AMA: equity research analyst at top 3 AM

Note: as of 07 31 18 I will no longer answering q's on this AMA. Thanks for your questions and I hope some of the responses help.

Before I started in the industry I used to (somewhat anxiously) trawl WSO for hints of what life was like in the role, pros/cons, compensation, hours etc... now I am 4+ years into it and a friend (who still uses WSO regularly) reminded me of the service so I decided to throw this out there. Hopefully it might be useful to someone looking to start out.

If you are not familiar with buy side structure or the lingo - I do mostly bottoms-up and occasional top-down analyses... financial model/analysis, management contact, expert/trade contact(s), initiation and pitch to PM(s).

I have friends who are in other large shops, small shops, hedge funds and who do ECM IB... happy to compare and contrast, and attempt to be unbiased!

Comments (66)

Jul 21, 2018
  • what is your background?
  • how did you get the job?
  • what is your investment sourcing process like?
  • are you industry focused? If so, which industry?
  • what type of fund is it (value, growth, domestic etc.)?
  • what is your all in compensation?
  • what are your long term goals?
    • 1
Most Helpful
Jul 21, 2018

Background: I will avoid discussing to remain anonymous. Suffice to say - top 5 school, average grades but some good success with sports/societies.

How did I get the job? Applied via the website (didn't know asset management, my parents had funds), interned and converted. Had no idea about finance/asset management (whole family is "normal" no connection to finance) just wanted a well paid starter job.

Investment sourcing process: Flexible with a quality preference and largely valuation agnostic. I tend to spend a lot of time on the next 3-6m and a lot of time on the business in 3 years... the former to establish a good entry point and the latter to derive fair value. Avoid utilities, telecom and industrials (unless niche/pricing power)... strong preference for recurring revenue businesses or product businesses where replacement is the majority of the demand driver.

It normally takes me around a 5-10 working days to fully turn around an idea from knowing nothing to initiation. During this period I would have normally done 1) read at least 1 annual report cover-to-cover word by word and sense check the accounting 2) read the last 4 quarterlies/half year 3) read last 6-8 conference calls 4) mapped the value chain (spoken to upstream/downstream if relevant, got our own's analysts views and/or bulge bracket sell side views) and taken views on key input costs/suppliers 5) 3-5 year financial model built 6) a few hours on the phone to IR 7) sometimes a CEO/CFO call/meeting pre initiation 8) expert calls via GLG etc as needed to triangulate proof points brought up from the due diligence process or as due diligence itself.

Valuation - if cash flow generative then normally DCF triangulated against EV/S, EV/NOPAT and FCFE yield. If not cash flow generative or cyclically suppressed - EV/S with target margin etc. Try to value all three statements whenever possible and quantify why there might be discrepancies.

Modelling - critical aspect of the model is nailing your 1-3 important KPI drivers and spending your time there. Have to understand working capital movement - non cash accruals etc, pension and 1x stuff. Balance sheet - maturities, covenants, debt mix (fix/float, bank/bond) and the assets they are secured against.

Ongoing - build management rapport... continuous communication. Introduce them to PMs and keep up the slow burn pitch work... PMs can sometimes take months to be convinced to buy an idea it's rarely quick. Most importantly, keep probing and testing the thesis!

Fund type: The house is pre-dispositioned for more growthy funds but there is a solid value/special situations contingent too. You can normally find a willing ear for any kind of idea.

Comp: Not going to comment specifics. I'm not the best paid guy I know in the space but doing okay. It's comfortably in-line with bulge bracket IB M&A/ECM in a normal year to significantly ahead in a good year with 50% less hours.

LT goals: There is one HF I would work for... that offer hasn't materialised yet. Very happy where I am so hope/pray to make PM in my early 30s and start the path to dying in harness at 80.

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Jul 21, 2018

What about more "macro-oriented" people? Is there any room/career path for somebody like an equity strategist? Or is it more something that somebody develops when it gets closer to a PM role?

Jul 21, 2018

I work in equities (equites, fixed income and multi-asset are the divisions of labor for us) and frankly can't espouse much on the rest of the business with confidence.

