Observations of an Equity Research Associate

IamObama's picture
Rank: Senior Gorilla | 900

This is just one of those threads, where we talk about what the ER industry is like. I'm a first year associate at a BB in ER, and I just finished my 2nd week. I'm working under a group that I really like and I thought I would create this thread to help those out who want to understand the ER industry.

But I'm going to approach this thread from a different perspective. Instead of being a straight Q&A, I'm going to talk about things I thought I knew about the industry or what my perception of the industry was and how that compares to reality. Of course, feel free to ask questions at the bottom. I'll update this as I go along into my new role and I learn more thing.

Perception #1: ER is a cost center and the first one the be laid off.

Reality: ER is not a cost center and is one of the biggest reasons your bank will generate trades from the buy side and have them use your services versus the competitor. The ER department is one of the most useful services for a buyside firm from a sell side firm, so its essential to the success of a BB or any broker for that matter. Therefore, it is not a cost center, it just generates revenue indirectly.

Also, if you are an II ranked analyst, chances of you getting laid off are pretty low. If headcount needs to be cut, the analysts that will be cut will be those that are not II ranked or are generally not seeing a lot of trades in their sector by clients. II rankings and how your bank is trading a particular sector matters a lot when deciding who gets laid off or not. So if you are an associate going into ER, try to get into a group with a II ranked analyst.

Perception #2: Sell-side analysts live and die off the financial models.

Reality: Depending on your analyst, models are more or less used just to create an EPS number and a price target. It is not the real value add by the sell side analyst to the buy side PM because the buy side PM has a buy side analyst who could do the same thing.

The value add of the sell side analyst is to provide the buy side firm with a different perspective on the stock and get color on companies from their industry contacts. Buy side doesn't care what your rating or your price target is. They care to a degree what your estimate is and they care a lot what kind of perspective you are giving them (generally its something out of the ordinary) and what kind of legal information you can generate from your contacts.

Also, analysts typically don't build models. In fact, analysts are rarely in the office. An experienced analysts job is to meet with clients, entertain, meet with industry contacts, entertain, visit companies and their subsidiaries, visit conferences, host conferences, figure out different perspectives on your companies, and figure out what your next note(s) are going to be.

90%-99% of the modeling, analytic work is done by the associate. They are the number cruncher.

Perception #3: You don't work banking hours.

Reality: It depends on how big your team is and how much work your analyst wants to do. For majority of the associates, they come in around 7:30-8 unless they need to be on their sectors morning call. They also stay until 7-8pm. This is the average day, when you don't have a big note going out the next day or earnings aren't being reported etc.

On the other hand, if you are working for the bigger, II ranked analysts, your hours can be much more. These analysts tend to generate a lot more face time with clients, therefore they need to be constantly thinking of the next note or what else can they do to improve their perspective etc. So these analysts generally assign their associates a lot more work, so your average day can range from 7-8AM to about 9-10PM. If you have a big note going out the next day, you are likely in the office from 6:30AM-12/1AM.

So it really depends. Also the size of your team generally depends on if you are an II ranked analyst or the amount of volume your particular sector is generating in client interest. Again this is generally, but it could vary. I've so far seen the II ranked and top sectors with on avg 2 associates, but sometimes 3, and the non ranked analysts and those in the lower groups only have 1.

Perception #4: Sell side analysts research is BS and they don't know how to pick a stock

Reality: This again depends. Going in I thought most of sell side research was mediocre. But there are some really smart analysts in sell sides who really understand the fundamental dynamics of the stocks they cover. Also, a lot of buy side PMS were at one point sell side analysts who were usually ranked or close to. But there are some really smart guys in sell side research who really know their stuff. There are also some real big dumbass analysts who fit my perception of them going in.

Perception #5: The morning sales call must be so cool

Reality: No one goes to a morning sales call unless you are in sales or if your team is presenting.

I'll update as I go along and learn new things.

Comments (31)

Jun 15, 2012

Thanks for opening this up - can you tell us a little more about your background and why you chose ER? I just wrote CFA Level 3, am applying to MBA programs this fall and considering ER as a means to move to the buy side.

