Among the persistent themes of this blog are that there are many investment strategies, that the components of them can be put together in a number of different ways, and that deeply exploring the “how” of an approach is the best way to understand it and improve it over time. As a consultant on investment process, my task is not to convert an organization to my way of thinking, but to provide ideas for change that can leverage the strengths of its approach and clip the wings of its weaknesses.
Trying to get in sync with different types of firms (and people) is a critical skill in that regard, which brings us to another chapter concerning “those darn analysts.”the research puzzle | Last week’s posting focused on the broad range of skills that we expect research analysts to have. As noted last week, many analysts struggle with the communications demands of the job. No wonder.
Let’s say you are an analyst at a large buy-side firm. Among your clients, if you want to call them that, are portfolio managers with a tremendous array of personal tastes in stocks and stated mandates for the portfolios they run. It’s your job to try to help them all do well, and one way or another they will have an important say in how you are compensated and how your career evolves.
One of them might walk into your office and read off a list of new 52-week highs in your universe — stocks that you don’t have rated as buys, but he thinks you should. Another might only want to get you to focus on the big uglies, down-on-their-luck industry stalwarts, no longer loved by the crowd. Others may want some thoughts about a coming IPO without revenues, or a small potential takeover target, or whatever. And let’s say that you are, yourself, a classic GARP investor.
Operating in that ecosystem, what constitutes a “buy”? Different things to different people, which makes being all things to all people, as we often ask analysts to be, a recipe for disappointment.
A sell-side analyst deals with analysts and portfolio managers (plus reporters, etc.) of an even-greater variety, limited only by the ways in which stocks in a given universe are used by someone, long or short.
Suffering from a lack of available time, analysts have to decide how to focus their efforts. Invariably, that means migrating to those who share their point of view, who are keen on their particular analytical capabilities, or who hold a certain power (for buy-side analysts, the portfolio manager with the most assets or the ear of the CIO; for sell-side analysts, the dominant firms in the industry or ones known to vote in popularity contests like those of Institutional Investor). Other constituencies get left out or served in passing.
The most successful analysts try to serve a wide range of constituencies and to communicate the landscape of information in tailored ways, understanding the needs of different clients and their variant perspectives on the world of investing. They can be criticized for doing so, as when something is a “buy” for one person who asks about a stock and a “don’t buy” for another, even though the demands of their separate approaches make those precisely the correct respective calls.
This business of analysis is all more complex than it’s made out to be, perhaps nowhere more the case than in communicating ideas to people that walk different investment paths. “To each his own” (pardon the gender reference, we’ll get to that aspect of the issue in due time) is a good mantra for analysts. Pretending that your take on something is all that matters is to make your probability of success lower than it otherwise could be. Learning to add value for clients of all kinds is a rare and valuable skill.