Advice for Junior Buy-side Research Analysts
This week I will share with you career tips for junior buy-side research analysts. I want to thank my Instagram followers for contributing to some of the great tips. For this article, let’s assume the interaction is between you and your portfolio manager, but it also applies if you work for multiple PMs or with senior analysts or sector heads.
Let’s get into it.
The four large ideas every junior research analyst should know:
Right mindset
Non-stop learning
Develop your process
People skills matter
Right setting your mind
Focus on increasing your value
Unless you have been analyzing stocks since you were 10 years old and can become an idea generator right away, most of you don’t add much value when you start on the buy side. For the investment bankers and equity research folks, good for you with all that modeling skills. Sadly it’s the reasoning and the industry knowledge that go into the assumptions that make the money, not the mechanics of the model themselves.
Don't focus solely on compensation early on
You are paid to learn, in exchange you do the grunt work that PM does not want to do. So do not obsess over your compensation for a couple of years as long as it is not ridiculously insulting. Instead, focus on becoming a more valuable member in all the ways possible.
A close Instagram follower who is a hedge fund partner told me all the candidates he interviewed asked him what’s the upside for them. He had to remind them “Yo, you are a junior investment banker.” Don’t act like you deserve to participate in the upside when you won’t be significantly contributing to the upside for the first few years.
If you really start to develop as someone with consistent insights who can autonomously generate stock ideas, stay at your current shop for two years and go somewhere else if you are not fairly compensated for your value add. One of my mentors taught me the general rule of thumb is two years of buy-side experience dramatically improves your optionality – most recruiters perceive two-year mark to be a plausible natural attrition point.
Be open-minded
It is highly unlikely you will find a shop that invests the exact way you personally believe in because you are not the PM. Every PM has their biases and that carries with them as they become a Portfolio Manager. I want to make you come to terms with that reality now. But everyone who has been in this business for a market cycle or two has some sort of repeatable process for making money consistently in the market.
For me, despite severe philosophical differences, I still learned many tricks that I wouldn’t know because they can only be learned by observing my PM. I wasn’t receptive to everything they do, but some of the tools became part of my toolbox today. If I wasn’t told by my mentor to be open-minded, I would have missed out on some invaluable knowledge.
Don’t have an ego
The goal is to make money. If disconfirming information for your stock is staring right in your face, admit you are wrong and move on. It doesn’t feel great, but if you are wrong, you are wrong. Learn from it. In some places you might get yelled at, or worse, your PM will be passive-aggressive. I am sorry that’s the hand you were dealt, but develop a thick face and get back to improving your process, and don’t make the same mistake again. More on developing a process later in this video.
Be honest about not knowing
Investing requires the highest level of intellectual honesty – this is not a fake-it-till-you-make-it profession. The only person you are fooling is yourself because the market will tell you that you are wrong. If you don’t know something, say I don’t know let me dig into that and get back to you. If you cannot find information that forms the crust of the thesis, be ready to concede the stock idea is a pass.
Stay unemotional
Don’t get too high on wins or too low on losses. You know you have found a good PM if they come into the office every day with the same emotion despite the book being up or down that day. You should strive to develop the same emotional fortitude.
Learn non-stop
Read, a lot
If you want to succeed in this business, you must love to learn. You just never know what new thing you learned today can be the knowledge that helps you develop a variant view on a situation that turns out to be correct. So always be learning and understanding the world a little better.
One of the best ways to learn is to be a voracious reader of books. Legendary investors and billionaire business founders are all voracious readers. You get the pattern of success here. Once you have gone through the classic investment books, it’s really about reading broadly in different disciplines like history, philosophy, biography of people and business, and so on. I have curated a reading list for all of you for that exact purpose.
Do work on stocks in your free time
The availability of information in the public market is both a blessing and a curse. The blessing is information is easy to find if you want to invest in public companies. The curse is there is no excuse for you not to be looking at another company or another industry in your free time.
