists at decoding the financial statements. They developed their own methodologies and spotted things. They missed some (such as Enron), although a few analysts despite some pressure raised an alarm (and market participants that ignored such pleas).

I think this is an important art that each analyst needs to learn still. Despite the algorithm that can scan faster than we can possibly imagine the Bloomberg databases (or your proprietary databases) and spot any abnormalities, still qualitative judgment seems demanded. The rates markets are moving more automation, I think, rightly so. The credit and equity markets remain a playground for fundamentalists and probably they continue to be.

So why not hire trained and qualified accountants for the investment analyst roles? Some investment houses do. But some don't. Some prefer ex-IBD people (I do not understand why at all) or those who have been trained from the day 1 in such a role. I think there are a few reasons.

Firstly, you need to separate abilities to do something from willingness to do something. Yes accounts can do what the investment analyst can do theoretically (and can do BETTER), they have the abilities to, but probably they don't want to. Essentially, being an analyst means voicing your own view and stand by it. You are not right 100% of the times, but you have to stand by it. For example, you make some recommendation on a stock based on your trip to the company (lunches etc.). A quant will tell you that (with all the sophisticated mathematics and sound economic theories) that your view is not right. You still have to stand by that. It's hard when you have a view that contradicts the traditional economic theories (but how useful are they!) and what the numbers tell you. So this is a mentality problem. Accountants simply do not want to put themselves in such a position.

Secondly, the investment analyst offers a less structured career path. At the end of the day, you are not really needed and if the company has to reduce the headcount, you might fall under the sword. You are an investment analyst - not a sales person. Technically, you are not really needed. Accountants, on the other hand, are a key contra role at a corporation that provides checks and balances and produces reports that can be used by banks to assess the suitability to extend the credit. The accountancy is a safer option and offers a long and sustainable career.

Thirdly, there is a wide spread misconception about what accountants do and what their skills are among investment bankers. The bankers tend to be people who don't go out much and some can't really reflect on what they do and why they do (hence the 2am at the office) and give a cold shoulder to accountants that they occasionally see in their offices (for audit purposes or what not). The bankers think they know accounting (although they have no "tangible" qualifications other than their undergrad degree) and the accountants are non-Front Office people (people of inferior races). This is a misconception and the accountants do not wish to correct this. I mean what is the point, right?

I think a fully qualified accountant with a great ambition makes an excellent investment analyst. They just need to be brave and be able to fight for their place (after all that seems to be what the banking is all about). Gradually, the old school thinking of investment bankers should change with time.