The 7 Habits Of Highly Effective Equity Analysts by Sentieo

7 Habits Up Front

  1. Be Proactive: Optimize Your Coverage Universe and Expand Your Circle of Influence
  2. Begin With The End In Mind: Don’t Miss the Macro for the Micro or the Structural for the Near-Term
  3. Put First Things First: Maintain A Catalyst Calendar and Do The Work Well Ahead
  4. Think Win-Win: Giving More Than You Take in meeting Sellside, Management, and Industry Contacts
  5. Seek First To Understand, Then To Be Understood: Take Notes, then Use Visuals Often
  6. Synergize: Synthesize Your Information and Debate It With Your Team
  7. Sharpen The Saw: Research New Techniques

Why Make Effectiveness A Habit?

We at Sentieo care a lot about helping Equity Analysts do their job better. That’s pretty much all we do. It’s not just an efficiency argument, that Equity Analysts are expensive and as a population have limited time to cover a large range of stocks in depth. As former buy-siders ourselves, we know what it’s like to continually grind away at an established process that sometimes, to put it bluntly, just isn’t working. As managers of Equity Analysts, we have also felt the struggle of “quality control” beyond boiling the investment process down to rote form filling and box checking. We surveyed the Sentieo community and from our interactions with hundreds of analysts decided to put together broad takeaways. If it helps just one analyst get more effective, we will have done our job.

Literature Survey

There is a surprising dearth of information on how to be a better equity analyst. Most of what Google will give you is tailored toward personal finance and individual investors (although we do like this Morningstar presentation). Look up hedge funds and you are mostly inundated with vapid “analysis” of 13F filings of big hedge fund names. That is like trying to learn how to be a better writer by looking at what books JK Rowling or George R. R. Martin just put out. Inspiring? Yes. Enjoyable? Yes. Helpful? No.

Our thesis as a firm is that the market of serious/professional investors is seriously underserved by the present state of technology, and it seems that the media has also largely neglected this massive industry. We should caveat this by recommending Jim Valentine’s Best Practices For Equity Research Analysts, which is worth its weight in gold and is jam-packed with practical, battle-tested advice that doesn’t insult your intelligence. Tom Brakke’s review of the book is quoteworthy here:

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.

Going Outside For Ideas

[drizzle]The world of finance tends to be an enormous echo chamber where even ostensibly intelligent participants can get caught up in manias and panics of groupthink. We actually found it more instructive to steal ideas from outside of finance. In particular:

All have very similar constraints on resources and relevance to the ultimate research output. Of course, we don’t think there is any better authority on general personal effectiveness than the original Covey book, which we plan to crib extensively from. Without further ado, we present our 7 Habits of Highly Effective Equity Analysts.

Three Individual Habits Of Equity Analyst

Habit #1 – Be Proactive: Optimize Your Coverage Universe and Expand Your Circle of Influence

You only have so many hours in a day. Valentine and most major hedge funds recommend covering up to 40-50 stocks at most. If you can’t find a good idea in those, you are doing something wrong. If you are trading hundreds of stocks a year, you are going too broad to have any edge over a quantitatively driven process (and probably paying too much in commissions). The only way humans will have a sustainable and permanent advantage in investing is in deep fundamental research. Fortunately, we working on ways to help use technology to augment, not replace, the human. Think Iron Man vs Ultron.

Given the universe of thousands of stocks, it can be hard to narrow it down. Not to worry, we have screeners for that:

Equity Analysts
screenshot: screener

Once they have a sensibly defined investment universe, effective Equity Analysts go deep. Buyside analysts have a wealth of broker research resources at their fingertips but often do no more than drown in floods of daily push emails. The most effective equity analysts access information on a “pull” basis – on demand instead of having their attention demanded, with a specific intent in mind and gathering as many relevant facts as possible. Sentieo, the “Gandalf of Document Search“, enables that by bringing in access to the full spectrum of Broker Research on our Document Search platform.

Equity Analysts
broker research search

Habit #2 -Begin With The End In Mind: Don’t Miss the Macro for the Micro or the Structural for the Near-Term

All too often, analysts get worked up about basis point moves and minor catalysts when the earth is shifting under their feet. The movement of literal macro model inputs like commodity costs and currency fluctuations aside, the shifts of tectonic trends from Software Eating the World to regulatory and political shifts can serve as incredible headwinds and tailwinds to investment theses that far and away override modeling considerations for the next fiscal year. Models are only as good as the assumptions that go into them, and no amount of Excel wizardry will help if, for example, you try to buy the dip in Macau casinos in the face of a massive anticorruption crackdown in China, or if you invest in the grocery store space without paying attention to the sea change in consumer spending patterns thanks to well funded startups.

Although one should constrain their coverage universe (see Habit 1), no stock is an island. What a financially focused search engine allows is for effective Equity Analysts to quickly read-across from adjacent sectors to stay informed. Sentieo enables you to quantify that over time by mention count:

Equity Analysts
how effective REIT analysts keep tabs on tenants

Habit #3 – Put First Things First: Maintain A Catalyst Calendar and Do The Work Well Ahead

Stocks often run ahead of earnings. It is not an infrequent occurrence for a company to beat and trade off – cueing puzzled commentary from the street about “high bars”, thanks to the 30% run in the stock in the lead-up to the beat. Funds need to be sized up at the start of these pre-event moves, not just the day or week before. The proactive analyst

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