As it is for most every position in the investment business, the job description for an equity analyst can be boiled down to the three words of today’s title: “Analysis plus communication.”
When I evaluate a research organization or an analyst, I start with that construct, so it makes sense to include some thoughts about it in the series on equity research of which this is the second installment.the research puzzle | This PDF updates with new postings as they occur.
For the “analysis” part of the equation, the necessary components for an analyst’s consideration can be fairly described as “anything and everything.” To many, it boils down to “picking good stocks” (and avoiding bad ones). It’s not unusual for an organization to have that as the effective bottom line of an analyst’s performance review.
But what does that mean in practice? There are myriad ways to measure research “performance” — and what we really want to get at is the process behind the apparent success or failure (since it often is, of course, a matter of luck, good or bad).
As I wrote in a 2010 posting about “those darn analysts,”the research puzzle | This is one of the most popular postings about research that I have written. we ask analysts to perform a wide variety of chores and — especially at bigger shops — serve a wide range of masters. Sorting out the value added by analysts is exceedingly difficult and beauty (or lack thereof) appears differently in the eyes of different beholders of that research work.
This presents a real challenge for an analyst, a director of research, or a chief investment officer. For all concerned, it is easier to create an orthodox research approach rather than an innovative one, despite the fact that almost by definition alpha accrues to those who approach the research puzzle from an odd angle.
Future postings in this series will deal with a variety of pertinent analytical and organizational issues, so let’s turn to the “communication” part of the equation.
I have written a number of postings about the importance of communications ability in the investment world, including one of my “letters to a young analyst,”the research puzzle | This is a PDF index of the whole series; the particular posting is “communicating ideas.” in which I said that “I saw more [analysts] fail because they couldn’t communicate well than because they didn’t have the analytical chops for the job.”
It is the culture of the business to not worry much about communications skill, thinking that a good analysis or good numbers will be heard and will win out. For example, it is mystifying to me that multi-billion-dollar hedge funds send out investor letters that look like they were done by (business, not design) undergraduates. I stated so in a tweet recently and got a responseTwitter | From @WallStreet_Rant. that said, “It’s data that matters, not how pretty you can make the chart.”
But it is how clear you can make the chart, the report, or the presentation. What surprises me about many investment organizations is that they don’t understand the importance of the communications side of what they do. It’s not that their work isn’t pretty (although much of it is amateurish and ugly), it’s that it’s not effective.
Whether it is within an organization or with clients, how you present your information matters a great deal, whether it is an image, a report, a speech, or an elevator pitch. To point to a recent example outside of investments, consider the first presidential debate.
President Obama looked to have an insurmountable lead; the race was his to lose, but he flubbed the first debate and it is very close coming down to the wire. Why? Try to find anything anywhere about a substantive answer that turned the tide. It was entirely related to his communication style and the impression that he gave rather than what he said.
If you think that’s not the case in investments, you are fooling yourself — and leaving out one half of the formula for success.