That notwithstanding, I would note some of our highest performing PMs (especially on the global side) have strong views on macro and cycle timing. At a basic level in equities, everyone has to know what makes a good/bad company, how to interact in detail with management and the Street, and how to value a stock. What you do thereafter... is entirely your own volition. If you want to layer macro trades on with your equity trades and it adds alpha nobody is going say no.

I guess while the moniker of many active managers is "bottoms-up" stockpicking - macro/style agnostic - I think this really only works consistently at small cap level when your have a pre-disposition to larger indices outperformance and to higher growth (rising tide lifts all ships)... reality is for most PMs their bread will be buttered on their mid-large cap allocations o/w start to be affect by common macro and regulation versus idiosyncratic small caps.

Does that make sense/sound reasonable?

    • 2
Jul 21, 2018
ridingthebullwave:

I work in equities (....)
Does that make sense/sound reasonable?

I didn't specify that I was especially interested in the macro point of view in equities, ignoring FI and multi-asset.

Essentially you confirm my hypothesis that macro topics get more and more relevant as one move from an analyst position towards a PM(-ish) one and focuses more on allocation which makes a lot of sense. On the other hand, if I understand correctly you also say that even at an analyst level if you base your recommendations on macro considerations nobody will say anything against it (as long as you you are good of course), correct?

The reason I ask this question is that I am thinking about going into equities but although I can do fundamental analysis I am not too much of a fan of that and I am wondering about the (career) opportunities in this asset class for somebody more into macro-based investments and country/sector allocation.

Thank you very much for the AMA!

    • 1
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Jul 21, 2018

Hi, thanks for doing AMA.

Have you pitched any commodity related names? If so, do you think DCF is adding any value to the analysis/valuation? Or how do you think is the proper way to value them?

Jul 21, 2018

Most of my experience is not in these types of names but I've done a few...

DCF is clearly not appropriate here. Where you are going to make money is not even on valuation metrics themselves it's about absolutely nailing your next year or next few quarters EPS forecast - you should spend all your time worrying about supply/demand dynamics and almost nothing on valuation itself. The stocks will likely trade on EPS momentum e.g. actual EPS versus Street a 1-4 quarters ahead with positive revisions upward good and negative downward bad.

Apologies if this is patronising (I don't know how much detail you wanted) - the rule of thumb is with greater uncertainty you shorten your effective forecast period e.g. 3 years to 1-2 quarters out and "dumb down" your valuation metric e.g. DCF becomes EV/IC. The first question with these types of stocks is: am I going to get blown up next quarter... figure that out and go from there.

Akin to the sciences - physics is seen as the most pure... then chemistry... then biology (and economics is not a science as we all know... it's more like a religion). The DCF is the only true way to value a company but it's meaningless for companies with extremely volatile cash flows and thus either to implicitly apply a handicap probability to those cash flow or out of pure laziness, people use multiples instead.

In short - really valuation doesn't matter for commodities. Calling supply/demand imbalance to a tee is what drives the stocks because implicitly that drives commodity price and all these things typically have very high operating leverage. Near term EPS momentum is all that matters in my opinion because 1-2 years out absolutely nobody has any idea.

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Jul 21, 2018

Thanks for the reply.

I agree with you that valuation isnt the most sensible for commodity names as the results depend solely on the underlying commodity price. So understanding the timing in the cycle is essential (for longer period holds eg. 2-3 years). Which is basically understanding the supply/demand situation.
But why do you think using multiples to value is the lazy way? I mean it obviously is a time saver, but not necessarily worse than a DCF as the DCF correctness is based on your assumptions. And a DCF has more assumptions than just projecting 3 statements and slapping EV/EBITDA, P/E, EV/FCF, DY% fair value multiple. So higher number of assumptions > higher chance that you might overlook/be plain wrong about something?

And I noted you use lots of lesser used multiples such as EV/IC, EV/NOPAT. Why exactly do you think are they better than plain EVEBIT, EVEBITDA and so on?

I also wanted to ask if you are more into small/mid caps? Based on my experience its relatively hard to get a CFO/CEO on the line if the company is > $5-10bn in mcap.

