What is the role of an Equity Research Analyst in the equities research division of major financial institutions and how to become the best “sell-side” analyst on Wall Street? Industry Knowledge, Company Knowledge and Stock Picking are the “basic building blocks” of an equity research analyst on Wall Street. You will spend anywhere from 25%-50% of your time playing with those blocks. The best analysts, in my opinion are “trusted business relationship managers,” who can convince corporate executives and institutional investors that they are the best source of information, knowledge and insight about a sector. In short, 50%-75% of an equity research analyst’s time is spent on advising and mentoring people.
I spent 17 years on Wall Street as a technology analyst in equity research; most people have absolutely no clue as to what a financial analyst does in the equities division of an investment bank. Most people’s views are shaped by what they see on CNBC or read in the Wall Street Journal so the perception is a mix of traders, hedge fund managers, economists, accountants, investment bankers and salesmen. It is a little bit of all those, but above all you must be a knowledgeable and trusted advisor to institutional investors and corporate clients. With that in mind, let me tell you what it’s really like to be an equity research analyst at some of the largest financial institutions. More importantly, let me share with you what it takes to be the best from my own personal experience as a top-ranked equity research analyst nationwide for many years.
I started my career at a small institutional research boutique in Dallas called William K. Woodruff & Company. It was a small firm with less than 30 people so it was a great place to learn the ropes so to speak on different parts of the business. One day you are helping write a registration statement as an investment banker for a public offering and the next day you are working as an equity research analyst. In between, you get to do a little trading and some corporate finance. Bill gave me plenty of rope to hang myself as well as learn on the job and I certainly did both…lots of times.
From WKW, I went on to concentrate on equity research at Minnesota-based Dain Bosworth, which served as my launch pad to the big leagues in New York City where I was the telecommunications equipment analyst Lehman Brothers, Bear Stearns and Salomon Smith Barney. My coverage included Cisco Systems, Ericsson, Alcatel, Lucent Technologies, Motorola, Nokia, Nortel Networks and Qualcomm just to name a few. During my tenure on Wall Street I became the top-ranked analyst nationwide according to surveys by the Wall Street Journal, Reuters and Institutional Investor Magazine for many years.
How did I get to the top? I was a general technology analyst when I received the call from Steve Balog the US Director of Research at Lehman Brothers inviting me to an interview with him and the Global Head of Research Fred Fraenkel in New York City. During the interview, Steve indicated I was under consideration to become their telecom equipment analyst. There were very only few good ones at the time and Steve wanted to groom someone for the role and proceeded to give me the best description of what it takes to be the best equity research analyst on Wall Street.
Despite all the new regulatory challenges today, there still are three critical “basic” elements you need to be a good equity research analyst:
- Industry Knowledge. This just takes time learning the industry either on your own or by pulling someone from industry. On your own, you can easily immerse yourself and be knowledgeable in about six to 12 months. Most people assume, the best place would be to pull someone from industry. I believe that works if the industry person works under a senior analyst for many years first similar to Goldman’s Mary Henry, who was under Dan Zinser’s wing for some time after she was recruited from Alltell. Without a mentor, a person plucked from industry may suffer from the “curse of knowledge” and the inability to decide what is important or focus t0o much on process without regard to timing.
- Company Knowledge. This part is Financial Statement Analysis you learned in your first finance undergraduate class or CFA I. You need to be able to meet with a company, figure out their competitive position within the industry and analyze their financial statements to figure out how they make money. At the end of the day, this boils down to spending a lot of time with management and all of the company’s SEC filings. You spend a boat-load of time creating your financial models up front then it’s all maintenance and tweaks.
- Stock Picking. This is difficult to explain. Some are good at it some are not. At the end of the day, it’s close to a random walk. The equity research analyst just needs to learn when it’s worth putting their head on the proverbial chopping block on when not to do so. I will say this much, and it is purely subjective, for every bad call you make, you will need to make four great calls to be back even with your clients.
You may be the smartest person in your industry sector or the best stock picker, but if no one hears you or no one wants to listen to you, then you are dead in the water. It’s the answer to the old question “If a tree falls in the forest, does it make a sound.” With respect to Wall Street, the answer is NO!” If you pound the table for everyone to buy a stock and it goes through the roof, it doesn’t matter if no one listened to you or no one knows about it.
