The Research side of things

At the very outset, let me clarify that this is my opinion on the Research side - from my limited time with Ambit Capital. This post was prompted, in part, by a recent article (India's Best Equity Analysts) that I read in the June 18th issue of Business Today. I was a little surprised to find that most analysts on that list were in their mid-to-late 30s. That set me thinking about how long a horizon should I be giving myself to make a name in this field.

Research (the sell-side) is all about credibility - it is not necessarily about how flawless your analysis is or how many different models you had used or how many types of charts you have analyzed and so on. Most brokerage firms are involved in two types of Research: Private Client Group Research AND Institutional Research.

The objective is the same. To ensure that mutual funds buy our ideas and recommendations for their trading positions. Now, it seems that these fund managers (from what I have heard) apparently do not have the time to go through multiple-page research reports and recommendations. Hence, they tend to rely more on the credibility of the analyst who is making the recommendations. And building some amount of credibility and a track-record is what takes this long.

Every analyst makes mistakes: of both Type I and Type II kinds. So, it all boils down to picking more winners than losers. Something very similar to selection at various B-schools, selection into various clubs and committees at these B-schools and maybe even recruitment at various Day 0 companies. In fact, this is as true in life as it is in sports - our captain Rahul Dravid and coach Greg Chappell experiment with a lot many combinations in their effort to pick more and more winners. Sports - Education - Politics - Employment - and of course Stocks - it is all about "Picking Winners".

Of course, we might argue that knowledge of more models and more charts will help an analyst understand the companies or sector better. True as it may be, to an extent, what matters in this field is the quality of an analyst's judgment and gut feel. And it takes quite a while to develop that judgment about your preferred sector or your preferred stocks. It takes a fair amount of tracking before an analyst is able to develop a good strike rate.

What this occupation also calls for is a lot of co-operation. Not necessarily restricted to people within the same company, though. You need contacts from across age groups and across brokerage companies to understand what the latest directive from one of your companies might mean. Ideally, you should be frequently having personal interactions with executives from the company you are tracking. In order to get a better idea of the general direction in which the company is headed.

You need to develop judgment about the company - and you need to rely on some clues to develop that judgment. Those clues are supposed to emerge from your interaction with the company executives. How credible do their ideas and plans seem to you? Does the management seem sincere enough to implement such a plan, given the limited resources they have at their disposal and the unlimited constraints they have staring at them? How prepared is the management for the most likely eventuality and how about their preparedness for something more long-term?

Those are the kind of questions to which you need answers before you can form an opinion or judgment on particular stocks. Based on the answers to those questions, you make your assumptions - and based on those assumptions, you form your judgment. Of course, reading helps - so does keeping your eyes and ears open. Some of the best and most effective tips emerge from the unlikeliest of sources and at the unlikeliest of places. On the local trains in Mumbai - at an analyst meet - at a bank - anywhere.

Now, what skills does an MBA, in particular, have that can be utilized in such a career? Networking skills - basically knowing the right kind of resources that can be tapped to source information and tips. It also helps to be fairly decent in valuation - because at the end of the day, you are recommending stocks with a target. That target is basically the result of valuation - with all your assumptions et al. I believe every analyst benefits from the CFA course (not the Indian one). When you have this qualification, somehow your credibility in the eyes of a fund manager goes up a notch or two. Another very useful skill is the ability to talk 'globe'. "What is your opinion about this sector?" OR "Where do you see this sector in 2-3 years?" - harmless questions they may seem but it is the kind of license you need to start talking globe non-stop.

Again there are other skills that emerge depending on how the market is behaving - when the markets are raking in the points and market caps are zooming through the roof (not happening anytime soon), you need a set of skills. And when markets are crashing and tanking points like nobody's business, you need a different set of skills including how to avoid a call on your mobile.

That's about it then - so much about the Research side of things. Any takers?