Jul 21, 2018

Thanks for doing this. Couple questions for you, if you don't mind:

1) How did your career progress over the past 4 years in AM? What were you doing to add value during your first year when you were more inexperienced and how have your responsibilities ramped over time? Were there any specific benchmarks / goalposts you set for yourself?

2) Some AM firms don't expect juniors to pitch stocks for the fund, just support seniors. Any recommendations on what those juniors can to become a great investor without pitching responsibilities that you've had yourself?

3) You mention there's only 1 HF you'd work for. Hypothetically, if you were attempting to make a transition to a wider range of HFs, all of which share your investment philosophy but some of which you haven't networked with / don't know anyone there, how would you approach them and attempt to earn a job there?

4) Hear a lot of investors mention their best opportunities consist of good companies trading at a temporary discount. How much of your pitches consist of that versus you trying to find companies where you believe you have an analytical edge? For the latter, how do you source those opportunities?

5) Fattest pitch you've observed in your career? How did it turn out vs expectations?

    • 1
Jul 21, 2018

Question 1: I wanted to lol at this point because it made me instantly reflect. It's a good question.

To summarise: 4 years ago convincing a PM to buy an idea would basically be impossible unless they had asked you to look at it (they were looking to confirm their confirmation bias blah blah)...The duration to convince them to buy ideas is (unexpectedly) directly correlated with trust/respect/performance.

In terms of specific benchmarks... of course I set them but never told anyone haha. The only goal is survival.

Question 2: That's the normal model... who would trust a 22/23 year old to beat the market?!.

1) engage and challenge them - you need to be a critical thinker (never ever accept the first word you hear as gospel)... of theses, management, sell side and the PMs themselves... you rapidly gain respect if you can engage in friendly informed debate.

2) Presumably - maybe I'm wrong - but you're work life balance might be a bit better if you're less trigger puller. Read more books. Read The Economist, read the WSJ/FT... should try this anyway but just be informed of non-work non-sector events.

3) Trade your own ideas... and if you get friendly with a PM ask to pitch him. Another way to win respect and get noticed if you do it right. Getting bloodied in this industry is the fastest path to learning... and you want to bloodied in your 20s when people expect it rather than your 30s/40s when you have exponentially higher career risk and control of capital.

Question 3: I don't have a good answer to this.

In terms of doing it today... I've had this discussion a lot with HF contacts (some of whom doing it now). You have a window in traditional AM between 3-6 years of experience where you need to make the jump to a vanilla HF. Then the window closes as generally the perception is you're too institutionalised... the window generally re-opens at >10 years experience but for a different (generally better kind of fund in my opinion) with longer term/deeper dive focus.

Getting a job via a recruiter is not the best way. Going to conferences and building the network face-to-face in a disarming environment has worked very well for me. Everyone likes talking stawks!

Like I said - don't have a good answer here other than contacts contacts contacts and patience.

Question 4: It kinda sounds like the former is just buying value traps... I don't buy anything where I don't think I have some kind of edge on the fundamentals of the business. That edge can be "the market has this generally right and this should compound" or it can be something more specific/differentiated. Valuation itself is never a reason to buy a company.

How do I source? Good question... no easy answer. I meet 2-3 companies a week, do conferences etc. This sounds flippant but ideas just appear.

Question 5: There's a couple but they are so uniquely me it's going to betray identity to anyone from my team who may read this (my paranoia here is directly correlated with the more info I reveal hah)... the highest alpha trades I've seen have been 1) good and growing fundamentals 2) consolidation on top... that's a fat pitch.

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Jul 21, 2018

Thanks for the detail, esp Q4. 1 other question I'm curious to get your thoughts on:

They say you never know how good you are as an investor until you invest in a prolonged bear market / recession. With your career only having begun 4 years ago, how do you expect to survive and even outperform?

Jul 25, 2018
ridingthebullwave:

The bad year was the final year before I moved into my new role and frankly was the best learning experience I've ever had (despite it costing me a great relationship, and probably some hair loss)... after that I abandoned benchmarking myself.

Can you talk more about what happened here?

Jul 21, 2018

Thanks for the AMA.