So you can look at different names in your free time and discover the types of businesses you want to own or the types of situations that align with your filter of actionable ideas. Deep dive on things without anyone asking you to because eventually as a Senior Analyst, you are expected and incented to bring your own investment ideas to the table. You might as well start as soon as possible if you commit to an investing career.
Curate your trusted source of quality information
For me, I read Ben Thompson’s Stratechery (not an ad, he is just awesome), a few Substack blogs that cover the industries I follow, and listen to a few podcast series, and I follow investors on Twitter.
As you start to do calls with sell-side research analysts, you will also know the different kinds of value add each analyst in your sector can provide. Your buy-side network of like-minded investors will tell you about their trusted sources as well. I will talk a lot more about networking in the people skill section in the later section.
Take advantage of your access
As a junior research analyst on the buy-side, you have access to people who have done this job longer than you have. The highest quality of information comes from practitioners. Take advantage of that. On a Friday after market close, ask your PM how they size positions, how they develop their idea filters, and how they decide on the net exposure. If they want to invest in you, they should be willing to divulge that information.
Develop your process
Regardless of your investment style, most research analysts need to be good at two things: Assessing what a business is worth and how stocks move. How much time you spend on these two things depends on what kind of shop you work at.
Stocks are tied to companies. Companies have a history and a story. Their stocks have a separate history and story. And the value of the company does not nearly fluctuate as much as the stock price of the same company. And value investors believe the investment opportunity lies when the stock price over or undershoots the value of the business.
Those who like watching movies as I do. Do you predict the ending of a new movie you watch? If you do, how are you able to predict? Based on all the movies you have watched in the past right?
Investment Journaling
Stock investing is similar. It’s pattern recognition. The challenge is every stock and company are just a little different from the ones you have analyzed before. And investment journaling is a great way to improve your pattern recognition.
You should journal your analysis and decision points. Note down your decision at the time you bought the stock. As time goes on, keep adding data points to that journal: over time what were the events that materially moved the stock, was your thesis at the point of entry right or wrong? If the stock went up, is it because your thesis is right or because something else happened that helped lift all the boats in that sector? If the stock tanked, is it because your thesis is wrong or because something else happened that sank all boats?
In this brutal profession where most judge you on the outcome, you have to stay intellectually honest about whether you got lucky or you made a good decision. And you have to rely on a robust process because luck won’t always be there.
Establish a good research process
Along with journaling, it’s good to establish and refine your investment process. I didn’t value the need for a structured investment process until I was forced into a high idea velocity work environment. To survive, I had to quickly crystalize what key points to hit on so that I can cope with the expectation of looking at one company per day in completely unrelated industries.
Now think about all the steps you take to reach a conclusion and write them down. You could turn it into a checklist or whatever. A repeatable research process is a huge time saver. Follow that process for the next company you look at. Over time, you will learn from investment mistakes and adjust your research process to better address your intellectual blind spots (for example, you used to not care about management compensation but you got burned on a company that paid excessive compensation for empire-building type M&As so you learn to pay attention to proxy statements for future stocks). So both journaling and a robust process can help you constantly improve as an investor.
Just because you have no idea generation obligation as a junior person, doesn’t mean you shouldn’t work toward generating ideas because that’s required for you to progress to Senior Analyst anyways.
Idea Generation
There are infinite ways to generate stock ideas, and all of them are hard and time-consuming because idea generation is not a quantitative process. Even if you quantitatively screen for either valuation or business metrics, you have to dig into the company to understand what has happened in the past, what is the issue now, and why your view of the future differs from what the market is pricing in.
So start developing your own idea-generation process. For me, I just have a pile of businesses I want to own at the right price, some are actionable now some aren’t. For you, it can be reading the WSJ every day and reading Barron’s over the weekend. Or following value investor club / SumZero write-ups, reading quarterly letters of funds you respect. It’s okay to borrow ideas, but you cannot borrow their convictions. So do the works on names for which the thesis resonates with your investment style. If you are not comfortable with it, you learned about another business and situation. If you gained the same level of conviction, put together a full pitch and float it in front of your PM. I don’t think PM is opposed to hearing a new idea and you get to practice presenting an idea concisely and defending your thesis. All for the purpose of ramping yourself to an idea-generating analyst in the future.
