Wednesday, March 9th, 2011
the book on equity research

Facing four hundred pages of a book about equity research, I was wondering what I’d think of it, given that I have written extensively about the topic myself.  I had a hint when in the first paragraph of the preface, James Valentine explained why he thought research in general isn’t better than it is:  “There are few, if any, quality control processes.  Furthermore, there is minimal professional training provided to equity research analysts.”  Amen.

The book, Best Practices for Equity Research Analysts,AnalystSolutions | This is the book summary on the website of Valentine’s consulting business. is a comprehensive look at the day-to-day life of an analyst.  Almost any analyst that reads it will come away thinking about the areas where she or he comes up short.  A warning, though, to the prospective analyst that tackles it:  You might feel daunted by the breadth and depth of the challenges of the craft.  (As of this writing, a summary by Valentine of some of the main points is available online.CFA Magazine | The piece, entitled “The Proper Care and Feeding of Great Analysts,” is from the January/February 2011 issue of the CFA Magazine.)

Throughout the book are shaded boxes in which the “best practices” in a given area are outlined in detail, summarizing and reinforcing the chapters themselves.  That makes for convenient and easy review of each topic.  The information is very accessible, even though much of it is presented in exhaustive detail, including everything from specific Excel functions to the best methods for filing information to tips on how to read body language.

There’s plenty here on the nuts and bolts of analysis, but the softer side of things receives its due.  Much of the work of an analyst involves ongoing qualitative assessments that augment the number crunching.  And interpersonal skills often make the difference — in getting information (one-on-one interviews and open-ended questions are always best) and in delivering it.  The ability to influence others cannot be overemphasized as a key to analyst success.

Valentine captures the big picture and the finest details, often conveying the nuance of analysis via examples from his years as a practitioner.  In studying novices versus senior analysts, he has identified many of the traits and techniques that can make a difference.  Can the book “accelerate” the careers of newer analysts?  I think so.

There are so many good ideas here that I can only scratch the surface.  One of the most important pieces of advice:  “don’t cover an excessive number of stocks.”  Others include perfecting the lost art of taking detailed notes; being clear about what is opinion and what is fact; understanding the different types of investors and their views on a particular idea; seeing the macro as well as the micro; using technical analysis to augment the fundamental work; and being obsessive about managing time.  In that regard, the focus ought to be the few “critical factors” that matter when analyzing and communicating a stock idea.  It sounds easy, but in a business full of noise, it is extremely difficult to do.

While the author’s personal experiences form the foundation of the book, he includes the perspectives of others, as garnered in interviews and surveys.  He also cites academic studies of particular interest.  I especially liked the concise summary of the findings of behavioral finance and how they can matter for an analyst.

There are charts and lists and acronyms, but whenever you feel like the book is veering too much into consulting lingo or getting too pedantic, you find that the ideas themselves are sound, not filler.  Despite first appearances, you can tell that Valentine is not a check-the-box guy, but he is thorough.  Just like an analyst needs to be.

I had a few quibbles (when have I not?).  Valentine stresses the importance of tapping the expertise of others in the organization, but he missed one category that can often provide great input — fixed income analysts.  I would have liked more information on balancing the documented tendency toward overconfidence with the required conviction in the communication of ideas.  And I would have welcomed more on how those critical factors should be reflected in an analyst’s communication.  Finally, and not surprisingly given the author’s background, the most in-depth information concerns sell-side research.  The buy-side material is not as robust and the world of independent research was not addressed.

All in all, that’s a pretty meager list of quibbles.  Valentine and I come at things from different directions — I focus on trying to rethink research structures,the research puzzle | This is a posting on “those darn analysts,” in which I looked at what we expect from analysts. while his goal is to improve how analysts operate within the current ones — but you need to do both.

I recommend the book for analysts of all types, those who want to become analysts, and those that interact with them on a regular basis, including portfolio managers, investor relations officers, and corporate managers.  Valentine has written the book on equity research.