Equity Research Analyst — Ask Me Anything

This post is a summary of the AMA I did at a few forums. If you have any questions too, please feel free to leave a comment at the bottom.

What was your average day like?

0615 — leave home, check emails and start reading news on the way to office with the hope that I am able to read through all of them by the time I am there

0700 — arrive at office, have a quick breakfast (if time allows), get prepared for the 730 morning meeting in case any questions from sales and trading

0730 — morning meeting/talk to sales, traders

0800 — reply the more in depth emails/call clients

1000 — quick breakfast if not already had earlier, talk to team members on projects, spend some time writing research reports, check stock price movements

1200 — client lunch

1400 — more research writing, excel modelling, talk to investors, talk to colleagues and boss on the latest office gossips to try and make sure I still have a job in the next 24 hours

1600 — head out for a coffee with a client

1800 — get the research report ready to be published for tomorrow

1900 — leave office or quick dinner and try to finish the above report

Pros and Cons of the job? Best way to prepare as an undergraduate?

First thing I can think of is the travelling. If I hadn’t work in Research, I wouldn’t have imagined I would have travelled so much in my 20/30s. I think most of us should enjoy this when we are younger but when you get older and want to or have families, mentally it becomes harder. It also gets harder physically as well because the itineraries are usually packed.

Another perk is the expensive lunches and dinners you get to have because you have quite a generous budget when you treat clients. Another thing is you get to work with really smart people most of the time. Yes, there can be jerks every now and then but those guys are just trying to be difficult to put you off and if you get to know them or they like your work and know you, they are actually nice. And because they are difficult, they are actually very sticky as clients. Sometimes it is actually more difficult to impress friendly clients because they are the ones that everyone would call. Anyway, real jerks are really rare.

For the cons, I would say the industry has got tougher over the years because of competition, margins coming down and regulations. Each person is trying to defend their share of a shrinking pie and the end result is there is a lot of politics unless you are just a really star performer, which given the nature of the industry, is very difficult. This is because the performance metrics of an analyst is not very clear (although this is changing with the new Mifid) so is very subjective. What this means is that, not only will you need to spend a lot of time talking to clients, you will also need to spend a lot of time talking to your bosses, ie, the managing internal part. So it is a lot of effort and time commitments.

I will be writing a lot about this in my blog, which you can check out later as well.

As an undergraduate, I would say, you need to think very thoroughly what you really want to do. As different roles have really different outcomes in your careers such as sell side and buy side are very different, even covering different industries could lead to different career paths. It is probably a bit far ahead but anyway, it helps to have some idea about your passion, strengths and if they are good fit for the roles you are after. For example, if you really enjoy talking to people, you should probably be doing a sell side analyst or even sales jobs as opposed to buy side.

It is a bit cliched but try to network with as many people as you can in the industry. You can do this through Linkedin quite easily now. When you connect with people, do some research first and ask some relevant questions. Not everyone will respond because they are busy or maybe just not interested but you will get some responses. And when they do, there are reasons for that so try to work out if they are actually hiring now or if they are just nice and want to help. Even if it is the latter, you have built a contact, which could become very useful later in your career or when they do hire in the future, you are already a warm lead. At this stage of your career, everything you do you are investing for the future. The person you just got to know right now, in 5 year’s time, you already know him for 5 years and people remember that.

I would actually say, don’t worry so much about the grades, as I personally feel those are more for the formal HR processes and screening. If you meet these people in person, you already bypass that and if you can show to them you are genuine and committed, they will take note. There are a lot of hires that just come from referrals not the formal HR processes.

Forgive me if this is an ignorant question, since I’ve never worked in equity research, but when doing equity research, what was the role of developing a macro view? Did it filter into your write-ups in an explicit way frequently? Also, given that you were covering companies in Asia especially, what role did your understanding of national/regional politics play in developing your view on equities?

These are actually great questions.
Most research departments usually have an economics team, some might belong to equities and some fixed income.
They would publish certain forecasts on economic variables like GDP, interest rates, loan growth and for example, since I used to cover banks, our forecasts for individual banks would be based on their economic forecasts.
So in principal, the sector analysts are not supposed to have macro views as such.
Understanding of politics was important for us, as we covered banks, which is macro and policy driven. In fact, a lot of investors questions were on politics, senior management changes because some banks management are actually appointed by the governments or they could leave for government roles. So for example, to understand their career history and objectives would give one a better understanding of how they would run a bank.