  1. What do you think are the pros/cons of working for a small AM firm versus a place like yours? Also what do you think are the pros/cons of long only vs. HF?
  2. What are your thoughts AM as a viable long-term career to go into for somebody still in school?
  3. What are your hours like?
  4. How is your bonus calculated? Based on the performance of your stocks that make it in a fund or something else?
Jul 21, 2018

Question 1: Great question.

It's not really a small versus large question... it's a middle versus extremes question. You do not want to be in the middle. The middle is going to get killed.

Being in a large shop... you have infinite resource, access and good stability/predictability. This can make you lazy. You also get access to a wide menagerie of styles and thought processes to help you develop as an investor. Exit opportunities likely much better with brass plate name on CV.

Being in a small shop... you can be noticed more quickly, get closer (get ideas in the funds in meaningful size = job satisfaction) and likely get paid more if things go well... but you are a nobody and likely going to have to work very hard to get an information edge. Like PMs, if you can get CEOs to respect you they will take your calls and invite you to good meetings irrespectively of fund size... they are so tired of hearing people who've done 0-5 mins work asking banal questions over and over again. You are also likely going to be pigeon-holed into your PMs style and due dil process... which is probably a negative longer term unless he/she is amazing.

In essence: the dispersion of outcomes is way higher the smaller you go.

Question 2:

The near-term view: you get paid to think (this is a ridiculously intellectually satisfying job), you will get to travel the world, you will earn more than 95-99% of your friends if you're good at it.... what is not to like.

What's not to like near term: it's 24 hours a day 7 days a week if you want to survive and be good. You cannot fully turn off. I love my job and mostly like my firm... so I am okay with this. I ... I was okay with this but if you want a 9-5 this isn't it.

Longer term: the industry is consolidating and healing but for that to be achieved pricing needs to fall even further (there are no barriers to entry) to weed out the players in the middle. So it might get worse before it gets better... the good news is that analyst and PM salaries are still quite small as % of overall costs, and degrading your product but cutting those has never proven to be a winning strategy!

Bigger question for next 50 years (I really do want to work until I am in my 70s hah) is the cost of debt in the market. Public equity markets as a primary method of raising capital have collapsed due to the lower cost of debt and liquidity out there... PE/debt raises much easier. Historically... over the next 50 years that should right-size (although when it does it won't be pretty) and as the relative cost of equity comes down... I am hopeful we eventually see much more primary markets activity and thus higher dispersion in equities... higher dispersion = better chance of active manager outperformance.

What I am also hopeful for is we reach peak indexing... crossing/crossed the 50% threshold today... when active managers cease to be the marginal price settors (ex algo trading - which is like 70-80% of flow anyway) I am hopeful we see a chance for a 40:60 outcome where passive dominates with a high quality active component bolted-on. The rage directed against active mgmt. in general for low performance and high fees is entirely justified in aggregate... industry needs more Darwinism.

Question 3: Worst week was 90-100 hours but didn't sustain that for long. Normal week now is like 50ish hours. Very rare to work weekends. It's pretty chill... I get 7-8 hours sleep a night and have time for exercise which is the important stuff.

Question 4: A large qualitative component (what does mgmt/PM team think of you) and slightly larger quantitative component (impact on funds and performance of all ideas versus respective benchmark - are you making alpha overall irrespective of whether PMs bought your ideas). The most important variables to long term progression are: 1) what do your target PMs think of you (e.g. the most senior/running most important funds) 2) what is your batting average/accuracy (e.g. greater than 50% or not)... absolute relative outperformance is what gets you $$$ as an analyst but survival and eventual promotion to PM I get the sense is much more about aggregate batting average and investment process.

    • 3
Jul 22, 2018

Can you expand on what you mean by "middle" in your first answer?

Jul 21, 2018

Thanks for the thoughtful answers. Just a few follow ups if I may.

  1. What are your thoughts on CFA and/or MBA? Any internal pressure to get these or any personal desire to do so? Or do you feel having a top 5 UG gives you the pedigree that makes pursuing these fairly useless?
  2. In the same vein as Q1. Do you see benefit in working directly for one PM or co PMs of a single fund? It seems like it could be beneficial in learning the skills of being a PM. Versus a role like yours where you're pitching to multiple PMs - which seems like you work more in a silo and is more akin to throwing stuff against a wall and hoping it sticks, so to speak.
Jul 24, 2018

Hi,

I am intrigued by your comment that you "realise your ability to make small talk with normal folks disintegrates rapidly over time". Could you explain on that point please?

