Equity Research is not supposed to bring in the money?

I am a student in Finance and I don’t have experience in the industry yet. We read a lot of research articles such as from the Journal of Finance. I understand some things like there is no skill at stock picking for portfolio managers and hedge fund managers, however during some short time a manager can outperform the market, but it lasts so long until he starts managing more money, then he stops generating meaningful alpha. But what about Equity Research analysts? I think there is a general consensus that financial markets are believed to be semi-efficient. Also, accroding to Efficient Market Hypothesis, in semi-eficcient markets it’s impossible to predict future price by studying publicly availabale data no matter how hard you try. But isn’t it a job of Equity Research guys to predict future price? If so, then according to academicians, those analysts get paid but give random results, no?

^Shhh! It’s the elephant in the room! You’re not supposed to say it!

If you admit that any idiot in the world can do your job, how are you supposed to make millions doing it?

*ducks and runs away from artillery fire*

Haha, but I expected to hear some arguments that, you know, analysts build some models that must work, or give more or less accurate predictions at least on average. Otherwise I can’t imagine someone doing all this work day to day knowing it doesn’t have any meaning. But I guess, commenting on my own starting post, doing fundamental analysis on small stocks makes perfect sense, because the analyst coverage is not the same as for big stocks, and you can spot some mispricing.

See the Grossman-Stiglitz Paradox.

The question in your title is not the same as the question in the message body. Anyway, regarding the value of equity research in a semi-competitive market, ask yourself, how does the market become semi-efficient to begin with? The valuation of a broadly covered company is more or less known partly because many people write about these companies. Having 10 analysts cover AAPL is much more efficient than 1000 firms each doing their own research.

Furthermore, the present value of as stock reflects the probabilities of many uncertain events. Investors rely on research coverage to position themselves on various sides of these probabilities. So, just because the value of a stock is known, this does not mean that investors do not hold different opinions on the underlying company, and that they do not rely on publications to form these opinions.

To the question in your title: should equity research “bring in the money”? That is, is equity research a worthwhile business model? A lot of the value of equity research comes from cross selling other products. Many customers expect this coverage when they place trades through a company’s brokerage or if they subscribe to other services. So, the question is not so much what is the incremental value of coverage as it is what business will be excluded if firms do not provide this coverage.

I have a friend in ER who will get berated by his boss when the stock goes down without an explaination. These small cap stocks will have no news available, the stock will dip, and he basically has to make up a reason for it that will hold water with the buyside clients.

Chicken-or-the egg…

What came first? The Stock price of $XXX reflecting all available public data, or the research report with a $XXX target that actually PROVIDES all available public data?


Read this

Let’s see… academics professors in school making around 100k no bonus. analysts getting paid 300k+ to “give random results”. If you want to pick academic, go right ahead. no one is stopping you

lol yep. im pretty good at getting berated.

My grad professors all made in the $200-$300k range in a not-high-cost city. That doesn’t include their consulting gigs that I assume they have on the side. Not a bad package, if you ask me.

Its also important, as a young person Mr. Lukia, that you know that everything in life is reflected in your salary+bonus. The man with the larger salary is always right and should never be questioned. The analyst makes more so the academic is a fool. Remember that.

^ Yes. Greed is good. Coffee is for Closers. And only marry for the money, you can always learn to love.

Yeah, I read that paper a while ago, but for me it is not so natural to grasp the idea. It says the more analysts are out there, the less money each analyst can make (by finding mispricing) -> less incentive to study firms -> analysts quit -> incentives appear again and the cycle is repeated. However, I assume for ER analysts the incentive is not in finding mispricing, but to provide the most accurate BUY or SELL targets, is it not? But what confuses me is that if there are so many analysts out there, it might mean you can’t have a free lunch, but it doesn’t mean you can’t look at beta, market price of risk and give your price targets based on expected returns. But IF this was the case, it would mean that any ER analyst is no better than another because they all would do the same procedure.

ohai , I understand that the stock price today incorporates the future possible companies outcomes and price movements with associated probabilities, and that an analyst might place more weight on some of the outcomes and thus he could give prediction of tomorrows price. But doesn’t it mean that on average he will be as many times accurate as many times wrong? What would make him being more accurate on average? And yes, you are right, my question was as you said " is equity research a worthwhile business model?" given the fact that average analyst should not give accurate preductions in the long run (based on EMH). And to be honest, I am asking this question because there is a CFA research challenge, where srudents basically do Equity Research, and I presume the main criteria (other things being good too, like report quality) for chosing the best team is based on how accurate their predictions are. So, that’s why it really buffles me. If CFA Institute thinks you can give an accurate forecast of future price, then CFA institute thinks EMH doesn’t hold, or the winners are just all lucky! And thank you for very informative response, ohai!

Some of these academics are getting paid 300k. I’m sure Gene Fama makes more.

I’ll spill the beans kiddo.

  1. Ever hear of a Sell Recommendation?

  2. The objective of ER is not to predict the future price of the stock, but to act as a financial puppet and get to know the company so investment banking has a shot as their dealman.

  3. Ever hear of anyone get rich off of reading sell side equity research reports? I heard of a study once showing how following the Buy/Sell/Hold calls would leave you underperforming the market.

  4. Do you see any posts by Itera that are positive and fun?

Charles Ellis addressed this very issue in his book “Winning the Loser’s Game”. He basically said that all ER guys have gotten so good, and there are so many of them, that they’ve basically worked themselves out of a job. Basically, they’re so good at analyzing the market that there’s no alpha to be made with public information (semi-strong form efficient).

He continues to say that someday, enough people may begin indexing that there’s actual alpha to be made in ER, but until then, you’re better off sticking with index funds. (Note - he is also on the board of directors at Vanguard, so take his advice for what it’s worth. I still think there’s a lot of truth to what he says, even though he’s almost certainly biased.)

I get that, and I generally agree with the idea that whoever gets paid more, he gets that for a reason. But comparing academics and analysts based on the salaries is not a good idea, I would say. Most of the academics chose that path knowing they won’t make big money, and it’s not the money what is the main reward for them (or at least they want SOME money and some prestige, big name in the world, hunger for reasearch, you know this sort of things).

^ Missed my sarcasm.

Looking at the Ontario sunshine list (which would only contain hacksaw universities by Itera standards), an associate prof in finance makes about $180-240k and a full prof at UofT $280-350k. One even cracks $400k.