Reflections on Equity Research

Getting Started

I would like to thank everyone that has stopped by shared a comment or email with me.  It is not always possible for me to respond individually to each person, so I will try to respond on this blog as generically as possible and without revealing any personal information. 

Also, I would like to point out that I started this blog while in graduate school; real-life practicalities and time-constraints have left me with little time or inclination to ruminate here.

Answers to some of the most popular questions can be found via this roer.blogs.com site index or via the search box in the left-hand margin. 

Answers to some of the most popular questions include:

Financial modeling and equity research books?
I highly recommend Simon Benninga's Financial Modeling - 2nd Edition.

Career advice? 
I suggest beginning your search with a Nelson Marketplace Directory, which provides manager and analyst listings by subject, industry, style, etc.  You can obtain from any business reference library.

A few more follow:

2009

I guess I am back in action, at least sporadically and for the time being.  Since I closed this blog in late 2006 the quality of financial blogs have risen tremendously.  A very high bar has been set.  Take for example Zero Hedge -- a  prolific blog with insightful and amusing commentary, and providing links to quarterly updates from well-known hedge funds. 

It's interesting to see from letters posted on that blog most hedge funds do not buy this rally in financials, though some have handled the rally better than others.  Tiger Management still has high conviction of its financial short exposure, and Greenlight claims to have covered its shorts in financials in early March and put them back on more recently.

This makes a lot of sense to me -- keeping shorts on the financials.  Despite the rally, I really do not see how the fundamentals of our economy have improved, and like some others, I do not see how a second wave of defaults will be avoided by REITs and some consumer credit companies.  I understand a stock market recovery precedes an economic recovery, but this seems a little forced -- as if there is a "build it and they will come" mentality and this stock market rally should stop rising unemployment in its tracks.  I dont' buy it because the numbers on many individual companies -- the single-digit fundamentally junk companies that have rallied 50-100% -- just don't look good to me.  And I really can't imagine their fundamentals appearing much better any time soon either.  Boy, has that made me look really dumb over the last 6 weeks.   

But in general, this rally is a good thing.  Maybe it will work -- that is, making companies think twice about further cutting staff, and maybe that will generate the self fulfilling cycle -- and if things aren't that bad, maybe there won't be need for budget cuts, maybe consumers can spend a little bit more than they were planning to a few weeks ago, and maybe the valuations of stocks are too low, etc.  But for now, I just don't buy it.  A 50/50 net long short position in a portfolio seems like a fine place to be right now. 

Now, back to less talk and to more reading. 

The CIA, Wikis and Blogs

An interesting New York Times magazine article out today on wikis and blogs and intelligence gathering, that reads to me like an extension of the CIA's Sept. 2005 paper on wikis and blogs.  This technology is so cheap to implement and easy to use that there really is no excuse for anyone in the intelligence gathering business to not use them.

Choosing Strategy Consulting as Your First Career Choice; Brief McKinsey Valuation Book Review

Getting into strategy consulting is probably the best career choice you can make pre-MBA.  I say this never having been involved in strategy consulting.  But I do have a number of friends in the field and even took an MBA course on the subject a while ago -- so I guess that makes me an expert now. 

Increasing Efficiency with Excel Macros and Ace Ventura

At the end of each month I run this great screen that I developed* for finding value stocks.  While I'm not a programmer and never will be, I've been able to automate this screen by hacking** together macro scripts that I created along with those posted on the Excel Newsgroups.***

(* I use word "developed" in the Japanese sense of the word -- i.e., taking what already exists and drastically improving it.)

(** I use the word "hacked" in the literal sense of the word, not the honorific computer programming sense of the word.")

(***If Excel macros and Ace Venture floats your boat, you're going to love the rest of this post.)

Star Trek, Asimov and Equity Research

I predict we are increasingly going to see a few more companies that merge financial data mining and advanced graphical user interfaces popping up -- their announcements coupled by carefully worded explanations of how concept to inception were driven by some independent stroke of brilliance.  Another prediction -- relevance and ease of use provided by these front-ends are going to continue to suck for a long time, because none of them have been developed by fundamental analysts.  They are also going to suck because for any of these tools to be relevant, they have to work with a spreadsheet, be a part of of a spreadsheet -- and Excel sucks, a priori, in terms of speed and stability, and not even a quadro or octavio Pentium IX is going to help with that.  So we are going to continue to see candy coated yet irrelevant front-ends until someone actually in the business of fundamental equity research partners with a Star Trek set designer and a programmer/Isaac Asimov nerd, gets funded, and makes something happen.  And when we do -- we're going to read that it's all been in the works since prior to November 2004.