Journaling also helps you build a bullpen of companies you want to own at the right price because so often in this business stocks were not actionable at the time when you first did work. And that’s okay because you can revisit them when the stock does become attractive and you can refer to your journal to catch up on what has happened in the past with that company.
Write down everything
It’s a style thing but I always write down what I want to say when I am pitching a stock or preparing for a call with management. Being more prepared calms me down. For pitches, it helps convince your PM to act on your recommendation. For meeting with management, you can get more of the management if you ask better questions. I am not saying material non-public information but if you ask good questions, the management gives you good answers instead of regurgitating a line you can find in the transcript.
Preparation is also a form of respect for management’s time, which makes management like you and again helps you get better information. Don’t ask a question that you can find the answer to in publicly disclosed sources. Ahead of the management call, you can run through your question lists with your PM to make sure. Organize the questions into categories such as growth, margin, capital investment, moat, etc., and prioritize the ones that you must get to the bottom of on the call.
Learn to kill ideas
Time is the most precious commodity as an investor because there is the opportunity cost of looking at something that’s not actionable at the time. In a higher velocity idea shop, your PM has no shortage of ideas for you to look at. You can look really good if you learn to kill ideas very quickly. If you reach the conclusion that this stock is not actionable based on your research on the 2-3 things that matter to the stock, tell your PM and move on to the next thing. Your PM will appreciate your judgment.
Stay organized
It pays to stay organized in the research profession, which is something I acutely focus on as a content creator and as an investor. Everyone does it differently and I don’t advocate for additional paid tools if a simple one will do. I just use Microsoft OneNote. Some use Evernote. There are a lot of YouTube videos that teach you how to use Notion or notetaking apps on iPad Pro. You can use this tool to set up your investment journal and organize it by ticker and have sections like your notes on the business, intra-quarter management commentary, the big news that moved the stock, earning preview, earnings summary, guidance change, etc.
Don't drop balls (on big positions)
You will have “coverage” responsibilities on a group of stocks. Be on top of news flows and always have a view on whether that piece of information is material to the stock thesis, keep talking to others about the name to prevent intellectual blind spots. You should never drop the balls on the largest positions under your coverage.
Not a single PM likes drawdown, not a single one. Doesn’t matter if it’s Ruane Cunniff Goldfarb or day-trading prop shop. And the stock moving against you is the market telling you that you might be wrong. Sell-side is most helpful for understanding stock moves but I understand most of us don’t have timely access as a junior, especially at a smaller fund. So go on Twitter and use the dollar sign to feature to see if you can understand what’s driving that move because your PM will ask. A lot of times a stock move is just noise and that’s what it is, but sometimes you can uncover a reason that could be a good chance to tactically add to the position.
I know you must be thinking that investing legends like Warren Buffett tells everyone to not pay attention to the stock price. Well, in reality, we all work with constraints and 99% of us don’t work at Berkshire with that kind of true long-term and permanent capital. So most of us do live the stock market day-to-day and try our best to make sense of how stocks of our companies move.
People Skills Matter
Just because the investing profession is more individualistic than other professions doesn’t mean you don’t need people skills to do well. As a junior research analyst, you don’t bring much insight as an investor yet, but at least you are in control of being a good person. It can’t hurt to be liked during the bonus season, or you need to rely on external parties to land a new seat.
Be a good communicator
You want to always think about how to deliver the same message with fewer words. Just look at what folks post on financial forums and do the opposite of that as a start.
A good investor thinks clearly, understands what matters, and delivers a message concisely. PMs are busy so they appreciate someone who gets to the point. For stock pitch, you know the drill: punchline up front, here are the 2-3 takeaways you need to know. Let your PM ask questions about the details.
Know your customer - the PM
Your PM is your customer. You want them to act on your idea right? Start by knowing your customer, write down their expectations, and deliver the products in the format they like.