Hey thanks for this. It seems that moving from actuarial analysis to data management is a reasonable transition, but how did you position yourself to make the move into research coverage? Did it look like more networking or did you have prior industry experience within banking and insurance that you could sell as a story? Thanks again and I’m glad to hear you’ve found your passion in what sounds like a really interesting space.

Thanks for the courteous note.
As my grades in actuarial was quite average, there would have been no way I would make it to an IB quant team — first, I couldn’t get pass the screening and second, I couldn’t have survived with the technicality anyway.
So I was lucky in a way that the data management role was an experienced hire and was more like an operational role without so much technicality but just knowledge of their existing systems.

There are 2 points on research coverage. Firstly, you have to move into the actual equity research sector teams, ie, the teams that actually write the research. Secondly, from there you have to work your way into getting actual stock coverage for yourself.

For me, both points were luck and not planned but that’s just life I think, you have to at least get yourself into a position where luck can apply to you.
Looking back, I think I got into the research role because most importantly, the market was expanding and getting into a bull market so there were not enough experienced people out there so they had to branch out and looked for people with similar experience. So for me, that data management research experience helped. To be honest, I don’t even think my boss back then knew what I did but he was probably like ok, this guy was at least in a research department before. When I started I didn’t even know how to calculate yoy and qoq figures for example. All these things you just have to learn on the job and find a position/boss that will accommodate that.
I actually got the position from a headhunter, which was introduced from a network so yes, networking is vital. You have to get yourself into that community. I would say that is more important than any of my “story”. Its all about developing warm leads and working the numbers game, ie, network with as many people as possible and at least 1 would like you and actually hiring.
Hope this helps and let me know if you might have any more questions.

I don’t understand much of the industry as a whole, but an I’ve heard from ex analysts that the industry as a whole is shrinking, and equities research isn’t as highly valued as before, wanted to get your take, maybe it’s different in Asia?

To add my friend was in Equity Research at a BB about 20 years ago (before dot com) and said that Equity research used to go to pitches with IB, but now there’s a strong wall between banking/research.

Yes I agree. I think our work was much more valued before.

I think the industry is subject to a major change.
Research reports in PDF formats, calling clients over the phone and leaving voicemails, these are really old ways of doing things. There will need to be more usage of social media, more interactive models, automation.

For example, there is increasing usage of social media for the analysts, which need to be compliant with regulations on information distribution.
The basis of analysis have also changed. Most of us are trained under fundamental analysis so analysing financial statements but now there maybe more focus on again analysing social media and media newsfeed as they have more impact on share prices especially short term and the investment horizons are getting increasingly short term as well.
Yes, 20 years ago was probably the best time to do Equity Research in its current form. The good old way of talking to management, investors, stakeholders and coming up research with mosaic theory. There were less news back then so share prices were less sensitive to random events and you can genuinely identify value.
To your point, a senior used to tell me there wasn’t much difference between a financial journalist and an analyst except the analyst gets to go to pitches and do IPOs, which meant he earned a lot more. So with this wall, independence and tighter regulations, the analyst job has got more difficult and harder to justify the comp.
But still, they get paid a lot, which is why everyone is still trying to hang on.

Thanks for taking questions, did you move sectors during your career or stay focused on financials throughout?

I stayed focus on Financials but I did cover a range including banks, insurance and diversified financials like asset managers and brokers. Each of them could be considered an independent sector and covered as such.
I do see analysts move across sectors from time to time due to different reasons. But given the nature of the job, it is really stepping out of your comfort zone to cover another sector as you have to build relationships and knowledge again from scratch pretty much. Some people would do it because it’s a new and upcoming sector, where there maybe a lot of deals, or they are moving to a sector with bigger market cap so implying more commissions, while some could be involuntary such as the juniors.
I would say it is more common on the buy side as it helps to have looked at multiple sectors before becoming a PM but in the sell side, the career path is different and it is more common to be a specialist.