Industry Knowledge, Company Knowledge and Stock Picking are the basic building blocks of an equity research analyst on Wall Street. However, the best analysts, in my opinion are those who can deliver world-class client service marked by high levels of responsiveness, accuracy, insight, urgency, attention to detail, professionalism, follow-through and enthusiasm to build trusted relationships with institutional investors, portfolio managers and corporate executives in global markets.
11 thoughts on “What Is The Role Of An Equity Research Analyst?”
Nice Job! Sound advice from a top Pro.
That is the first complete description I have of your profession. Thanks Alex.
Alex and I have both known well paid and well respected analysts that never, and I mean never, made money for their clients with their investment thesis or stock recommendations. They were paid by the client because of their industry and company knowledge or often their ability to put key CEOs in front of the client for one-on-one conversations. What I teach our young analysts and folks who aspire to graduate to an investment bank are the following.
1) Do not assume you can win with your intellectual horsepower. The investment business attracts people who have been at the top of their class since pre-school. Commit to knowing more facts — not more educated opinions.
2) Thoroughly understand what the consensus knowledge and thesis is for your sector and your companies. Always ask yourself, what do the really smart guys know that I don’t? Don’t quit digging until you know everything they know or think they know.
3) Then the work starts. What about the consensus is wrong? What facts do you know that the consensus does not?
4) Knowing better facts that might change the consensus is worthless if the consensus never changes. What event or events are most likely to cause the consensus to change and incorporate your not widely known facts?
The market is fairly efficient and reflects not all knowledge, but certainly the consensus knowledge. Knowing what the crowd knows not is a money maker. Knowing what the crowd does not know and why it will matter is a money maker. That is how an analyst can build a reputation with his clients. However, it will also make the analyst consistently a contrarian. Contrarians rarely become the most popular or with the most clients by definition. But if one aspires to be an investment analyst does one want to be popular or wealthy?
As I close every research report — don’t believe me, do your own research.
Thanks for adding your point of view Mark. I would just like to correct your second to last sentence. An analyst can be popular and wealthy. It’s not an either or, its “and/or.” It is possible to do both at the same time. There are numerous examples just in the technology sector
There are many small things that separate the best analysts from others. You might want to read the HBS Lehman A Case available at Harvard Press. Alex gets it right. A lot of small things lead to a big success which has a different meaning for different folks.
Thanks for the comments Jack! You Fred Fraenkel and Steve Balog were the most instrumental in taking Lehman Brother’s Equity Research department to the top of the polls as the number one research team nationwide for many years. I feel privileged and honored to have been part of that.
Hi Alex! I’m new to the finance industry and this article provided much needed insight into the role of an equities research analyst. I recently started at II.com as a Product Director, and am trying to improve and develop new products to offer our readers. If possible I’d love to pick your brain about our website, the rankings, and any other problems that an equities analysts encounters where technology isn’t doing a good job at solving the problem. You can contact me directly at email@example.com.
Will contact you via email directly Adrian
if some equity analysts are compensated based on their industry knowledge and ability to get CEO access for clients…. what makes them different from an Investor Relations professional?
And – if equity analysts specialize in one sector and a group of stocks,why wouldn’t the buy-side want their opinion? If the buy-side is looking at hundreds of stocks why wouldn’t they want stock recommendations from an analyst only focused on say 15?
Thanks for your questions Jon. I will take your questions in order. 1) Analysts can help with access to a host of companies whereas an investor relations professional can only get you access to their company. Same with an IR agency. You only get access to their clients and they have a vested interest since they are paid by the company to represent them. You can debate whether analyst has a vested interest or not, but the analyst still has to balance the needs of their entire firm’s constituents with institutional investors, in my opinion, among the most important. 2) The buy-side does want the sell-side’s opinion. That is the sell-side analyst’s main constituent. Above all else an equity research analyst on the sell-side must provide the buy-side value. Value means different things to different people. Each analyst has their own niche(s) within their sector. A buy-side analyst or portfolio manager might place greater confidence in one analyst’s financial ability, another for their industry knowledge, and yet another for company information.