I am curious as I just started on my career in AM

Jul 23, 2018

Did most of the people who work with you/ at the firm start out there/a buyside firm or have many transitioned from Sell-Side ER.

What would the firm/ team look for in laterals

Jul 21, 2018

Senior analysts generally sell side poached. A lot of the PMs were hired from college. A lot of guys lateral in and out (the latter generally when they realise they won't make PM).

In terms of laterals... well the sell side is starting to get nasty with MIFID etc churn is picking up so really it's a guy who's been at a bulge bracket with good track record/industry connections who can run a team. I think we still prefer to recruit from college for most things and train internally (plus you are a lot cheaper lol).

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Jul 23, 2018

Could you extrapolate on the cultural differences between LO and HF? The stereotype I've been given by others is that LOs are "sleepier" but I'd imagine that would hurt you going from LO->HF, not necessarily the other way around. Would be very interested in your take

Jul 21, 2018

Hard to comment. I have not worked in a HF.

But yes... I can react to stuff sometimes days later versus HF friends who need to react instantly. I actually get to think about or better yet phone the company first etc.

Also just the level of banter/abuse is different. It's not in our culture to raise your voice at someone and PMs can be seriously reprimanded for abusing analysts. I've been on the phone a number to hedgies and heard the shouting/swearing in the background (nvm the anecdotes your hear)... not my preference.

Jul 23, 2018

First of all thank you for doing this - it's probably one of the more insightful things I've seen on this forum.

Most of my questions were answered already in some way. But I just want to know more about your opinions on LO vs HF. From a firm level -analytical/research/portfolio perspective, what do you think are some key differences that separate, let's say a medium-long term (1-3 yr horizon), "vanilla," L/S equity hedge fund from you guys (Fido, Welly, Cap Re). And also, from the perspective of a junior analyst, what's the differences in terms of the training/learning experience, career growth, responsibilities, etc?

You mentioned that you are only willing to go to one HF. After 4 years in, where do you see yourself 5, 10, 20 years from now? Do you see yourself being in a great spot comparing to your peer group, and having a healthy career trajectory in terms of responsibilities, fulfillment, and of course, salary, by staying at this firm? Know these are not simple and easy questions, so really hope to hear your thoughts. Thank you very much man.

Jul 21, 2018

Training/career growth - it's a simple answer... the spread of permutations is just way larger the smaller you go. You're pretty likely to get good exposure and good training at a bulge bracket. What you do with it after... is your decision. In the opposite scenario, well worst case your fund winds up shortly after your join because your sponsor pulls the capital or your PM makes a ballsy trade which fucks up. BUT things could be a lot faster in terms of personal growth, money and path to capital at HF/small shop if things go well for you.

In terms of us versus some of the more respectable HFs out there... they are better then we are in my experience. These are the guys I seek out and some of them are just incredibly smart/thoughtful. They do insane levels of due dil and look like at things with a truly differentiated lens.

Lol I would like to survive. I don't compare myself to my immediate peer group, I compare myself to me (I learnt that doing varsity crew nevermind this job!). There is definitely a place for me here and a path to capital if I continue to execute... and once you get capital and a track record the world is your oyster. I have seen guys build $20bn+ franchises from zero in 10 years in my shop and make $$$. The sales machine is unstoppable so once you actually feed them good product to sell, you can scale very quickly.

The HF is attractive because a) the sums are a lot larger and a lot quicker b) the type of fund I am thinking of is long term deep research concentrated and perm cap (yes I want it all)... yes you earn more but you also have much more control of destiny. Just playing the waiting/praying game for the guy to make a move ;)

    • 1
Jul 23, 2018

This is incredible. The fact that you are writing this type of insightful and sincere responses for close to all the questions here (an anonymous internet forum) says a ton, and I just want to let you know of my appreciation.