I just started out covering as a junior covering financials on the sell side so was curious. Since you spent quit a bit of time in the industry, looking back is there anything you wish you done differently? whether that was in the sell-side or buy side?

I would say you need to find out if you see yourself in the sell side for the long run or looking to move to the buy side eventually.
If you are looking to stay in the sell side then you should focus on your own name, so try to have your own coverage and also talk to investors, sales and management as much as possible.
If you are looking to switch to buy side eventually, you should study other sectors or even ideally switch teams after a couple of years because breadth is more important. You should try to switch to sectors that are on a rising path like Tech, Healthcare. Then try to focus on speaking to fund managers (not the analysts) and not just talk about fundamentals but also how to actually trade the stocks and also show your knowledge of other sectors. That should help position you when opportunities come up on the buy side.

Have you seen anyone in their mid-30s come into research because they are extremely passionate about a specific industry? Assuming no specific research experience before, but extensive finance experience on the macro side.

Yes, we do have that for experienced hires and I have seen successes especially when you are extremely passionate.
You would be bringing in knowledge that is currently not covered by most in the industry but where there is a lot of client interest.
The person I knew that got in this way started out presenting at our conferences and client events. And he became so good that our team head hired him.
He was also quite naturally gifted in serving investors, which is the other skill you have to learn quick to survive once you are in.

How safe is ER from automation?

I would say the job would still be here because you cannot really take away from the analysis, presentations, corporate access and relationship management parts.

But what people do could be very different. For example, we used to have juniors writing daily/weekly/monthly summarising news or data, results reports which are generic based on the results numbers. Those could be replaced by AI.

An analogy I can think of is when I first started, a senior used to tell me when he was an associate he used to have pencils, a grid paper and a calculator to build models with. Each time, they change a model, he would rub off the previous calculations and do new ones. The junior’s job has obviously changed since.

This is also a job where they have written traditional reports in pdfs, presentations in ppt and used phones and emails to communicate for 10–20 years. In the future, there would likely be more usage of interactive models such as investors can change certain assumptions and see different results in the report, infographics and much more use of social media.

If you think about it, analysts are effectively influencers, ie, how much they can paid depends on their market power and ability to influence the market so there will be a lot of leveraging of social media. In fact there is already just that only some people are doing it but less formally and there are regulations, which is limiting the usage as well but is opening up gradually.

I would also say that right now, analysts are usually divided by industries. In the future, with more assistance from automation, there maybe more generalists as well. This is a trend because commission rates are coming down and the way to increase production is by covering more stocks to justify the compensation.

I will write an article in my blog with a bit more details on this, which you can check out later.

From what you’ve read about ER in the USA (if you have read about it), how would you say it differs from ER in Asia? Are there any significant differentiations that you like more there or like less there? What was your typical day like, and what is the work culture like? I’m genuinely curious because I find the work culture in Asia somewhat fascinating.

We actually didn’t get to work with US colleagues so much unless there is like a global industry report, which there is some sort of collaboration. Or there can be some data requests every now and then for a common client.

The impression I got is that usually the US guys are more experienced to be honest because I think the industry is just more established. They probably have worked for a few years, did an MBA and got in as an associate. The analysts in Asia are usually younger as they got in directly from university undergrads and worked their way up so some guys could be in their late 20s/early 30s and a senior analyst already whereas the senior or team heads in the US are more likely in their 40s or even 50s.

The other thing I would say is that in Asia, the churn is probably higher so people maybe in a job for 1 or 2 years and they leave to the next job because of higher pay, more senior positions so career advancements are probably faster here. But overall, I think the compensation structure is slightly lower in Asia compared to the US.

If you work in Asia, there is also a lot of marketing in the US and EU but if you work in the US, there is probably more travel within the US and less to EU and Asia. I recall an EU analyst told me this is a positive as you age because the long haul flights take it out of you when you are older.

I don’t think a typical day differs a lot — it would still be reading news, talking to sales, clients, writing research but the impression I got is that in Asia, we had a lot less focus on the actual research reports whereas in US, there appears to be a lot more focus on that. I think this is because of the volatility of the stock prices, the time frame of the ideas and transparency of information.

