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GUEST COMMENT: Face it, you’re not good enough to get into equity research

Sad asian businessman

Jon Moulton, titan of the private equity industry, well-known critic of finance’s sacred cows and not a man known for biting his tongue, thinks that equity researchers are going to have to start working for a living sometime soon.

It’s worth pointing out the obvious here: a man who works in an industry involved in taking companies private is unlikely to be an advocate of the public equity markets. Nevertheless, Moulton seems to be onto something.

The equity research model is not really viable. Research is a cost centre, not a profit centre for banks. This in itself might be enough to smash the research business, and it’s not the only hammer hovering overhead.

The equity market outlook is poor. Equity markets aren’t rising any more. It’s harder to hide bad trade ideas behind increasing index levels. Most of the developed world is facing stagflation, and the large investors, like billion dollar pension funds and others, haven’t crossed the Rubicon yet to allow them to invest big sums in the emerging market equities which are still seeing some prospects for strong growth. This translates into poor conditions for the equities divisions of the big banks. Volumes are falling, and so are commissions.

At the same time, the nature of equity research is changing and so are the kinds of people required to do it.

In order to be successful as a researcher you’ve always needed to be extremely analytical with immense attention to detail. Now, you’ll also need to be a people person. You’ll need to get out there and meet the management of the companies you cover and you’ll need to persuade them to give you information that will differentiate your research from every other piece on the market. And you’ll need to meet investors. Increasingly nowadays, researchers are being asked to market their own product. The days of researchers sitting in ivory towers are long gone.

If you want to get into equity research you’ll therefore need a rare and contradictory set of traits: irrational optimism about the future of research, but realism about the future of companies; and immense nerdiness combined with extreme charisma. Is this you? If so, apply. If not, don’t bother.

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Comments (2)

  1. Research shouldn’t be a cost centre. It used to add huge value, and still could, but probably won’t. Research used to find interesting, niche, up-there-and-at-’em companies and find them funding, making big profits out of the exercise.. Apple garage, anyone wept over the poor s*d who sold his 33% share for $800? And bought in then?

    Research had its balls cut off by management, regulation, greedy salesiders and even greedier uber-bosses, who wanted deal flow and churn rather than quality. Think dot-com. the true equity research pros were tearing their hair out saying ‘DON’T’. And then when the greedy ones lost their boots, equity research was restructured so that it was lean and mean and keen. i.e. cheap. None of the seniors with experience were kept on

    The wise (experienced souls) were binned for cautioning against filling ones boots against a a bunch of Numba Chrunchas who say what they’re told to say, do what they’re told and then get binned in turn. ‘In a bull market you don’t need it, in a bear market you can’t afford it’. It’s a salesman’s world today. So don’t touch Equity Research with a ruddy bargepole.

  2. What rubbish!

    “The equity market outlook is poor…and the large investors…haven’t crossed the Rubicon yet to allow them to invest big sums in the emerging market equities… Volumes are falling, and so are commissions.”

    And just where else do you suggest that investors put there AUM? FI is even worse, commodities…not enough liquidity, and same goes for your emerging market equities.

    “In order to be successful as a researcher…Now, you’ll also need to be a people person.”

    Um, when was this ever not true? Since the dawn of time equity researchers have had to sell their ideas to PMs or other decision makers. People that can’t communicate well and build relationships have never been good researchers.

    “You’ll need to…meet the management…and you’ll need to persuade them to give you information that will differentiate your research from every other piece on the market”

    What’s the number of the Serious Fraud Office again?

    As long as real money investors have AUM, there will be demand in the equity market, and as long as there’s that demand good research will separate the firms that survive and those that make announcements about “strategic rebalancing.”

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