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.