It will be nice if your PM has a manual that documents the kind of ideas they like and exactly their investment philosophy. No, I am not talking about the philosophy language they included in the marketing material or investor letters. Not that. But it’s unlikely they have made that document. So pay attention to their idea buckets: When they discuss why they own the current positions in their portfolio, decipher the thesis behind them so you have a sense of what setup your PM likes so that you know what ideas to generate in the future.
Networking relentlessly
It’s a small industry. By third-level connection, you probably know 95% of all the stock investors out there. Buy-side jobs are mostly filled through referrals. Build a brand so that your next job shouldn’t be through a recruiter. I have never gotten a single job by applying through career websites so I understand how job sourcing works in buy-side land.
And go build connections with like-minded investors. You guys can grow together and cover each other’s intellectual blind spots. So next time you go to a sell-side conference or a company analyst day, grab a drink, introduce yourself, ask for contact information, and keep in touch over email, LinkedIn, or Bloomberg IB.
That said, I disagree with the advice out there that you should build a relationship with peers or seniors with very differing investment styles. Especially if your style is on one extreme of the spectrum. For example, if you are a long-only investor and you are at a dinner table full of pod analysts, I highly doubt there is any common language. How many long-only investors do you know who care about quarterly setups and the buy-side whisper?
Similarly, when you go to industry conferences, you will interface with customers or channel partners who do business with the company you are researching. Make friends with them and ask them good questions so that you establish a circle of trusted industry experts who can give you insights on changes going on in the industry.
Also make friends with the non-investment people at your firm, the CFO/COO, and the head of investor relations. If you want to be transactional about it, they are connected in this industry too so you never know when they might help you. But even without thinking about the professional benefits, you can learn about what they do and what are their pain points on the job, that knowledge can help you down the road if you decide to start your own fund. So if they ask you to do a pivot table or format their spreadsheet, say yes because it’s an opportunity to build goodwill and it doesn’t cost you a lot of time as you are likely more efficient on that task than them.
Find mentors
There is only a small amount of people who are great investor, a great leader, and a good person. Find them, impress them, and become their mentees. I still have monthly check-ins with a few of my mentors and I am very grateful for the access and the constant book recommendations of course. Be of value to them by sharing your knowledge. If you outgrow your mentor, find new ones. That is a good situation to be in but continue to seek out mentorship from someone who is just a little ahead of you on the career ladder.
Don’t be an ass
To sell-siders who made to buy-side, you should understand better than most that what it’s like to serve the buy-side clients. Now that you have become the client, you should remember to treat your counterparty with respect. That means, be nice to your equity salespeople, to your rep at the expert network who sources speakers for you, and be respectful when speaking with sell-side analysts or associates. If you work at a smaller fund, know you are not a top priority to them, so send all your questions at once instead of pestering your salesperson with one question every 15 minutes.
Be consistent with your brand
This is an incredibly small industry. Jamie Dimon said it really well in my favorite graduation speech video: “There is already a book written about you. You will be surprised how much I can know about you without even talking to you.” People can validate easily with a phone call. And I am not just talking about calling your colleagues at the funds you worked at, remember sell-side research, expert networks, and alt data providers work with most buy-side firms, so you never know whose bad review of you could hurt you. I remember doing informational with a PM and I told him I interned at this hedge fund during my MBA. He asked “so you know the founder of that hedge fund” I am like yeah. I am sure he just called the person to ask about him. I assume the founder said good things about me because I advanced to the final round.
Give value
Once you have grown your connections across all these counterparties. Be valuable to them. If you hear something interesting from your research, share it with your peers, sell-side analysts, company IR, and management. The entire investment ecosystem is just an information chamber. Helping others reduce informational asymmetry always builds goodwill in this business, as long as you ensure compliance.
Life outside investing
Finally, don’t forget there is a life outside work. Have hobbies and make friends with people outside the investing industry. And take care of your body: exercise, meditate, eat healthy food, drink water, and get adequate sleep.
Thanks for reading. I will talk to you next time.
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Hi Richard, this is honestly a fantastic post that captures everything I can think of!