What do you find in the Asian work culture that interests you?

Do you think ER teams actually have independent , contrarian ideas or do they tend to go with the flow and be very process oriented? Since you were on the inside, what are ways an investor can take advantage of the weaknesses of bulge bracket ER teams decision making process to beat them?

In addition, going into the future, what do you think the prospects are of someone starting their own hedge fund (more fundamental research based) and is there a right way to do it/what leads to success in this endeavor?

To answer this question, it helps to understand the actual business model of ER.

ER in itself does not really generate income. Again, this is changing with the new Mifid but will take time. But in any case, I don’t really think the subscriptions of research and time costs can justify the compensation. Therefore, ER is supported by commission income from asset managers/buy side and investment banking, ie, IPO fees or primary deals like placements.

So if the bank is working on a primary deal in a particular industry, it maybe somewhat difficult for the analyst to put out a really negative note on that industry even though that maybe his/her true opinion and clients that are smart, which most of them are, they know and appreciate that.

So to illustrate, if an industry have many deals coming, the analysts will very rarely put out very negative research. In an industry that is more matured, there maybe more genuine, independent ideas.

There are also a few independent research houses out there, which emphasise on independent, contrarian ideas as you mentioned.

I think it is also a balancing between being independent, ie, protecting your own brand as an analyst and having to leverage your brand to sell the deals. In any case, contrarian ideas are really hard to come by and you need to be brave to call out a buy in a falling market. To be honest, most of us tend to go with the flow because you should have already built a client base so there is not much incentives to go out contrarian a lot unless you have built your reputation around that.

The buy side mentality is very different so I don’t think it is about beating the bulge bracket because their objectives are different. The buy side is just interested in returns whereas the sell side is interested in commissions and influence. So for example, if a buy side knows that a particular sell side has big influence in the market and that sell side has just put out a buy note on a particular stock. The buy side can just go and buy more of that stock for a short term, 3 month trade or something like that.

My personal opinion is that starting your own hedge fund and surviving has got harder because investment horizons have got shorter and the fees have also came down. The returns on traditional strategies like fundamentals got eroded and information overflow/algo trading meant stock prices are much more sensitive so a stock could move and you would have no idea how to explain it based on fundamentals. My friends that work at hedge funds work very long hours so it is a lot of sacrifices not only personally but your family as well. The hope is that you can make a lot of money in a few years and retire. And while that happens, it doesn’t happen to everybody clearly and the anxiety, stress you have to go through means you have to really enjoy the job. This is one of the reasons I opted out to be honest.

A bit cliched but I think you need to come up with some sort of new angle like using AI to analyse social media, which people are using already, to raise capital. Then again, having the right connections, always help as well.

What is working in Hong Kong like? Did you speak Cantonese before working in Hong Kong? I’m looking to work in Asia before I settle down so would love to hear how it is

To be honest, I actually haven’t heard too many complains from expats working in HK. The city is generally vibrant, there is a lot to do, especially when you are young, the food is good and you are just one short flight away from a holiday destination like Thailand, Bali or Japan with Macau just next door as well. Property prices are not cheap so you would have to do with smaller personal spaces but then again you probably wouldn’t be spending too much time at home anyway.

I am actually from HK so Cantonese is my first language but you would survive with just English here. Career wise, you would be better off learning Mandarin if you are looking to learn Chinese, which is easier to learn anyway.

I think it makes a lot of sense to spend a few years here especially now with the opportunities in the Greater Bay Area in Guangzhou or Singapore as well for South East Asia.

You went from ER -> Startup Hedge fund -> Credit rating agency? Quite a strange progression, why the last move?

After 10 years of sell side, you would want a change because the travelling, politics and results seasons drains you and the work is really repetitive. The hedge fund was because everyone on the sell side want to go to the buy side and I was no different. After I went, I realised it wasn’t really for me and I started having children as well by then so thought credit rating had good work life balance. Actually, a lot of people go from sell side to buy side, credit rating or investor relations.

What were your thoughts on working for a credit agency? It would seem a step backwards for me but I think the lifestyle balance could possibly make it worth it? What was the rough total comp cut you had to take?

