Successfully reported this slideshow.
We use your LinkedIn profile and activity data to personalize ads and to show you more relevant ads. You can change your ad preferences anytime.


Published on

  • Be the first to comment

  • Be the first to like this

  1. 1. Buy-side and Sell-side David Lowy September 26, 2002 Jim Ryans (Mod. Oct 2002) The Two Approaches to “Equity Research”
  2. 2. Agenda <ul><li>Overview and Context </li></ul><ul><li>Buy-side: Decision Makers </li></ul><ul><li>Sell-side: Opinion Makers </li></ul><ul><li>“ Recent” Controversy </li></ul><ul><li>Review </li></ul><ul><li>Quiz </li></ul>
  3. 3. Overview and Context: Why is this Important to You? <ul><li>In less than five minutes you should know: </li></ul><ul><li>Who the key players are in the investment world… </li></ul><ul><ul><li>… and what they are called (buy-side or sell-side) </li></ul></ul><ul><li>What your MBA friends are doing with their lives… </li></ul><ul><ul><li>… and what questions to ask when they say they are going into “equity research” </li></ul></ul><ul><li>Who a Wall Street analyst is… </li></ul><ul><ul><li>… and why only 5% of all analysts recommend selling stock </li></ul></ul>
  4. 4. Overview and Context: Opinion Makers vs. Decision Makers <ul><li>Financial media </li></ul><ul><li>B-School Cases </li></ul><ul><li>Friends </li></ul><ul><li>Family </li></ul><ul><li>Etc. </li></ul><ul><li>You </li></ul>Primary Opinion Makers Decision Maker Broker What influences individual investors’ decisions?
  5. 5. Overview and Context: Opinion Makers vs. Decision Makers Analysts Institutional Investors Primary Opinion Maker Decision Maker Institutional Sales What influences institutional investors’ decisions?
  6. 6. The Buy-Side: Decision Makers <ul><li>Not an individual investor -- invests money on behalf of others </li></ul><ul><li>Examples include: </li></ul><ul><ul><li>Mutual funds </li></ul></ul><ul><ul><li>Hedge funds </li></ul></ul><ul><ul><li>Pension funds </li></ul></ul><ul><ul><li>Asset managers </li></ul></ul><ul><li>Researches companies in either industries or regions or for specific investment goals (growth, value, etc.) </li></ul><ul><li>Names you should know: </li></ul><ul><ul><li>Fidelity Investments </li></ul></ul><ul><ul><li>Alliance Capital Management </li></ul></ul><ul><ul><li>State Street Global Advisors </li></ul></ul>BUY STOCKS $                                         
  7. 7. The Sell-Side: Opinion Makers <ul><li>Not making investment decisions </li></ul><ul><li>Researchers paid to have opinions on a handful of companies/stocks in one industry </li></ul><ul><li>Examples include: </li></ul><ul><ul><li>Large investment banks </li></ul></ul><ul><ul><li>Boutique research houses </li></ul></ul><ul><li>Representative names: </li></ul><ul><ul><li>Morgan Stanley </li></ul></ul><ul><ul><li>Merrill Lynch </li></ul></ul><ul><ul><li>W.R. Hambrecht </li></ul></ul>GIVE INDEPENDENT ADVICE Buy! Sell!                                         
  8. 8. “ Recent” Controversy: What are these Scandals All About? Jack Grubman Hyped: WorldCom and Global Crossing Mary Meeker Hyped: Homegrocer and AskJeeves Henry Blodget Hyped: and Why did these top-rated sell-side analysts put “buy” recommendations on such bad stocks?
  9. 9. “ Recent” Controversy: Most Analysts are NOT Independent Institutional Investors Decision Maker Institutional Sales Investment Bankers Use Analysts to Get More (Profitable) Business: IPOs Mergers Acquisitions <ul><li>There’s More: </li></ul><ul><li>- Companies </li></ul><ul><li>Investors </li></ul>
  10. 10. Review <ul><li>Buy-side: Decision Makers </li></ul><ul><li>Sell-side: Opinion Makers </li></ul><ul><li>“ Recent” Controversy </li></ul>
  11. 11. Quiz (Part 1 – Easy) What Kind of Analyst Wrote this Report and Who Was it Written For? Sell-side for Buy-side
  12. 12. Quiz (Part 2 – Harder) Why do only 5% of analyst recommendations recommend selling stock in the companies they cover? It Eliminates Potentially Lucrative Banking Business
  13. 13. Quiz (Part 3 - Hardest) <ul><li>Fact: The Buy-Side Has Always Known That Sell-Side Recommendations Are Not Independent </li></ul><ul><li>Fact: The Sell-Side Continues to Be Affected by Conflicts of Interest </li></ul><ul><li>Question: Who Will Listen to this Recommendation and Buy A Bad Stock? </li></ul>People Like US
