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:

Estimating the Cost of Debt

Here's a practical tip on how to better forecast the cost of debt as part of the calculation for a firm's weighted average cost of capital (WACC). The fastest way is just to divide reported interest by average book debt multiplied by (1-tax rate).  This probably works fine for stable firms with high bond ratings.  But for highly leveraged companies it's a better idea to do a little extra work.   

Free Quantitative Finance File Sharing Forum as Marketing Tool

I just came across Paul Wilmott's free file sharing forum for quantitative finance.  This forum and the rest of the web site is being used to market several text books he's written. I guess it's a good plan, because I just ordered Wilmott's introductory quantitative finance book.  I'm hoping to find a few ideas in the accompanying CD that I can use to build out a few models.  I'll let you know if I find it any useful or not.

Another Hybrid "Open Source" Business Experiment

Another hybrid "open source" business development project was launched recently.  While independently conceived, it is similar to what I proposed a few months ago.  There seems to be an increasing number of people that are independently trying to borrow and apply aspects of open source software development projects to business models.  (Some have been successful, notably Innocentive and GoldCorp.)

One problem I've had is translating initial excitement and interest into actual participation.  Once people are required to actually contribute, they lose interest. 

Perhaps a central website, which is nonprofit and not tied to any specific person, product, service, industry or market, could act as a central clearing house and discussion area to explore a solution to this problem.  I'm not suggesting a central location built around investment research, but more of a generic clearing house, like Source Forge, but around business development as opposed to software development.   

Perhaps participating on this message board would be a good preliminary place to start.

Nobody is as Smart as Everybody

Below is an essay I created last fall as part of Bill Taylor's Maverick Seminar at the Babson College MBA program.  In summary, it explores my interest in open source management practices, online collaboration and investment research using Blackboard as one possible business model to pursue.  Since I refer to this essay time to time, and because I couldn't find the original blog post referencing the Word document, I've decided to repost it below.

The Relevance of Social Tagging and Indexing Tools to Investment Research

Recently I posted a few links that I've gathered over the last few weeks with a "social tagging" service called del.icio.us.   These links are posted to my blog automatically via a service called  RSS Digest.  On my desktop, I can easily sort through all these links via another service called del.icio.us director.

What is great about all these services is that, foremost, they together help store, index, search and share online information and, second, they are free.  These services, and a few others,  help the  "research team" at MSIR work together share information much more efficiently than other other analyst teams that still use scissors and glue to do the same.  For example, each link in these link posts that you see on this blog took me about 2 seconds to tag and zero seconds to publish -- they just appear automatically via RSS Digest. 

(And if any traditional newspaper clipping service companies still exist, it's probably a good time to say goodbye to them now.)

Open Source Investment Research Projects

A list of blogs and websites that appear interested in exploring collaborative and open source issues as they relate to developing investment and market research. 

How Do You Share Without Giving it Away?

That's what we are exploring at the Maverick Society of Investment Research.  Also at the site I've posted a few model updates on LVLT (getting close to being usable) and added a FAQ section.

Meanwhile, I've added a message board that I hope someone will help me integrate with the comment functionality on this blog and the Maverick website.  I'll probably use this until JotSpot's message board functionality improves to this level. 

In theory, I am hoping that this message board is not used exclusively with this blog or the Maverick site.  I will consider setting aside a forum for other blogs assuming that: 1) the discussion is related to investment research; and 2) that you moderate the discussion to ensure  a high quality level.  Then again, if you are truly interested, you may just want to set up your own for about $5/mo. 

Embedding DNA into Spreadsheet Models

I believe I may have found a solution that promotes collaboration and ensures attribution in an industry renowned just for the opposite.  Using NextPage's "Digital Thread" technology, I can "...track and manage documents as they move through disparate systems, including e-mail, hard drives, servers, removable media—and even non-subscribers’ machines."  In other words, I can now track the use and distribution of models that I post. 

My hope is that this will ensure user compliance with the Creative Commons License and provide useful versioning controls in collaborative development process.  As a result, I've opened up the new Maverick Society of Investment Research website for guests.  Those who wish to modify existing content or make submissions  still require a username and password. 

If you end up downloading and using the models posted on that site for commercial purposes, I will send you a $1000 invoice for every model you copy and distribute.  Which in my opinion is a beneficial solution for all.

Monetizing the Value of "Open Source" Investment Research

Over the past several weeks I've put in about 15 hours of work into the model that helps forecasts the levels of principal, cash interest, accrued interest payable, accreted interest, reported interest and capitalized interest for Level 3 Communications.  Years of experience and thousands of dollars in educational bills have gone into building that model. 

Paid associates at a U.S. investment bank or consulting firm probably wouldn't have the time to develop such a model.  This model provides me with edge in forecasting a company's reported earnings versus other professional analysts.  And I've thought hard about making the model and others like it  freely available online.  Just the thought of freely providing something I consider so valuable sounds absurd, doesn't it.

Then again I'm not the only one that has been posting valuable models online for free...