Blatant Advertising on this Blog for Outsourced Equity Research

I've always held a policy of no blatant advertising from outsourced equity research providers (or from anyone else) in posts or comments.  It was because I couldn't figure out a way to capture any revenue from any referrals and I was toying with the idea of building a consulting practice myself.

I'm not very interested in doing this anymore -- so I've decided to let outsourced equity research providers to post a blatant self-serving post on this add if they'd like.  As long as you let me append the words "Blatant Advertisement" to the beginning of whatever short paragraph you'd like to post, I'll be happy to post it.  I'm interested in seeing what the impact of this will be.

Interstitial Advertising on this Blog

I started to this blog two years ago to generate interest and discussion around an open source valuation project and various topics related to equity research.  Another reason was to to learn a little bit about the increasing convergence of media, advertising, telecom and technology in general by actually playing around with some of the releted technology (blogs, rss, contextual advertising). 

Of course, then, it fits that I'm testing out a new feature on this blog.  It's called "interstitial advertising." 

Just the Facts, Ma'am

"When you think you know something when you don't know something, mistakes are made."

"In an argument when nobody has any facts -- and I've seen a lot of those -- the person with the strongest personality wins.  But when one person has the facts and the other doesn't, the one with facts always wins." 

"When both people have the facts, there's no argument." 

Attributed to Larry Ellison, in Matthew Symond's Softwar.

The Process

I've been fielding a lot of career-related questions lately.  One would think I'm a career counselor, which I'm not.  I'd have more fun writing about the process, but that's something I stay intentionally away from.  Too much overlap with my real job, and we can't have any of that.  But if anyone has any generic process-related questions, please send them my way.  It would be interesting to hear what is on people's minds and how authoritatively I can answer these. 

Which brings to mind the professional investment research/ accounting consultants at the AAO Weblog.  They have shared a lot of interesting perspecties over the last few months -- the impact of changes in pension accounting, for one.  It would be nice if they, or someone like them, sponsored a message board to answer atypical questions.  I'd bet they'd generate a lot more interest for their product if they did something like that, whether such a service would be free or paid. 

How to Make it in Hollywood

Several recent grads have asked me how I got started in this job, why I chose equity research and how to break into the field.  I think I mentioned that before, but here is another summary.

Right after getting my B.A. I thought of several possible career possibilities. 

This included working on an oil rig the Gulf of Mexico, trying out as a field goal kicker for the New York Giants, teaching English in Japan or China, moving out to L.A. to get a job in some mail room and write screenplays at night, or working as a junior trader somewhere. 

How to Save Some Time in Researching PIPEs

"I just started working at a small advisory that structures Private Investment deals (PIPEs). We focus on small cap, pink sheet and over-the-counter-traded companys.   Any recomendations on the best way to identify these companys and not waste time with bad prospects?"

VBA and Financial Statement Analysis

"I have recently finished my graduation.  I have done Msc in Investments Banking.  I am very keen towards working as an Equity Analyst.  I am a fresher.  I want to concentrate on building financial modeling skills. Can you suggest me some book which is a dummy's guide towards learning Excel and VBA, with particular focus on financial modeling.  I am not from an IT background."

My Favorite Blogs

I stopped listing my blogroll (list of blogs I read) a while ago.  I found that many interpreted the list as a form of endorsement where all I was doing was just reading them.  So instead of listing my favorite blogs, I'll just let you find your own.  Some good places to start are Between the Hedges Abnormal Returns , and Trader Mike. 

The Fruit Guys Get It

It seems to me that Fruit of the Loom (or more likely it's ad agency The Richards Group) understands the current advertising market, using television and Internet video and sound clips to complement and inspire interest in the other.  The Richards Group calls this Spherical (R-in-a-circle!) branding. 

What I learned from Taleb

I finally got around to reading Taleb's  Fooled by Randomness.   Like a thousand of other bloggers before me, I highly recommend reading it. 

It took me a while because for some time I couldn't get past the tangential and self-aggrandizing references to classical Greek philosophers (it's clear that Taleb is proud of his Greek heritage and views himself as a modern day Socrates in the world of trading). 

Luckily for me, I skipped the first few chapters, began reading and got hooked, and reread the whole thing.  It turned out to be one of most interesting and entertaining reads I've had in a long time. 

Here is what I learned from Taleb's book as it relates to what interests me, in equity research: