I am a buy-side hedge fund analyst. So, take it from me: No two jobs could be farther apart and still be nominally in the same industry than a buy-side analyst and a retail broker. We carefully research and pick stocks. Brokers flog their firm's morning notes.
Or so I thought until I met Jimmy, a former retail broker at a very large brokerage who now works in institutional sales at a boutique shop. When Jimmy was a retail broker, he and his colleagues — the experienced ones, anyway — made a career (and lots of money) by betting against whatever the overpaid equity analysts at their firm were selling. That's right. They would read the morning notes and short their own analysts' recommendations. I am a professional short-seller by trade (I do go long, too, but I spend as much time researching shorts), but I now know that no one on the planet knows better the folly of sell-side research than a retail broker — a fact that could have saved the public billions. Mary Meeker? Henry Blodget? Their recommendations were pretty darn silly, at least from where we were sitting. And you folks knew it too, or should have known it. And you should have done something about it.
If you didn't know it, or were suckered by greed into buying that stuff, herewith is some buy-side advice, learned the hard way.
For starters, there's nothing new under the sun. For years, the electric utility business was a prosaic, dividend paying industry pitched to the proverbial widows and orphans. Deregulation changed that. High flyers like Enron, Calpine and Shaw promised indefinite stretches of 15 percent earnings-per-share gains in an industry where top-line growth had been mid-single digits for decades. Was there any reason to believe otherwise? Deregulation, of course, had an impact, but any careful investor should've been hard pressed to take management's claims — and the sell-side's reiteration of these claims — seriously.
Remember the sell cycle: Every few years a new (or old) industry gets hot, and the investment bankers and analysts proclaim it to be the New Thing. And it is — for them. For you and your clients, it's a loss maker, unless you get in early, in which case you're playing the Greater Fool Theory. But remember, for the theory to pay off, you have to get in really, really early. So, don't believe the hype, and don't forget that even colleagues at your firm may not have your interests as their foremost concern. Really.
The truth is, given the sadly compromised state of most investment banks' research departments (see page 28 for new NASD rules), you have more in common with a buy-side guy than with a sell-side guy. Like us, you need to be skeptical, especially of investing fads; above all, resist the siren song of easy money in the hot industry du jour.
We on the buy-side have sliced and diced the investment universe into a million different sectors, industries and sub-industries. Some follow one narrow industry, or one particular market or company type. Brokers, on the other hand, tell clients they have it all. They are the one-stop-shop for answers.
Can you really be comfortable recommending utilities in the morning to Grandma and biotechs to her grandson in the afternoon? How much do you really know about these investments? It's best to specialize in something, to be an expert in plugging whatever interests you. If you have a focus, your advice will have, as Henry Kissinger said, the added advantage of being true.
Of course, many money managers have had a couple of tough years. No doubt, you might have asked yourself, “What am I paying these bozos for? I could have done better.”
Actually, probably not. Otherwise, you'd be sitting here next to me. It's true you are paying me to be on top of my game. However, I don't have to worry about doing financial analysis while trying to raise money for us to manage. Don't think that you can do it either. Being a good client rep and a better stock picker than me — it ain't gonna happen, not over the long term. You are better off trying to guide your clients to a reasonable asset allocation, picking good managers and trying to prevent clients from chasing the hot dot. Leave the stock picking to guys like us.
The author works for a New York hedge fund that specializes in shorting stocks. He asked that we withhold his identity.
