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  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: Toys.com and Pets.com 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>

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