Jun 16, 2012
Spalding Get Your Foot Off the Boat:

Thanks for opening this up - can you tell us a little more about your background and why you chose ER? I just wrote CFA Level 3, am applying to MBA programs this fall and considering ER as a means to move to the buy side.

I just graduated from undergrad..the only reason I got in is because I knew my team really well. I've seen people transfer over from industry to ER without a MBA or CFA etc, but its because they had good contacts at the bank. But if you have no contacts, an MBA or CFA is definitely needed, but I recommend a MBA over a CFA since banks of structured programs for MBA

Jun 15, 2012

Wow this is a great way of sharing your experience. While Q&A is more personalized, I personally found this more helpful then reading through a whole thread.

I keep seeing the "II" thing a lot. Can you link something that helps explain what it is? I'm under the impression it just means "top analyst", and if so, where can I find the rankings online?

Jun 16, 2012
Toronto:

Wow this is a great way of sharing your experience. While Q&A is more personalized, I personally found this more helpful then reading through a whole thread.

I keep seeing the "II" thing a lot. Can you link something that helps explain what it is? I'm under the impression it just means "top analyst", and if so, where can I find the rankings online?

II=Institutional Investor

http://www.institutionalinvestor.com/Research-and-...

Jun 15, 2012

Great post! I am interested in seeing more your post.

Jun 15, 2012

Great post. Would you happen to have the latest II rankings handy? :)

Jun 16, 2012
IamObama:

Perception #2:
Sell-side analysts live and die off the financial models.

Reality:

Buy side doesn't care what your rating or your price target is. They care to a degree what your estimate is and they care a lot what kind of perspective you are giving them (generally its something out of the ordinary) and what kind of legal information you can generate from your contacts.

Can you elaborate more on the legal information that contacts share with you? Are you talking about legal problems such as lawsuits or regulatory actions or something else?

Thanks for the post.

"Hope for the best. Prepare for the worst. Capitalize on what comes."

Jun 16, 2012
TEX:
IamObama:

Perception #2:
Sell-side analysts live and die off the financial models.

Reality:

Buy side doesn't care what your rating or your price target is. They care to a degree what your estimate is and they care a lot what kind of perspective you are giving them (generally its something out of the ordinary) and what kind of legal information you can generate from your contacts.

Can you elaborate more on the legal information that contacts share with you? Are you talking about legal problems such as lawsuits or regulatory actions or something else?

Thanks for the post.

My legal I mean anything that is not insider information

Jun 16, 2012

The Institutional Investor survey is the Oscars of the equity research business.

Because there are literally dozens of houses covering certain stocks, its used as a barometer of how "good" an analyst is compared to the street. II is ranked by votes of buy-side firms with AUM weighting taken into account. So an II vote from a long-fund with $100B AUM is worth MUCH more than a start-up hedge fund with $0.5B AUM.

II ranks analysts by their sector teams, and there is also a country vote.

It's important because of a few things:

1) Raises the firm's value perception to buy-side clients
2) Testament of the firm's strong equities platform (and indirectly helps IBD)
3) Raises the profile of the analyst
4) Helps with recruiting talent

Jun 16, 2012

Awesome post. Eager to hear more.

"All things are difficult before they are easy"
- Thomas Fuller

Jun 17, 2012

Nice post.

Jun 17, 2012

Nice post man, SB for you.

Jun 20, 2012

Great job. SB for you as well.

Jun 20, 2012

Thanks for your post. I'm pursuing ER, and this helps a lot.

Jun 20, 2012

Great post bud. I'm starting as an associate in a week and have many similar preconceived notions about the industry.

Jun 20, 2012

I would actually say CFA > MBA for ER

Jun 20, 2012
grapefury:

I would actually say CFA > MBA for ER

To break in? No. But maybe it's based on an individual case.

Jun 22, 2012
grapefury:

I would actually say CFA > MBA for ER

This is not true. I know most ER job postings say CFA or MBA preferred but CFA is by no way better than an MBA. There are two ways majority of the people get a job in ER. Eithnder through the MBA program or they know anyone. Probability of you getting a job by just applying because you have a CFA is pretty low. So if you don't do the MBA program, the next way is if you know people. Usually, if an analyst has the need for another associate, he will first tap his network and if he cant find anyone he personally knows we will tap his industry contacts and try to bring over someone from industry. If at that point it doesn't work they will go for the resumes received through the job posting..which the likely hood of this happening is pretty low

Jun 20, 2012

.

Jun 21, 2012

Hi, great post! Thank you so much! I am about to start in ER full-time and am waiting to interview for sectors. Can you talk about how a person should identify which sector fits him/her the best? I roughly have a feeling of which industries I would like, but that is really based off subjective feeling...if you could share any advice on this, that would be wonderful!

Jun 22, 2012
Reader54:

Hi, great post! Thank you so much! I am about to start in ER full-time and am waiting to interview for sectors. Can you talk about how a person should identify which sector fits him/her the best? I roughly have a feeling of which industries I would like, but that is really based off subjective feeling...if you could share any advice on this, that would be wonderful!

What the above guy said. Pick the analyst that seems like the smartest and you will learn the most with, but also seems to be fun around. Your analyst is the person you are closest with in the office so you want to make sure it will be possible to have a good relationship

Jun 27, 2012
IamObama:
Reader54:

Hi, great post! Thank you so much! I am about to start in ER full-time and am waiting to interview for sectors. Can you talk about how a person should identify which sector fits him/her the best? I roughly have a feeling of which industries I would like, but that is really based off subjective feeling...if you could share any advice on this, that would be wonderful!

What the above guy said. Pick the analyst that seems like the smartest and you will learn the most with, but also seems to be fun around. Your analyst is the person you are closest with in the office so you want to make sure it will be possible to have a good relationship

Great advice. Thank you both. @IamObama: I PM'ed you.

Jun 22, 2012

Don't pick an industry, pick the senior guy and the team you will get along with. Beyond the obvious industries ( oil, software, internet) it will be very hard for you to figure out which industry will be hot/relevant in 5 years. Beyond that, go for large cap names, investment banking heavy sector, ranked analyst. Try to avoid "fad" sectors

Jun 22, 2012

Perception: You read a lot.

Reality: YOU READ A LOT. You read 10ks, 10qs, press releases, 8ks, earnings transcripts, industry conference transcripts, news, more news, industry primers, read through of other companies you don't cover etc. I would say 35-40% of my time in the office is spent reading. There was a conference recently where many of our covered companies presented so we listened into their webcast if it was available. Then we read transcripts for companies that are relevant to our companies to see what they are saying about the industry.

Be prepared to read a lot.

Jun 23, 2012
IamObama:

YOU READ A LOT. You read 10ks, 10qs, press releases, 8ks, earnings transcripts, industry conference transcripts, news, more news, industry primers, read through of other companies you don't cover etc. I would say 35-40% of my time in the office is spent reading. There was a conference recently where many of our covered companies presented so we listened into their webcast if it was available. Then we read transcripts for companies that are relevant to our companies to see what they are saying about the industry.

I just switched to ER, and this is spot on. Since I'm new, I probably spend even more time reading. Maybe 60% of the time? Transcripts, filings, presentations, even public investment pitches. All the reason to make sure you are covering a sector you like- I would shoot myself if I had to spend 30-40 hours per week reading about utilities.

BlackHat:

And the stereotype about ER guys being socially awkward and shit is totally untrue. Maybe 1st and 2nd year associates, but we were all socially awkward at that age.

Also 100% correct. Analysts actually spend a ton of time meeting with clients and management; they need good people skills. I guess research associates don't need great social skills, but an outgoing analyst is not about to hire some awkward guy.

On the whole, research is probably more sociable than IBD. While you work more independently, what interaction you do have is less tense. I know I can shoot my analyst a question without fearing for my bonus.

