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Life on the Sell Side: All About Equity Research

Calculator and PenDo you ever wonder how buy side analysts and portfolio managers generate investment ideas? While a lot of investing ideas come from proprietary research, sell side equity research can play a large role in generating investment ideas for the buy side.

When you step back and compare buy side and sell side equity research side by side, the similarities are numerous. Both involve researching and analyzing companies to generate investment recommendations. The only real difference is the end-user of the research.

Given the similarities, I thought I'd go right to the source and get the scoop on sell side equity research - from what it takes to break in to compensation to eventual exit opportunities.

Today's interview is with a sell-sider who has worked at both an independent boutique research firm and a large Wall Street investment bank, so he can offer a broad perspective.

There's a lot of valuable information here, so I decided to break the interview into two parts. Part 1 will cover the interviewee's background as well as an in-depth review of what equity research is and what it’s like being an equity research analyst.

Part 2 will cover the really juicy stuff like recruiting, breaking in, compensation, and exit opportunities.

Let's dive right in...

Q: OK, first things first: Tell me a little about your background and walk me through your resume.

Pre-resume, my father is a hog futures trader at the CME, so analysis and public markets were a part of my upbringing. I attended a small liberal arts school and earned a BS in Accounting. I chose Accounting because it seemed like a good foundation for anything in business, which was about as far as I had made it career planning at that point.

I quickly discovered that a big drawback at small schools is the lack of alumni network, so job searching was more difficult. A headhunter placed me in a job as a property accountant for a real estate company that owned warehouses. This was my first job out of undergrad. I worked there for three years until the portfolio was sold to a major industrial REIT.

After the sale of the company, it became immediately clear that my days were numbered. My office was full of graduates from a nearby top real estate MBA program, so I decided to go back to school and make a career out commercial real estate.

I went back to get my MBA with the intent of becoming a developer, but I was quickly neck-deep in finance and loved the challenge. I took part in a REIT analysis program where we, three other smart guys and me, hacked our way through nine months of managing a million dollars invested in REIT securities. We even somehow managed to beat the market during that short time period.

It was Money Management 101 and I was hooked.

Using our alumni network, I landed a job with a top boutique REIT-only sell side research firm and went to work. After a few years on the job I became burned out from the long hours, no weekends, and shitty company culture. I needed to get out.

So, after a short work hiatus, I re-joined my former boss at another firm. I was doing the same thing but in a better work environment.

Q: Wow, you left no stone unturned walking me through your resume. Now that we know your background, let's get started with the basics of the business: What exactly is sell side equity research?

Sell side equity research creates value for the buy side by being the go-to source for detailed and accurate company and industry knowledge, trading ideas, and company management access.

Sell side equity research makes money indirectly, primarily through commissions generated when the buy side trades through the sell side trading desks. You see, research is one (very important, I might add) part of a three-part team that also includes sales and trading.

Basically, research creates value by generating trading ideas (or arranging tours, industry expert discussion panels, company management meetings, etc.) and sales relays those ideas on the phone to buy side clients and trading talks to their buy side trading counterparts to get the trades that earn the commissions that get us paid.

Sounds simple so far...right? Well, if you decide to take a hack at this business, know that each firm has its own specialty or niche and it might mean the difference between loving your job and hating it.

Here's what I mean: Some firms are all about getting down to the nitty-gritty details and finding that little nugget of information in the back of an SEC filing that makes a difference in valuation.

Alternatively, the company might put on great investor events, bringing in the top experts to share their outlook, or they might provide meetings with hard-to-access management teams, or any other niche that the buy side will find valuable pay for through increased trading.

Q: That’s a valuable nugget of information for would-be sell side analysts. How would a prospective sell-sider find out in which niche the research firm specializes?

In an interview, it really boils down to asking the right questions to find out if it is a good fit for you. Some example questions to help you out:

What do your buy side clients say you do better than your competitors?

How much have your trading commissions grown over the last few years and how does that compare to the peak over the last decade?

Where do you see the greatest opportunity today to better serve clients and increase trading revenues?

The answers to these questions will help to gauge the firm's reputation - as well as where you can add value - and if the company is even focused on what interests you.

Q: You’ve managed to work at both a boutique and a bulge bracket firm. What are the differences between bulge bracket and boutique shops from an equity research perspective?

Bulge bracket shops seem to be more focused on maximizing the number of companies under coverage.

Boutique shops, in my experience, dig deeper on specific names, and are more academic, theoretical, and model-focused.

Q: Interesting. What about your daily routine? Take me through a typical day in the life of a sell side equity research analyst.