  14. 14. Sell-Side “Products” <ul><li>Initiation Reports </li></ul><ul><ul><li>Industry Overview </li></ul></ul><ul><ul><li>Business Segments / Products / Competition </li></ul></ul><ul><ul><li>Financial Analysis </li></ul></ul><ul><ul><li>Valuation </li></ul></ul><ul><ul><li>Investment Thesis </li></ul></ul><ul><ul><li>Rating / Price Target </li></ul></ul><ul><li>Quarterly Updates </li></ul><ul><ul><li>EPS / Financial Analysis </li></ul></ul><ul><ul><li>Business Review </li></ul></ul><ul><li>News Analysis </li></ul><ul><li>Marketing Book </li></ul><ul><li>Models </li></ul><ul><li>Company Presentations </li></ul><ul><li>Investor Presentations </li></ul>
  15. 15. Day in the Life <ul><li>Sr Analyst </li></ul><ul><ul><li>7 am: morning call </li></ul></ul><ul><ul><li>8 am: Calls! Calls! Calls! </li></ul></ul><ul><ul><li>10 am: Company phone calls (IR) </li></ul></ul><ul><ul><li>12 pm: Client lunch </li></ul></ul><ul><ul><li>1 pm: Discuss report w/ Assoc. </li></ul></ul><ul><ul><li>2 pm: Work </li></ul></ul><ul><ul><li>4 pm: Review reports w/ Assoc. </li></ul></ul><ul><ul><li>6 pm: Client dinner </li></ul></ul><ul><li>Associate </li></ul><ul><ul><li>6:30 am: do work while things are quiet </li></ul></ul><ul><ul><li>8 am: get directions and get to work (writing, other projects) </li></ul></ul><ul><ul><li>10 am: Sit in on calls and take notes </li></ul></ul><ul><ul><li>12 pm: Lunch at desk </li></ul></ul><ul><ul><li>1 pm: Discuss report w/ Analyst </li></ul></ul><ul><ul><li>2 pm: Work! Work! Work! </li></ul></ul><ul><ul><li>4 pm: Review reports w/ Analyst </li></ul></ul><ul><ul><li>8 pm: Finish and submit by deadline </li></ul></ul>
  16. 16. Associate Pros and Cons <ul><li>Pros </li></ul><ul><ul><li>Options (not stock) </li></ul></ul><ul><ul><li>Some travel </li></ul></ul><ul><ul><li>Access to Sr. industry people </li></ul></ul><ul><ul><li>Develop deep expertise </li></ul></ul><ul><ul><li>Strategic thinking </li></ul></ul><ul><ul><li>OK hours </li></ul></ul><ul><ul><li>Money??? </li></ul></ul><ul><li>Cons </li></ul><ul><ul><li>Lots of writing </li></ul></ul><ul><ul><li>2-3 years riding the desk </li></ul></ul><ul><ul><li>Assignment risk (analyst and industry) </li></ul></ul><ul><ul><li>Vacation? </li></ul></ul><ul><ul><li>OK hours </li></ul></ul><ul><ul><li>Money??? </li></ul></ul>
  17. 17. Qualities of successful analysts <ul><li>Love to read </li></ul><ul><ul><li>WSJ </li></ul></ul><ul><ul><li>Economist </li></ul></ul><ul><ul><li>BusinessWeek / Fortune / Forbes </li></ul></ul><ul><ul><li>“ Forging & Casting Weekly” </li></ul></ul><ul><ul><li>Financial Analysts Journal / Analysts Accounting Observer </li></ul></ul><ul><ul><li>Books </li></ul></ul><ul><li>Sales Affinity </li></ul><ul><ul><li>Phone mannerism </li></ul></ul><ul><ul><li>Persuasion ability </li></ul></ul><ul><ul><li>Enthusiasm </li></ul></ul><ul><ul><li>Presentations </li></ul></ul><ul><li>Writing </li></ul><ul><ul><li>Clear / Fast / Effective </li></ul></ul><ul><li>Your Hook </li></ul><ul><ul><li>Thorough research </li></ul></ul><ul><ul><li>First to publish </li></ul></ul><ul><ul><li>Access to management </li></ul></ul><ul><ul><li>Banking business </li></ul></ul><ul><ul><li>Innovative products </li></ul></ul>
  18. 18. Getting the Job <ul><li>Get the interview </li></ul><ul><ul><li>Standard </li></ul></ul><ul><ul><li>Skills </li></ul></ul><ul><li>Interviews </li></ul><ul><ul><li>What do you know about the business </li></ul></ul><ul><ul><li>What skills do you have </li></ul></ul><ul><ul><ul><li>Financial </li></ul></ul></ul><ul><ul><ul><li>Writing </li></ul></ul></ul><ul><ul><ul><li>(Technical - Industry) </li></ul></ul></ul><ul><li>Interviews Cont’d </li></ul><ul><ul><li>Strategic thinking </li></ul></ul><ul><ul><ul><li>Explain an industry </li></ul></ul></ul><ul><ul><ul><li>Why you think someone will succeed (stock pitch) </li></ul></ul></ul><ul><ul><ul><li>Analysis thought process </li></ul></ul></ul><ul><ul><li>Analyst fit </li></ul></ul><ul><ul><ul><li>Hard working </li></ul></ul></ul><ul><ul><ul><li>Doesn’t complain </li></ul></ul></ul><ul><ul><ul><li>Eager to learn </li></ul></ul></ul>