My Wall Street Exit Interview

 | Oct 24, 2011 | 10:00 AM EDT
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I recently concluded a wonderful eight-year stint as a number-crunching, non-black-rimmed-glasses-wearing, rebel-with-a-cause analyst at a boutique firm. After my first "dark" period in media land (or so I have been told that's what it's called), I am back with the same intensity to make a difference as I had when I emerged from college in 2004.

To say that the growth process has been remarkable is an understatement. I went from not knowing who Benjamin Graham was or what discounted cash flow is to being obsessed with the principles of the former and coming to view the latter as a waste of time in this modern investing jungle. Without getting too personal, I feel a duty to shed light on my experience as an analyst.

I see the average investor as having $10,000 in a TD Ameritrade account, a 401(k) that is hardly understood (except for the realization that it is lower than it was in 2007), and a penchant for executing stock trades after pulling up a Yahoo! Finance chart. On the other side of the curtain, there are competing motives (buyers/sellers), and the gray area that is the flow of information from those in the know to those who yearn to profit from knowing. The transmission of information has been of particular interest to me and something I have studied intensely -- it could be a CEO's facial expression upon being asked a difficult question, or the inability of an analyst to talk with executives during periods of subpar financial results. Either way, if you are hanging out in your home office attempting to conquer the markets, not only are you missing that direct access to management, but you are relying on the wisdom of those with competing motives. It sounds like a double disadvantage to me.

That said, here is my version of a Wall Street analyst exit interview.

There are bright-and-early team meetings to brainstorm for the biggest and best ideas, and maybe map out a change in a particular rating of a company under coverage. Then it's off to client calls or on the road to drum up new business. Of course, there is the time spent updating the aforementioned sacred DCF model and writing a First Call note or two, but those duties are increasingly being heaped upon junior-level associates so the senior point person could be utilized in a more efficient manner (like bringing in the greenbacks).

Equity research departments normally are a loss leader to firms, providing human capital to the greater pool of traders raking in the dough. The services of the analyst are now being lumped in with the pitch for client business, the other selling feature being best-in-class execution capabilities (this new model on display with execution houses purchasing research-only firms, which makes for a competitive edge in landing new business).

However, the traditional analyst role is changing quickly due to the realities inherent in choppy market conditions. If one aspires to be at the larger firms, he or she had better have major Street cred, a solid book of business, or both -- not to mention the intestinal fortitude to lay those merits on the line by making big, contrarian stock calls. After all, an analyst is a star only so long as the next recommendation works out. (How have Meredith Whitney and Nouriel Roubini faired since their crystal-ball calls in 2007?)

Analysts are no longer second fiddle to the mortgage-bond-trading desk or derivatives desk (ok, maybe the latter). They are being viewed as the keepers of obscure data that could move a market for a stock if unleashed. Expert networks, traditional sell-side analysts and buy-side analysts are all attempting to trump the other and find information that positions their firms correctly in the market.

Within that, the fine line of what is material non-public information and what is insight-driven through rigorous channel checks, discussions with management, and twenty-some-odd years of covering a company are being blurred. Management is not going to mention a potential acquisition -- a result of Regulation FD -- but may utter an off-the-cuff comment on inventory composition at quarter's end, after an analyst day webcast is over, that hints at downside risk or upside potential to consensus earnings. The casual observer, a.k.a. individual investor, has little knowledge of this comment. But to an analyst, that bit of information is golden.

All of this is pretty darn scary, isn't it? Do you feel used, taken advantage of? I sure do, and I have been near the inside of it all. The most unfortunate aspect is that there is really no course of action to one up analysts and traders, except to thoroughly know a company's story, have a macro thesis, find credible people to follow and hope for the best.

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