In regards to your response to my questions, I really liked how you say you only compare to yourself and not your peer group. That's definitely the winning mentality and a rare one in this day and age. Also refreshing to hear your thoughts about your current career path, and I definitely can now see the attractiveness of a LO career. As someone still aspiring to get a FT job in the industry (I highly suspect that I am in the process of applying to your shop), I am really inspired by you and hope to be in your seat one day. Keep it up man and good luck in your future.

Jul 24, 2018

Thanks a lot for taking the time, really appreciate it. I had four questions:

Value of social skills: I'm currently a sell-side analyst, looking to transition to a LO. Analysing companies and stock picking is by far the most enjoyable aspect of my job. But: I am concerned that in order to succeed in my career I should leverage my competitive advantage. And my key strength, according to three years of reviews by colleagues, is my ability to build relationships. To finally get to my question: do you think this is a valuable skill in a LO where ultimately your value-add depends much more on analysis and "getting it right" than on relationships, as is the case in the sell side? I.e. could it be a mistake to abandon the sell-side, which would potentially leverage my social skills much more?

Exit opps: Being a PM at a LO (or even an analyst in an industry you're really passionate about) is arguably the ultimate exit opp. Nevertheless, I was wondering where people that DO leave (before making it to PM and PMs) end up?

Compensation: I appreciate that you do not want to disclose your package (I wouldn't either), but could you provide us with a general sense of how compensation evolves for someone with 3 up to 10 years of work experience? And what percentage of base does the bonus look like (a range would be helpful) at the analyst / PM level?

Career-specific question: I'm in the fortunate position to already be covering companies as a primary analyst at my BB sell-side gig, three years out of college. My understanding from discussions with top5 LOs is that I would join as an associate without my own stock coverage for the first 1-2 years if I made the switch now. Do you think it is advisable to continue on the SS with coverage and seek to switch at a later stage straight into coverage responsibility at a LO, or is it worth giving up coverage for 2 years to make the transition to LO now?

Jul 21, 2018

Social skills are only important on the buy side to the point of building management rapport and industry contacts... this isn't salesmanship though this is people valuing for adding depth/breath to the conversation.

I have no idea what people do when they leave often wondered it myself.

Comp... the easiest thing - while it is Europe not US - is just to take a look at the EBA data. This is basically just GS/JPM big bank AMs in London (none of them have particularly huge funds or successful HFs tbh). You want page 69 onwards for the juicy bits - https://www.eba.europa.eu/documents/10180/2087449/...
Obviously that comp data is senior analysts and PMs. Basically your comp sustainably doubles (by that I mean there are bumps up/down due to performance) every 2-3 years from college entry for your first 8-12 years... then you stagnate... then it becomes about becoming a PM. If you scale then in the words of one PM to me "one good year in your 40s will be more than you made for your entire career up to that point".

Jul 21, 2018

Can you describe some of your favorite stocks over the past few years? For obvious confidentiality purposes, understand if you don't want to describe any of the investments you've pitched at your fund but am interested to hear you discuss in-depth 1 or 2 of your favorite businesses

Jul 21, 2018

This would be interesting to do but again paranoid about revealing too much. Sorry.

Jul 21, 2018

No worries, a different question then:

How do you personally try and develop a differentiated perspective and maintain a contrarian bent at all times without being contrarian for the sake of contrarianism? You've touched on this a bit where you discuss your sourcing strategies consist of ideas that other funds have overlooked but would be curious what other insights you have.

Also, do you intentionally try to avoid the most popular stocks among investors (e.g. FAANG)? How do you maintain confidence in your ability to outperform without also buying into those stocks?

Jul 25, 2018

Hey, genuinely appreciate all the advice and insight you've provided.

My questions are about breaking into ER, building the skillset, and starting a fund.