Credit Agency is generally less demanding and stressful but you still get to leverage on your prior knowledge. Of course, you get less recognition and as you mentioned, a step backward. But you will have different priorities in life at different ages and to me, it makes sense if you are looking for something more stable, less stress and less travelling. Some people I know went and really enjoyed Rating Agencies because in a way, there is more respect from the corporate as well compared to the Sell Side. Some thought it wasn’t really challenging enough and went back to Sell Side so it just depends on the person. The cut in comp depends as well but around the 30% range ball park if including bonuses but some Sell Side firms are no longer so generous on bonuses anyway nowadays. From a Return on Effort/Time perspective, it also could make sense especially when you have a family.

Thanks for the colour. Reason I ask is I’m 5 years into DCM role and burning out and just thinking what I can do to reclaim some time/sanity without destroying my career…, now following you on medium so will keep up to date with ya

Yes, completely understand. To be honest, I felt I stayed a few years too long in research for the exact reason that I was afraid of destroying my career. Back then, I didn’t really want to do what my boss or my boss’ boss were doing so those were the signs. We all have to think about what we are doing in 5–10 years time but most of us procrastinate. I spent a lot of time in the past year studying personal development and entrepreneurship, which is why I end up trying to build this online education platform. Happy to share more here if you have more questions or if you follow me on Medium, you will see some of my personal development posts later but basically, it took me more than 6 months to switch from the banking mindset.

What books or resources would you recommend for analyzing insurance companies?

I currently cover financials (e.g., banks, payments, credit cards) in a buyside fund and would like to branch out to covering insurance as well.

Maybe a bit cliched but probably the best way to learn is to go through the companies financial statements/presentations/webcasts. After a while, you should see there are certain metrics that the management and analysts focus on, maybe embedded value/new business value for life insurance or loss/expense/combined ratio for non-life, underwriting margins, the reserve and its methodology or their investment portfolios/returns then you can start drilling into more details on fundamentals of these metrics, which you can get from sell side primers. With books, I suspect it might be easy to just get bogged down to the details and you cannot really see the practicality.

Thoughts about bear market in China? When do you see the economy trending back upwards.

I haven’t been following the news and markets for a while as I am now concentrating on my startup so I am more sharing my experience. I would note that even if I had a strong view on something I realised that 1) it could be very much based on my own biases — cognitive or lack of full picture and 2) it is playing an odds game so most of us are probably right between 45–55% of the time. If you can get to either extreme, you still have to make multiple bets to consistently make money. Then, there is the issue of sizing and trying to lose less when you are wrong and vice versa.
But on China, I would say one common misconception is that in China, most assets are priced according to liquidity whereas the Western method is mostly based on risk pricing, ie, risk premium/discount rates. So we are effectively talking about 2 different framework of valuing assets. Therefore, I think you have to study a lot about the liquidity situation in China especially short term so look at things like interest rates, interbank rates, repo rates, bond repurchases, deposit growth, loan growth of banks etc. I think one has to develop some sort of view on this otherwise assets could be just cheap or expensive based on fundamentals but never really revert to their intrinsic value. A final thing is that a lot of the above are based on policies, which is extremely difficult to predict because then you start to delve into the politics and personalities.

Any advice on getting into ER with a couple years of finance experience after university?

I would say spend time networking with the ER people. If you have friends already in, talk to them, they may know where there are openings. Ask them for introductions to their friends. Use Linkedin, do some research on the person you are trying to connect, the profile and you can also just google them and since they are in ER, they may have been quoted before. Write something relevant or even better, try to prove your value add by showing knowledge.

Also, go to the investor relation (IR) websites on the companies you are interested in and you may find they have a list of analysts that cover them. Reach out by email but again do some research first and write something appropriate and relevant.

Not everyone is going to respond and you may run into a jerk every now and then but that’s life and in the end, it’s just a numbers game. If you reach out to enough people, you will eventually get some connections and they will lead you closer to where you want to be. You will have more chances doing this than the person not doing it.

Since you already have experience in the field, I would probably not worry too much about more studying but it’s more about getting out there and meeting the right people and make sure you are on their minds when they or their friends have openings. They are always looking for people and not all openings get to HR.

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