As far as daily routine, when it's not earnings season, I usually get into the office around 7:15 AM and scour for any news stories that might affect my companies while listening to the morning research call. After that, it's time to jump into longer-term projects, topical reports or initiation reports.

Throughout the day, there are emails and phone calls and news events that will interrupt your work, requiring quick analysis and write-up. I may be on the phone with a client who has a question about my model, or wants to know the risk factors on a company that we cover, or our take on a recent news event.

In addition, when any SEC filings are released or there are company news releases, it may mean a formal note needs to be published and sent out to all clients which means I'll need to draft that as well. If this happens after the market closes, it could mean a late night. On a normal day, though, I leave at about 6PM.

During earnings season (2-3 weeks every 3 months), the hours get longer, usually from 7AM to 9PM with some time to catch up over the weekend. Each company reports and holds a conference call, and so we update the models and write two published notes on each company.

Q: Earnings season isn’t very fun on the buy side either given the inflow of new information.

[To be continued]

LBS Note: Check out Part 2 of Life on the Sell Side where we discuss breaking in, recruiting, compensation, and exit opportunities.

{ 8 comments… add one }
  • Swing

    Hey Mike,

    Cool site,finally something for prospective ER guys!!
    A few simple questions with very complex answers I suppose.How do you find the next big thing?Can you only look in the sectors you cover etc?If everyone covers say APL or GOOG, how can you become very good at what you do? Is the only thing that matters in sell side ER short term trading revenues or does the long term also come into play, say 3/5 year views?

    • Lots of questions, in order:

      1) If anybody knew the answer to that, they’d never share it with anyone.
      2) Yes, you cover a specific sector with a specific set of names. On the buy side, you will find generalist investors that can invest in any sector or name.
      3) You can always stand out if your research calls are good. Just because everyone covers AAPL or GOOG doesn’t mean everyone needs to have the same view on the stock.
      4) Trading revenues are the result of good calls over time. Perennial II ranked analysts draw in consistently higher trading commissions year after year. It’s your long term track record that matters the most because your become a trusted source.

  • Is it not strange that not more emphasis is placed on objectively measuring returns from tracking exactly analysts’ calls?

    Granted that “whispers” and servicing buy side clients are significant aspects of an analyst’s function – hence the obsession over rankings in brokers polls e.g. II or AsiaMoney (on this side of the world).

    But would not an objective ranking of analysts based on their written and published calls be a more important metric to look focus on?

    Bloomberg has its ANR function which does the above half heartedly, and when rankings are published in the financial media some references are made to good calls etc; however i’ve yet to see theoretical portfolios built exactly on analysts’ calls and hypothetical returns updated and published regularly for investors’ consumption though. Or am i missing something here?

    Thanks in advance for your kind views.

    • The better shops do sometimes track model portfolios, which adds a lot to credibility, but ultimately it’s up to the buy side to deliver performance (i.e., make good investment calls) and the sell side to deliver good research.

      • Would it not make sense then, that for each individual named analyst, model portfolios be tracked based solely on recommendations published?

        While shops would benefit from knowing which sell-side analysts to take seriously; i’m sure analysts would just love the idea of having a daily updated score next to their name, ranked against their peers…

        Above also arises from larger question – on average, do portfolios constructed based solely on sell-side analysis outperform?

  • Renjith Krishnan

    Can I make an Equity Research Career without MBA finance, since I have MBA IT with Business Analyst experience in IT firms. I have enrolled for an Equity Research program from NSE. I need your advice, whether I am on right track to start an equity research career.

    • David Mandell, CFA

      Yes, your IT background makes you very qualified for a career in ER since you’re probably very familiar with MS Excel and MS word. Your ER program from NSE is a mistake, you should drop out immediately; personally I think pursuing a MS in computer science could help your chances as it will demonstrate advanced computer skills and analytical problem solving abilities.

      Honestly, you seem like an ambitious person. Send me your resume. My email address is DMandell@williamblair.com. I would be glad to help any way possible since we do get very nice referral bonuses.

      • Mathew Thomson

        Hi David,

        Similar to Renjith above, I was looking for some advice on how to break into a career within equity research. I have undergraduate and masters degrees in quantitative economics but am struggling to break into junior/entry level roles within the industry without any direct investment banking experience. Since graduating two years ago, I have been working as an analyst at an industry leading economic and financial litigation consulting firm, where I have been carrying out many tasks that overlap and fall in line with tasks typically carried out by analyst/associate roles in ER. Any advice you may be able to offer would be greatly appreciated. Thanks so much.

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