  1. How should someone reach out to an analyst like yourself to try and get their foot in the door for an internship at the firm or a referral of some sort? We hear a lot about networking on this forum, and I've done plenty of it. Connecting with analysts, doing a call/coffee chat, hearing everything about them and their experience, talking about the companies I'm researching, etc. Yet when I ask if they know of any opportunities or if they can push my resume through for an interview, they all say they aren't involved in that process. My background: going into sophomore year, 3.9gpa semi-target, pwm intern at bb in nyc this summer, leadership/community service.
  2. What did you do in the beginning to really hone the skillset you need to be able to pick successful investments? Was it just putting together a pitch/practicing 3-statement model/DCF on companies you like or was there more too it? How many times did you have to do this until you felt comfortable doing it very quickly and efficiently?
  3. What stops someone like yourself or another successful research analyst with a track record from starting their own fund? Some reasons I've heard from other analysts: comfortable/stability where they are, their family/lifestyle/age makes them unable to take the risks of leaving to start their own fund, don't want to deal with fundraising/administration work of a business, etc. If those are the reasons, would you say it's better to start a fund in your more formative years when you don't care about risk/lifestyle as much - even though you don't have as developed of a skillset?

just a monkey trying to find his way in the finance jungle

Jul 21, 2018

Question 1: If you're going to buy me lunch at a nice place... do it. Otherwise no. There's a lot of competing demands for your time - PMs, other analysts, companies, sell side, friends, family... don't expect a freebie (a lot of people seem to think this is a fair thing to expect). In terms of recommendations... I definitely have the power (and have exercised it) to put someone's CV infront of a decision maker and get them on the phone with that person but that's about it. Literally when I look at the clock I have been typing on WSO for nearly an hour now wondering wtf did I let myself in for when doing this AMA (I joke).

Question 2: There's no easy answer to this. I feel uneasy now pitching stocks even with simple business models and simple theses. What's the old saying about the more you know the more you realise you aren't that educated blah blah. You get humbled on the regular.

Question 3: I don't even know where to begin. For a start - who the hell is gonna give you the money... secondly if the typical analyst per the data that's out there is on $200k-1m+... you need to raise at least $100m just to get the same pay nevermind hiring other people, fixed costs and losing all the resources around you. The vast majority of new fund launches fail or never scale appropriately... I would rather lateral to a HF, make a lot more money in my own right, make some more contacts, get more tenure/track record, see how it's done from the inside etc before even considering it. Maybe I am just risk averse!

Jul 25, 2018

Great read, really appreciate you doing this

How has MIDFID II impacted the sell side? Have you seen a change in service or resources offered?

For the top 2 or 3 sellside sales people that cover you, what are things they do to stand out in your mind?

How do you figure out which sell side analysts are good and which ones are useless?

Jul 21, 2018

It's not just MIFID per se... that's more Europe (in a direct sense). The sell side has been in continuous restructuring since 2007... it's no secret that the sell side itself does not make money it's normally subbed by trading and investment banking. As commissions have collapsed, that subsidy has only increased.

Commissions are collapsing because active managers are under pressure (both in flows but also pricing) and thus looking to squeeze other costs out of the expense ratio before they cut their management fee (for obvious reasons).

The broker I knew well enough to actually talk real numbers with (he was an MD at a bulge bracket, made MD in 1999 so he had been around a while) amazingly had not seen his comp move since the crash... he was just flat in nominal terms (which I thought was amazing I would have thought down).

When MIFID does actually reach the US (probably 18-36m away) and forces price discovery in research... you will see exactly the same thing as Europe with exits, consolidation and accelerated human capital bleed. Longer term, you could take the view that markets will become incrementally more inefficient and this could be positive for active managers/managers willing to do their work and real due dil.

All the sell side sales who cover me are mostly useless - I mean they are just news reporters there to push the narrative. I've met two good salespeople in my (short) career - the value added from them was not analyses it was in their ability to connect people together and cascade smart opinions out into the market (by this I mean other LOs and HFs not the bank/themselves).

In terms of actual analysts, the best way to figure out their quality is request a fully working model and go through it line by line. You can see pretty quickly whether they've attempted anything of logical substance or just hardcoded everything, and extrapolated trends. I have never seen a good sell side model (they are all horrendous)... deliberately unwieldly and overcomplicated despite the fact their forecasting logic often ridiculously simple.

Other thing is that most analysts are just the mouthpiece of mgmt... they will just plug and chug whatever IR tells them, if IR is smart IR will be conservative and leave deliberate wriggle room in certain numbers but it varies.

