It has been seven years since I left my research analyst job at CLSA India. I co-founded eduCBA to train students on Investment Banking & Equity Research. Since then we have trained more than 10,000 students on different research topics. However, each time we see the same set of questions and one common question is “What are the Top Equity Research skills that one should acquire to be successful in Research”
I think the best way to get an answer to this question is to see the actual output of Equity Research (Equity Research Report). Below is a sample Research Report prepared by us when I was at CLSA , we downgraded Reliance Petroleum. We saw excellent response to this report in the market. Reliance Petroleum Stock tumbled by 18% in just 1 day.
1) Equity Research Course 11 Course Bundle, 40+ hours
2) Business and Financial Modeling (University of Pennysylvania)
3) Wharton Business and Financial Modeling Capstone (University of Pennysylvania)
4) Introduction to Finance: Valuation and Investing (University of Michigan)
5) Valuing Projects and Companies (University of Michigan)
Click here to know more – Reliance Petroleum Downgrade
source: CLSA Research Report
If you wish to learn Equity Research professionally, I have an awesome offer for you. I have created an epic bundle of 99 courses on Investment Banking and Equity Research
Now assuming that you have seen the research report, let me ask you a couple of questions –
- What are your key observations in general about the report?
- What do you think are the key skillsets required to prepare a research report like the one above?
- Do you currently possess these skills?
Till date, I have conducted more than 200 seminars across college campuses and I still receive the same responses. Most answers revolve around securing high GPAs, high quantitative analysis, analytical abilities, Intelligent, communication etc.
However, My top 5 Equity Research Skills are as per below –
#5 – Writing Skills
Writing Skills is at number #5. Equity research report is the most important communication from a securities firm to its clients. This report has a very specific purpose i.e. it is intended to help an investor take a decision about the allocation of resources.
- First thing First – One important aspect is that the research report is no where close to novels from Dan Brown wherein the best is saved for the last!. In research report the stock target and price recommendations comes first.
- KISS Principle – “Keep it Simple Silly” is the golden rule. It is important to be to the point and precise.
- Less is More – Another important aspect to note here is that you are not required to write a full PhD thesis here, a single page note or a couple of pages of reports would be great. Readers hardly have 1-2 minutes to read your full report. They may not even scan even till the 2nd page.
#4 – Accounting Skills (More than Numbers!)
Number#4 is Accounting! Accounting here is not about Debits and Credits. Infact is is much more than that.
- Be proficient in Financial Statement Analysis – The key word here is Financial Statement Analysis.This means you are expected to be proficient in vertical analysis, horizontal analysis, ratio analysis, cash conversion cycles, ROEs, ROCEs etc.
- Sourcing of Right Data – Another aspect where I see lot of challenges is to sourcing the right data. For example, if you require Annual Report of a company, would you visit company’s website or SEC website. In addition, which other documents will you refer to draw your conclusions. Typical key sources to look for information are the Press Releases, Conference Calls, SEC Filings etc. Financial Statement Analysis done on wrong set of numbers will lead to results which will mislead the analysis. Hence, as an analyst the primary challenge is to fetch the right data.
- “Identify the Shenanigans” – Our main focus in Analyst specific Accounting is identify and predict the accounting malpractices by companies. These are normally hidden away. You can see below the confessions in Satyam Fraud Case
#3 – Valuations (Lies in the eyes of beholder!)
Valuation Skills is at Number #3. Equity Valuation is the process of estimating the potential market value of a financial asset or liability. Valuations are required in many contexts including investment analysis, capital budgeting, merger and acquisition transactions, financial reporting, taxable events to determine the proper tax liability, and in litigation. You should be aware of the following –
- Intrinsic Valuation methods – Intrinsic Valuation Method (DCF) which means primarily determines the value by estimating the expected future earnings from owning the asset discounted to their present value
- Extrinsic Valuation Method – Relative value models determine the value based on the market prices of similar assets. This includes valuation ratios like PE, P/CF, P/BV and many more
- Key is to identify the right valuation methodology – There are more than 15 valuations approaches including DCF, Enterprise Valuation Methods and Equity Valuation Methods. Important thing to know is why a particular valuation Methodology is used in a specific sector. For example, Banks are valued using Price/Book Value, however, other sectors may not use Price/Book Value as a key valuation metric.
source: CLSA Research Report
#2 – Financial Modeling (Cliffhanger!)
At number #2 is Financial Modeling. Financial modeling means forecasting the future of the company or an asset by way of an Excel Model that is easy to understand and perform scenario analysis. In the context of our discussion here, Financial Modeling includes professionally forecasting future financial statements like Income Statements, Balance Sheets & Cash Flows. Unfortunately, in graduation and post graduation, every other subject is taught except Financial Modeling and Excel.
- Financial Modeling follows Modular Approach – The primary approach taken is Modular one. Modular approach essentially means that we build core statements like Income Statement, Balance Sheet and Cash Flows using different modules/schedules.
- Provide Additional Schedules for clarity – The additional schedules are the depreciation schedule, working capital schedule, intangibles schedule, shareholder’s equity schedule, other long term items schedule, debt schedule etc. The additional schedules are linked to the core statements upon their completion
- Free Financial Modeling Training – If you want to learn Financial Modeling from grounds-up, you can refer to the Free Financial Modeling Course. Please note that Financial Modeling skill may not be very easy to acquire. It requires time and patience to master this skillset.
#1 – Excel Skills (Most Obvious is Most Dangerous!)
At number #1 is the Microsoft Excel Skills! Neither I am joking, nor I am drunk. Equity Research Analyst spend around 10-12-14-16 hours each day working on excel doing financial modeling, valuations and financial statement analysis. Important points to note in Excel are
- Formatting is most important– It is important for analyst to produce an output that is error free and neat. There is lot of money riding on the research reports published by analyst and the last thing one needs is to lose a client due to loosely formatted tables and excel models.
- Speed & Accuracy – Timely delivery of reports, models is required in Equity Research Industry. MS Excel is the only place I can say where there are “Shortcuts to Success”! I have hardly seen research using mouse and majority of them are masters in Excel.
- Analysis – One should be able to use Excel tools like Pivot, Filter, Sort, VLOOKUP, HLOOKUP etc to analyze complex data and client requests.
- Scenario Building – It is important for to create different scenarios for Modeling like Optimistic, Pessimistic and Most expected. In addition, your client may want to change a few assumptions to see how they affect the target price, find terminal value, capm beta etc. Hence, it is important for you to be well aware of Data Tables, Goal Seek etc so that you can provide these features to your clients.
- Graphs & Charts – A picture speaks more than thousand words! You will find majority of the research reports contain neat and informative investment banking graphs and charts and less of written material. You should try and master this data representation technique.
source: CLSA Research Report
Other useful article –
- Equity Research and Private equity
- Equity Research Sales & Trading
- Equity Research Investment Banking
If you learned something new or enjoyed the post, please leave a comment below. Let me know what you think. Many thanks and take care. Happy Learning!