Guest Post: Why I Left My Career in Equity Research
An anonymous contribution from the RRC community on why they left the equity research world.
Reverence for the things we don’t have is funny. We long for something; pine over it because it isn’t in our possession. When we do have it, we treasure it for a time. Bask in the glow until the glow turns into a glimmer and then into barely a glimpse. Complacency takes hold. Then, moments later we lose what we had. This sparks the phrase “you don’t know what you had until it’s gone.” For me, I set my sights for it and I attained it. It was roughly for four to five years when the flame turned into an ember. However something was different. I didn’t fall into complacency; I shuddered to think of a life with it. I wanted nothing but to leave it. My longing was not for more of it, but for the absence of it. It… was my profession. Equity research was my career, and in 2016 I left it behind for something different. Before I explain why I took my leave, I think an explanation of the business is necessary.
Some might say that a life in the financial world is rewarding. Some are right. They were right through the late eighties and into the nineties. They were right heading into 2000. They were even right up until about 2008 (October to be exact). Ever since, the markets have experienced shining moments of glory mixed with bleak turmoil. The competitive world of investing was leveling up into a hyper battle royale. Those searching for return on investment sought after the best information and analysis money could buy.
Top tier research firms were the first to get the call from the investment community. Next in line were the mid tier followed by the lowest rung. In the world of equity research the tiers break out into a hierarchy of sorts. The top tier typically has a plethora of resources to draw from. Those resources are used to formulate investment thesis alongside modeling financial projections for publically traded companies. The top tier also has a lending arm. The bank portion of the top tier will help companies raise capital through debt or equity offerings. Virtually the top tier is the full service station. The mid tier shops might have limited resources to draw upon and in some cases may even have an investment bank attached. For the mid tier players, having differentiated views can drum up attention and spark conversation among investors. Lastly the bottom tier of players have close to no resources outside what anyone with an internet connection can attain. They also typically do not have a lending arm attached to the core business. The views are typically older and less focused. Being the case, the low tier players focus on providing research on stocks that are under-followed by the bigger players. It’s a strategy that can lead to promising results. For low tier firms, it is essential to focus on providing management or corporate access. Corporate access translates to “get the management teams of public companies in our coverage universe to visit the client base i.e. investors.”
I spent my career with the low tier research firms. Safe to say my research stemmed from talks with management, following smaller unknown companies and brainstorming counter-intuitive ideas. My main function was to get my coverage universe to market (or provide corporate access). According to higher ups on the food chain, corporate access was the lifeblood of our business. They understood the model from the client perspective. Clients demand to speak directly to the management teams of companies they have invested or will invest in. That service is quite valuable. However the business is changing. Investors can easily schedule calls or meetings with public companies without the use of research firms. They also want something more for their investment thesis. That “more” can be the difference between finding a value driven stock or a high growth vehicle. The analysis portion should typically be an objective third party view of the stock. No attachments should interfere with the recommendation of stock.
Well that should be enough to help you understand what I did. The business has its challenges, namely competition and advancement. Getting through to the investment (or Buy) side is challenging without a steady group of friends to help out. Also advancing into the top tiers of research firms can prove difficult as well. Those with high aspirations of calling the shots all throw their hats into the same rings. After a while you can’t see the floor anymore and you’re face is pressed up against a bulletproof glass ceiling. Commissions have been squeezed beyond belief. The shops trading stocks in rapid high volumes can survive, but those with smaller trading platforms and a limited number of relationships suffer. The moral of the story is money is sparse. We are not in the heyday of stock appreciation. The global markets have been in disarray and investors fear the worst. Research is a commodity that no one seems to be interested in due to cautious behavior.
The compensation is certainly an issue with the business overall. More importantly though is the prospect of an actual career. Staying in equity research was equivalent to gambling with my future. Devoting resources to a dying business or struggling cause was futile. The steps forward didn’t necessarily take me backwards rather the motion of the business was that of a person running along the deck of sinking ship. Gaining ground meant nothing in the long run. Years from now I could be in a position to have some responsibility, working round the clock to beat earnings estimates and maybe convincing clients to see things my way. But for what exactly? The satisfaction, compensation and outlook amounted to a zero sum. Research will always exist but in the form of exclusivity. The top shops will control the market while the small players will consolidate or die. Businesses are funny like that.
Seeing these signs… seeing the world I would have to suffer through, I made a choice. Life outside the stock research business was more appealing, more secure. My career now revolves around research still, but my capacity is not to recommend a specific security. This career stems from intrinsic advisement. From a value standpoint, information remains at the top. Information utilized correctly can turn the tides of any situation. I decided to use information to improve my life. Hopefully this information will improve yours.
Originally published at www.ratraceconfessional.com on February 19, 2016.