Street are also known for not paying attention to t+2 (e.g. 2 years out) numbers - which are actually more important. This is where you can make money as a LO analyst is thinking really hard about t+2 and t+3 because the stock is more likely gonna trade off t+1/quarterly numbers (it depends on what kind of company - how much durability can we ascribe to revenue stream)... Street will often just blindly cut t+2 and t+3 numbers because of a near term issue when actually nothing has changed in the bigger picture.

The final point on Street is that it's well known (there's loads of charts out there) that numbers start way too high (e.g. when they roll forward one year - exactly my point about not thinking about t+2 above...) at the beginning of the year and then you generally see negative earnings revisions on average across the market thereafter. Exploiting this especially if you are bearish on a stock is an important thing to remember.

Jul 26, 2018

This is an incredible post and I really appreciate you going in depth with all your answers.

Question 1: As someone new to the industry (1-2 years at a BB on the sell-side, no coverage yet), what would be the best things for me to do in order to position myself for a jump to the buy side? Should I work a couple more years here until I get coverage then build a name for myself with that? Or should I be looking to jump and find an opening on the buy-side soon?

Question 2: You mentioned that quality analyses from the sell-side are few and far between and I do agree. Some of the models I've seen are truly horrible - 50% because the analyst is simply not that good at modelling, and 50% because they're smart enough to know that they provide value to their clients in other ways. Given that, I can't really rely on the analysts I work for to help develop my ability to generate investment ideas. I'm left to learn on my own and thus would like to ask: How does one develop their own investment process/framework? How can one best utilize their time in order to get to the point where they can look at a company and immediately identify what makes it ticks and what's going to drive its' growth?

Jul 21, 2018

On question 1 - I can't really comment. I've not made that jump and don't know anyone who has. Sorry. As a general point, read read read. History, econ etc.

On question 2 - assuming you are allowed to work with clients (maybe the PMs analyst etc) then there's your outlet for getting exposure to a framework and eventually a job opp. This is sufficiently obvious my guess is that you already thought of that so again apologies but I've just not been in this situation so difficult to comment.

Jul 26, 2018

For those analysts that work at small boutiques, how do you think they can better position themselves to lateral to a big firm like yours (assuming they have decent exp conducting fundamental stock analysis)?

Jul 21, 2018

Have a very good explanation why you want to make the jump to working in a small team to a large one... assume mgmt is thinking you just want a name and some more training on your resume, and then going to head back to a better boutique.

If you're good you are going to get hired. It's not about showing off etc once you actually have experience it's quite easy to assess someone you just ask them to pitch a stock.

Jul 26, 2018

Any views on quantamental?

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Jul 21, 2018

Plz don't take my job k thanks

Jul 28, 2018

How are you ranking asset managers? Unlike banks which can be ranked on deal flow, I'd be hard pressed to be able to rank asset managers. I certainly hope you're not ranking by AUM. If so, you're probably at Fidelity/Wellington/T Rowe since you came in as an undergrad intern.

If you rank it by quality of performance, then it would be extremely difficult to rank them objectively.

Jul 21, 2018

Very fair point and not one I will dispute. Equally not one I will respond to given my desire to be anon.

Jul 28, 2018

I would love to hear what a day in the life looks like during earnings season.

  • If you have several important companies reporting on a day what are you doing besides reading press releases and listening to conference calls?
  • Do your PMs want a write up/summary on the quarter for holdings? Only if a company bombs it?
  • In what cases are you doing follow up calls with management/IR? How soon after? I'm sometimes surprised that IR does calls with us (sell-side) so soon sometimes as opposed to top investors (though i guess it makes sense because they want to make sure published notes are accurate).

Obviously I would assume it is more hectic for strategies with short-term horizons versus longer-term but still curious.

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Jul 21, 2018
  • Refresh the model and update forecasts
  • Write note to PMs - this happened blah versus me/Street blah this looks off I will follow up with IR etc + whether they should be trimming/adding and whether anything incremental to thesis + is Street moving up/down from this
  • Talk to sell side, traders and spec sales to get a feel of what others are seeing and where flows are going (this depends on the stock and what kind of reaction)
  • Mgmt I nearly always talk with irrespectively of what happens... just to keep building the relationship if nothing else. If it's a bad release I try to get them on the phone that day and generally succeed. If not a bad release then at most 7-10 days later.