Mod Note (Andy): #TBT Throwback Thursday - this was originally posted on 10/17/12. To see all of our top content from the past, click here.
Deciding to Recruit For the Buy Side
Most of my friends are going into banking. Not because pitch books and road shows are their thing, of course, but it opens a lot of doors. 100 hour work weeks, camaraderie in the form of all-nighters editing PowerPoint slides and sharing Seamless meals, and having no skin in the game never really sounded appealing to me, but I guess to each his own, right? Needless to say, it turns out I'm not the only one who's not overly excited about the idea of working on the sell-side, and this includes my friends lucky enough to get return offers or full-time gigs at their respective banks/research houses. But as most of them will tell me, "starting on the sell side is the quickest route to the buy side, and I'll be a hedge fund rockstar in just two years!"
Wait a second... wouldn't the quickest route to the buy side be... starting on the buy side? Or was I missing something?
Fortunately, I wasn't. And if you're sure you want to be investing for a living, going straight to the buy side is the best career move you can make. With recruiting all but over, I'm happy to be starting my career with the job title "Research Analyst" and doing something I'm actually interested in doing.
Anyone interested in making a career out of investing should be trying to make this jump. The argument that banking or sell-side research makes you a better investment analyst is bullshit. Being an investment analyst makes you a better investment analyst. But if you're planning on interviewing for the buy-side right away, there's a few things you need to be prepared for. I'll try to highlight a few of those below.
The Stock Pitches for the Interview
1. Have two stocks to pitch. And know everything there is to know about them.
If this sounds hard, you're not actually as interested in investing as you thought you were. If it sounds fun, keep reading. You should be able to explain exactly what these companies do in very simple terms (if they don't already know them), be able to paint the picture of why the market is divided on the stock, identify the catalysts in the short and long term that make this a great business that will eventually realize its intrinsic value, and provide some intelligent thoughts on valuation and why the stock is worth investing in today. I'd stress illustrating the long-term growth profile of the company over anything else, and make sure you highlight what the drivers are of that growth. Analysts want to know that you look at all aspects of a company, so mentioning management, industry economics, and company-specific competitive advantages are all essential. On valuation, you don't have to be an absolute wizard but you should know the typical industry multiples, show where the company is undervalued relative to competitors, and have some insights into how the company manages its cash flows and if there is a shareholder-friendly focus coming from management.
Obviously having one stock to pitch is always important, but I strongly recommend two. In a standard superday you'll most likely be talking to several analysts individually, and pitching them all on the same thing isn't a bad thing, but knowing just one business is something anyone can do. If you mix it up, it's that much better. You're likely not going to be asked for more than two ideas in any interview, so knowing three or four is probably not as beneficial as the jump from one to two.
Check out a detailed thread on WSO about preparing for hedge fund stock pitches.
Why Investing Answer for Hedge Fund
2. Have a reasonable (and legitimate) explanation for why you're passionate about investing.
A lot of the decision-making around who to hire coming straight out of undergrad seems to come simply from who actually wants it the most. Often, the simple "walk me through your resume" question gets substituted in buy-side interviews for a slightly different question, "tell me why you're here.", The answer isn't too different since either way you're trying to lay out a narrative, but if you can't point specifically to your experiences in the past (both on and off your resume) that show why you're a good fit for an investment firm right away, it's probably not going to work out. This is where having personal investing experience comes in handy, as you can usually point to that (but be ready to talk about your investments, see #1), or being part of some investing group may be just as good if it's not bullshit. Either way, you need to come across as someone who's completely okay with sitting at a desk doing directed research and crushing 10-Ks for a year or two, so conveying a strong interest is actually important.
Pay Starting in Buy Side Finance Job
3. Be prepared to take lower compensation at first. Trust me, it's justified by better hours and over-justified by a much higher ceiling as quickly as a few years out.
Even if you think you're better than Warren Buffet, you're in your early 20s and haven't proven yourself to anyone yet, so don't expect any more than you'd be getting had you worked on the sell side. In fact, it may suck but you should probably expect less. Some of my offers were pretty bare. Even among respected firms 70k base with 10k signing and 10-15% bonuses for the first year are pretty standard. And for someone just starting out, that's going to be plenty. Most places will pay less, some places may pay more, but it's not about your first year's pay. What's more important is what your ceiling looks like and how quickly you are going to gain experience and hopefully move up the ladder to a position with more responsibility. Though it's easier to make 150k in 1-2 years in banking, it's easier to make 400k (or way, way more) in 4-5 years at an asset manager or hedge fund.
