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The 7 Habits Of Highly Effective Equity Analysts

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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


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:

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 with this end goal in mind will maintain a priority list which will include a catalyst calendar, and organize her work around the profit potential.

Sentieo’s Calendar functionality feeds in from the comprehensive Watchlist functionality, and makes the forward Calendar plain as day:

Equity Analysts
screenshot: earnings calendar

Product launch dates can be tracked in Document Search, or if disclosed in external media, brought in by our Web Clipper whether on mobile or on desktop.

Speaking of which… PSA: 3Q16 Earnings Season is right around the corner! Longtime Readers may remember our last Earnings prep post.

The Three Interpersonal Habits Of Equity Analyst

Habit #4 – Think Win-Win: Giving More Than You Take in meeting Sellside, Management, and Industry Contacts

Most buy-siders are entitled douchebags.

There. We said it. We’ve all seen the blustering buffoon who interrupts investor meetings with obnoxious questions, completely unprepared, and then twists management’s sincere replies to support his own blindingly obvious bias.

The harder truth is when we turn our critical eye to ourselves (as with most things in life). We have all had that meeting we took while less than prepared, when we catch ourselves mumbling vague platitudes and nodding along when management teams and sellside experts reference past events obliquely. Taking meetings while unprepared is not only very disrespectful, but a huge waste of your time and theirs. It has follow-on consequences for subsequent meetings not only for yourself, but colleagues from the same firm can also find they get turned down for highly in-demand meetings because of a poor impression built from prior interaction. So the stakes are high.

Sentieo’s Document Search lets you investigate people as well as questions, and this is the best way to make sure you aren’t going over something that’s already been answered somewhere:

Equity Analysts
Don’t spend your precious time going over things that have already been said

As you accumulate these data points relevant to the industry, you start being able to give back to the people that you meet. While all the usual rules of prudence apply, there is nothing more rewarding for people in the industry than getting an informed outsider’s perspective on their industry and their stocks. And you gain a certain amount of respect when a CEO deflects a question with “I don’t have those in front of me right now” and you say “hold on, I do.”

Equity Analysts
have this in your head

Ultimately this Habit speaks to one of the key elements of Robert Cialdini’s Influence – Reciprocity, that forms the basis of human society and adds meaning and depth to your experience as an investor.

Habit #5 – Seek First To Understand, Then To Be Understood: Take Notes, then Use Visuals Often

Here’s a question that might throw you: What is the difference between a journalist and an investor?

The difference is more minute than you might think, and you can trace the history all the way back to the very first hedge fund. Fooling All the People, Some of the Time to simple, understated blogs like John Hempton’s Bronte Capital).

There is a real reason for the close relationship between the professions of writing and investing. To make their name, journalists must get scoops and break news at the micro scale, but also identify and tie together multiple disparate datapoints to cover emerging trends at the macro scale. This closely matches the interplay of near term and structural concerns that equity analysts must deal with. Not only that, while equity analysts must ideally compete for capital, journalists must compete for space above the fold. There is limited research time, limited room for output, and a potentially unlimited space of stories that may be worth following. Miss the big trade or the big story of the year, and you underperform.

While notetaking software has long been a core edge and focus for journalists to gather multiple disparate threads on stories they are working on, the same can not be said for the equity analyst toolset. Sentieo helps make equity analysts more effective by enabling them to take notes on everything. Everything. From clipping web articles, to copying snippets from fillings and transcripts with linkbacks to sources, to emailing in your specialist sales notes, to writing meeting takes on tablets and phones, there is a way for you to pull that in and understand the unfolding story. We are especially proud of our iPhone app, which works just as well offline as it does online:

Equity Analysts

But understanding is only half the battle. Once you have your idea, you have to get it out there and tell your editor/portfolio manager (see what we did there?) that there is a story here. And while pages and pages of words are nice and excel models can be marked up with all sorts of fancy formatting, nothing tells a story better than a chart.

Sentieo’s Plotter tool is an advanced financial visualization engine that not only makes it easy for you to extract the data you need to tell your story, but makes it easy to play around with the data, saving you time on maintaining your models and excel formulas. When you can toggle between YoY and moving average comparisons between peer sets in one click, the more you will explore and experiment with the data, coming up with unique empirically valid insights with far less pain. Of course, every plot you create is also saved as a note, for your future self to play around with, for your future future self to make a note of…

Equity Analysts
screenshot: ipad plotter note

But of course, once you have a great story to tell, shouldn’t you want to stress test and share it?

Habit #6 – Synergize: Synthesize Your Information and Debate It With Your Team

One of the most powerful and protected methods of gaining an investment advantage is Mosaic theory. We defer to the hallowed CFA Institute to elaborate:

A securities analyst will be motivated to identify mispriced stocks and will be gathering information to such an extent that exposure to nonpublic information is a possibility. However, the work of an analyst depends on the free flow of information. As a defense to a charge that nonpublic information is being used to trade on a stock, the mosaic theory suggests that the analysis of a company form a mosaic; that is, by assembling small bits of nonpublic information together, large and meaningful conclusions can be drawn. The idea behind the mosaic theory is that each individual piece of information is nonmaterial by itself: an individual piece of information would not move the price of the security if disseminated in a public press release. Taken together, however, the bits of information can form a meaningful mosaic. This practice is perfectly legitimate, and it is encouraged.

Read that again: The synthesis of publicly available information into material conclusions is the most powerful investment method available that is legally protected!