Jun 22, 2012

Having been a glorified buy-side ER guy I love this post. Whenever we met with a sell-side analyst, never once do we ask about their EPS estimate or their buy/sell/hold rating. These analysts tend to travel a lot to the sites of operations of the companies they cover, get a lot of interaction with management, host conventions and other gathering where management will present, etc. It's great to get their opinion on management, some insight into competition and all that kinda shit from them because they spend their entire careers in a small subset of industries. As generalists we found them extremely useful for that in more complicated sectors especially. Keep ballin out, ER guys.

And the stereotype about ER guys being socially awkward and shit is totally untrue. Maybe 1st and 2nd year associates, but we were all socially awkward at that age.

Jun 25, 2012

I love how in just two weeks this guy has figured out the ins and outs of equity research. How many of your position traders have you talked to? How many sales traders?

How could you possibly say that you don't work banking hours when you haven't even been through one earnings season yet?

Smokey, this is not 'Nam, this is bowling. There are rules.

    • 1
Jun 25, 2012
roar19:

I love how in just two weeks this guy has figured out the ins and outs of equity research. How many of your position traders have you talked to? How many sales traders?

How could you possibly say that you don't work banking hours when you haven't even been through one earnings season yet?

I don't think you read what I said regarding your last question or even understand the point of this thread.

Best Response
Jun 26, 2012

Here are some tips from the buy-side. I thought it might be useful to some, or maybe not, you'll be the judge of that. It's not my intention to cause animosity or be patronising, just to show you what a buy-side person thinks. I apologise in advance if anything below comes off derogatory or snobbish, I only aim to offer my 2c.

1) I understand that the core of your work is reading a lot of company filings and press releases etc. However, you need to think how you can add value to your model/reports. Just modelling what SEC filings are out there and regurgitating comps for peers etc, is the bare necessity, it's not adding value. When you talk to someone on the phone to discuss your model and view of the company you need to offer something extra. So go the extra mile, do some more research, read blogs, read technical docs (how many of you have ever read the feasibility studies of miner startups or the patent filings of companies?). It does show when you have just glossed over the basics and your only source of info is the management. The reason for this is very simple, the buy-side on the other end of the phone has already read the filings and press releases of the company and has done some due dilligence on the peers and built their own (basic) model. So unless you go the extra mile you are not adding any value to the conversation.

2) Try and keep the number of companies you are researching under control. When I see analysts covering 30+ companies that belong to all sorts of different industries I am sceptical on the depth they have actually modelled the stock. Everybody acknowledges that you can't do a proper job following the whole market and not carving a niche. Obviously we understand that you get a lot of pressure from higher ups to do all the work you do, but try to negotiate your way on your workload (if possible) so that you can actually build knowledge on sector(s) and companies. Be aware that a lot of buy-side people actually screen your recommendation and look at your coverage universe before even deciding whether they will ask to talk to you or not. You don't want to lose before you even start.

3) An obvious problem is that virtually noone dares put a SELL on a stock. We all know why it happens and I don't know if you can do anything about it, but I wish that would change.

4) Please, do come prepared and avoid bluffing your way through. We may not show it but we can tell when you are haven't done your work properly and when you are bullshitting us, and we will not call you again if we feel like you are insulting our intelligence.

5) When you don't know just say it. But make sure you always know if possible, we are coming to you for information and showing ignorance on fundamental aspects of a company shows that you are ill prepared. I appreciate that you are stretched out and that there are good reasons why that happens, but just don't take the call if you are not 100% ready.

6) Do follow up when you say so on the phone! If someone asks for a model or some extra bit of info, and you agree to send it later, don't forget it. We are all busy but it comes off unprofessional. Also, if you feel you came off unprepared on any bits of the discussion, look them up and offer a follow up email or call to cover them. Everyone appreciates someone who is eager and respectful of their profession.

All in all, I acknowledge that you have your own constraints and pressures. By no means am I saying that you analysts are incompetent etc. I appreciate that you are trying to juggle everything under pressure, but my advice is to avoid trying to bluff your way through as much as possible and try to go that extra mile whenever possible.

regards,

justanother

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Jun 26, 2012
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Jun 27, 2012
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"All things are difficult before they are easy"
- Thomas Fuller