Real life of an Equity Analyst. Buy Side

To Buy or Not to Buy

To Buy or Not to Buy (Photo credit: Wikipedia)

This comment is quite realistic of the real life as an equity analyst:

I was motivated to make this thread after reading a lot of the other threads in this forum, about why certain top analysts are still on the sell-side. It appears that almost everyone who doesn’t work on the buy-side or sell-side, or even a remotely close front office position fails to understand how equity research works, and what purpose it serves.

Let me start off by giving you some information on my background. I’ve been working in equity research at BB for close to 7 months now for a high ranked analyst in the consumer sector.

1) First of all, understand that content wise, 90% of sell-side equity research is crap, late, and just a way for the analyst to stay visible. I don’t argue this fact, and I don’t think anyone else does. But just because it is crap doesn’t mean it is useless. Sell-side equity research content from the average analyst does one thing for buy-siders: it makes their life easier.

Sell-side teams (including mine) do a lot of the mundane analysis that buy-siders can’t be bothered with, but nonetheless find valuable. As an example, buy-siders will often just use the sell-siders model as a template to work off of rather than create their own, thereby saving hours of work. So creating detailed, well structured models are adored by the buy-side, regardless of how meaningless the assumptions are.

The 10% of the sell-siders that are very good at their job, and are phenomenal analysts are the ones that buy-siders actually care for their opinion about. For example, one of our biggest competitors at another firm put out a very detailed, well thought, and original pitch for a company of ours to break up or go through a significant restructuring. This piece garnered a lot of attention for him, and every buy-sider interested in the stock cared about what this guy had to say.

So the conclusion to my first point is, even though most analysts suck, their work is still useful to the buy-side, and there are a few really good analysts that everyone listens to what their research has to say.

2) Corporate access: The biggest value add for the 90% of crappy analysts on the street, and the reason why they keep their job despite putting out crappy reports.

I work along side an analyst who is barely ranked in his sector, doesn’t issue any reports besides the earnings review and occasional pieces, and not much of original content. But there is one thing that he does that he does good: corporate access. He covers 20 companies, and he has very good relationship with the management team of at least half of them. He is able to set up non-deal roadshows etc that clients love him for and he is a huge value add for them.

If you think an analyst can only be good by creating good reports, than you don’t understandequity research. There are two ways for analysts to build their research franchise: 1) content or 2) marketing.

As I already mentioned, only a handful of analysts are good at the content part. The marketing part is where the strength for the rest of them is. Generally if they aren’t good at one of these two, they won’t be an analyst for very long.

3) Ability to move over to the buy-side…this is the topic that everyone outside of the industry thinks they know but have absolutely no idea. MANY people from research move over from the sell-side to the buy-side. And they are preferred at the average fund over bankers because research guys have a much better understanding of how the markets work and what moves the stock than the bankers who covered the same sector and same companies.

I must note that the people who usually move over from research to buy-side are associates and not the analysts. And there are several reasons for this, but I’m going to first cover the associates.

Associates have 3 options when it comes to career progression: 1) become an analyst covering their own sector, 2) go to corp finance/investor relations/some other career, 3) go to the buy-side

Believe it or not, I would say most associates go the 2/3 route over the more obvious choice of becoming an analyst. I think the reasons for this are as follows: 1) they realize the skills that are necessary to be a top 10 analyst and don’t feel they posses them, 2) they enjoy the pure analytical aspect of the industry and don’t want to deal with the marketing or 3) some buy-sider approached them first and becoming a sell-side analyst is still a few years down the road. Some also just go into IR/corporate finance/other because they are just sick of the wall street lifestyle.

Analysts, on the other hand, are much less likely to go to the buy-side (imo). The reasons include a dramatic lifestyle change or they just aren’t good stock pickers but are good marketers instead.

I think the reason the best analysts on the sell-side do not leave for the buy-side is the change in lifestyle. Buy-side life is a lot more stressful than being a successful sell-side analyst. My analyst works 30 hours a week, works from home mostly so he sees his family a lot, and when he travels, it is usually for marketing events where there is a lot of socializing and fun. And by doing all this, he easily clears over a million a year, more than enough to live a very comfortable life.

Now he could move over to the buy-side and get paid more, but he probably won’t see his family as much, he will probably work more hours, from the office rather than home, he won’t be able to sleep if he makes a bad bet on earnings, he will wake up in the middle of the night and check is BBfor the Asian markets are doing.

Most top analysts do not want this, and this is why they choose to stay where they are.

4) The final topic I want to hit on his ER as an industry going forward. ER will always be around…and anyone who thinks that it is not is crazy. Aside from the content, ER is the liaison between investors and corporations…and there will always be the need for the liaison. Big institutional guys pay hundreds of millions of dollars each year just for the industry to perform its duty as a liaison, content aside. And that isn’t going anywhere. You can talk about equity volumes all you want, you can believe ER is a cost center all you want (which is not true), but the industry is going no where. Will it shrink? I don’t know..maybe, but it it will still be here because there is still a lot of money left for clients to spend to access the services ER offers.

Interesting math for all the aspiring ER monkeys, take the comp you want to earn, then divide it by 0.10. So $300,000/0.1= ~$3 million required top line revenue/year. Divided by 12: $250,000 top line revenue/month. Divide that by average comission, 1% for giggles: $25 million. That’s how much stock your names under coverage have to trade each month for you to get paid $300k/year. OP covers 20 names, so his bank needs to trade at least $1.25 million on each of those names per month. More if they actually want to pay OP the associate.”

All the best,

John

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