How exactly do you pull together different kinds of information? When you have collected all your notes from anywhere you get them, our Notebook allows you to enter “List” mode and essentially surf through all the snippets of information. Clients have found themselves compiling these or printing them out in PDF form to essentially form the basis of their investment pitches, and there is no better tool to do this than with the Sentieo Notebook.

Equity Analysts
screenshot: notebook list view

Of course, compliance is a big issue in the business, and all equity analysts want to make sure they are legally in the clear while pursuing their investment theses. We have worked some of the largest hedge funds in the world to deliver fully synced compliance backend systems, and understand the mission critical importance a smoothly working compliance system has in these roles.

We also have an alternative data product, aptly named Mosaic, that can be used, for example, to track the performance of consumer facing companies in real time.

But we don’t stop there. Teamwork is the next stage of productivity. The market greatly rewards investment teams with diversity of thought and the courage of their convictions. This is why we have designed-in sharing and teamwork all over the platform.

Equity Analysts
screenshot: sharing of notes and annotations

The Habit Of Continual, Rounded Improvement

Habit #7 – Sharpen The Saw: Research New Techniques

This is the most transcendental of all the habits, and for good reason. Stephen Covey lists four dimensions of self improvement:

  • Body
    • Exercise
    • Eat Healthy
    • Get Sufficient Sleep
    • Relax periodically
  • Soul
    • Meditate
    • Keep a Journal
    • Pray
    • Take in Quality Media
  • Heart
    • Build Relationships
    • Give Service (back to the community)
    • Laugh, Love
  • Mind
    • Read
    • Educate
    • Write
    • Learn New Skills

We couldn’t approve more of these four internal and external dimensions. Until the Sentieo Fitness Tracker ™ rolls out, there is only so much we can help with these things, but we do like to think we can help in some small way toward the last point: Learn New Skills.

To wit: The Equity Analyst profession has pretty much ossified since the days of Graham and Dodd. Today, university professors like Aswath Damodaran pen giant tomes on Valuation like it is a settled science. At least in academia, there is a healthy regard for contradictory evidence with at least some attempt at statistical rigor applied to conclusions. Not so much in practice. Students graduate to two year stints in investment banking where everything has to be done just so and then go through interviews and then training camps (sometimes BEFORE the interviews… to game the interviews) on both the sell- and buy-side that tell them “market conventions” and a standard three statement model that has proliferated throughout the public equity investing world.

The old joke that we generally hear when discussing the state of the profession with practitioners goes:

Equity analysts spend less than 5% of their time thinking about how to do their job better, so they can spend the other 105% of their time on doing their job the old way.

As they say, comedy is tragedy plus distance. We think this is a fundamentally unsustainable way to run equity research, and we think this is a contributor to high industry burnout rates. Sentieo is constantly innovating with new tools to help keep equity analysts on their most value-adding modes. For example, with our Time Series tool, there is no longer any need to manually pull out datapoints when creating a model:

Equity Analysts
screenshot: time series extraction

We like early adopters who check out our free trial, even if they don’t sign up with us right away. These are the equity analysts that have the habit of self-improvement, that not only play the game but also keep an eye on the meta-game of how the rules of the game are changing and the risks and rewards moving accordingly. We hope to be at the forefront of this and to be involved in these considerations and discussions as the industry evolves.

Parting Thoughts

We don’t think we have stated anything particularly revolutionary in this post, but from our research we think we are the first to have pulled together all these effectiveness habits and interpreted them for professional investors. We think of our investing role models and mentors in our lives and can link back to how they practiced these habits:

  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

Ultimately, productivity and efficiency only gets you far if you are running in the right direction, and we like to remind friends and family that there is still a core element of risk-taking and psychology through which efficiency is channeled into success. There is perhaps no better statement of this than Rudyard Kipling’s old, somewhat misogynistic, poem, “If”, and this is what we leave you with:

If you can keep your head when all about you

Are losing theirs and blaming it on you,

If you can trust yourself when all men doubt you,

But make allowance for their doubting too;

If you can wait and not be tired by waiting,

Or being lied about, don’t deal in lies,

Or being hated, don’t give way to hating,

And yet don’t look too good, nor talk too wise:

If you can dream—and not make dreams your master;

If you can think—and not make thoughts your aim;

If you can meet with Triumph and Disaster

And treat those two impostors just the same;

If you can bear to hear the truth you’ve spoken

Twisted by knaves to make a trap for fools,

Or watch the things you gave your life to, broken,

And stoop and build ’em up with worn-out tools:

If you can make one heap of all your winnings

And risk it on one turn of pitch-and-toss,

And lose, and start again at your beginnings

And never breathe a word about your loss;

If you can force your heart and nerve and sinew

To serve your turn long after they are gone,

And so hold on when there is nothing in you

Except the Will which says to them: ‘Hold on!’

If you can talk with crowds and keep your virtue,

Or walk with Kings—nor lose the common touch,

If neither foes nor loving friends can hurt you,

If all men count with you, but none too much;

If you can fill the unforgiving minute

With sixty seconds’ worth of distance run,

Yours is the Earth and everything that’s in it,

And—which is more—you’ll be a Man, my son!

To see how Sentieo can help make your Equity Analysts more effective, simply go to Sentieo.com and sign up for a free trial. If you would like to continually receive content related to topics of interest in the markets, don’t forget to subscribe to the Sentieo Blog so that we can notify you of new posts by e-mail.


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