You Shouldn't Care About Location
4. Location is irrelevant.
Unless you can't handle early mornings in San Francisco (I know I couldn't), geography can't be a big deal to you, since many of the best places to work on the buy side aren't even in New York. For a while I was convinced that if you work in finance and you're not in New York, you must be a failure. I'm starting to think it's the other way around. I don't have much to add aside from that, but if you really want to jump straight into an investment research role, you can't be dead-set on a certain city.
Any other monkeys taking this path? Thinking about it? Advise against it? As always, I'd love to hear. But so far, I'm not having any regrets...
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Thanks for the informative post.
I'm a junior in college interested in getting into the buyside after graduation. As a novice, I've been having some difficulty finding stocks worth pitching. Many companies look hot and have a lot of things going for them, but that stuff is usually already reflected in the stock price. Or some other companies are relatively cheap but may have problems that make them value traps.
I read in another HF thread on WSO that analysts in value hedge funds may come up with only a few good ideas in a whole year, and that with them spending a decent chunk of their workday doing research. Unfortunately at college I don't have the time to spend all day doing research and reading 10-ks and company histories of a ton of companies.
What was your strategy when you were an undergrad for formulating stock pitches?
This is a pretty good post, +1 for you sir.
1 I don't agree with however. You don't need to know everything about the stock, you just need to know why others are wrong and the current price is not an accurate reflection of future performance, and then identify the (hopefully large) delta between fair value and current. It is far, far better to have a crisp, well reasoned thesis than to have a rambling dissertation about a name (I know you weren't saying to have a dissertation). It's kind of disappointing to interview someone from HBS / GSB / Wharton and get a 50 page slide deck on a stock only to realize they don't actually have any clue how the company works or why it would be a good investment. Like, at what point during your rambling 50 page presentation should you have realized that you have no idea what you're talking about?
It's also a question of return on time. If I can cover five names in the time it takes you to cover one, I'm going to win over time if I can hone in on the key points consistently (which I can).
Something approximating 90% of the people on the buy side have no idea what they are doing (true story). It took me a while to come around to that fact, but having met with over 200 management teams, read through countless conference calls with retards asking retarded questions, and having interviewed with many firms, I know that's a true statement.
2 This is unnecessary. It doesn't matter what your reason is as long as you're good and can make money for the firm. "Why do you want to be an investor?" is a retarded interview crutch question for retarded interviewers who don't know what to ask. It's a red flag if anyone asks you that. Real interviewers only need to ask 3 to 5 questions depending on the candidate (each of which may have follow up questions).
3 I agree with this completely, but you have to realize that this is beyond the scope of the vast majority of the people entering this business. I spent 4 years working directly for a PM with a top 3 track record among long / short funds over the last 15 years. Tell me how that's worse than working for some moron running a billion dollar fund where I would have made twice as much in the short run.
4 This is true. But West Coast hours are terrible.
This post contains some ridiculous stuff including all the language about you being so much smarter then everyone...Seriously dude you need to get over yourself. On #1 no junior kid that I hire is going to make me money other then by grinding away at ideas that I give him to explore...so questions that gauge passion for the business displayed through knowledge and questions about fit are very important. To be honest when I hear an investment pitch from a junior-type I am really more concerned with what it says about how he would work and how much hunger he has to suceed as opposed to whether the trade is actually one I would put on. If you are hiring a kid in his early 20s to actually make investment decisions I seriously question what is going on where you work....
I don't want to disrespect WhiteHat by thread jacking, but I also realize other readers might be interested in my response. I'll keep this short as a compromise and you or others can follow up with me off the thread if you want to go into more detail.
I should clarify my comment since the buy side is a big place and you have technical traders, swing traders, quant traders, and a bunch of other stuff going on. I should have said "90% of fundamental investors."
There are all kinds of ways to get into trouble:
The list goes on and on and there are many iterations. You need to find the intersection of value, good business, and timing. It might be 1 in 10 or 1 in 20 stocks within a set of criteria that is seriously mispriced. The rest is noise.
What others are thinking:
It depends on how "busy" the stock is. If it's a stock that has had a large price move in either direction in the last 12 months or less and is of a large cap size (>$500 million), there will be some general consensus in the stock, written or unwritten. If it is much smaller and has done nothing for years, there may not be anyone looking at the stock in detail. I always like it when I ask management when was the last time they spoke with an investor and they have to think about it for a while.
Edit: But I am a small and microcap investor, so that makes sense for me. My sweet spot is $250 - 500mm but I'll go lower or higher than that. I rarely spend much time on stocks above a billion because those almost always have good coverage on the sell side and buy side.