Editor's note: This piece is the second in a three-part series about the state of analyst research. Look for the next installment on Wednesday. The first installment,
What a Research Analyst Is (And What an Analyst Is
Sure, securities analysts pull down the big bucks. But between bonus checks they endure a grueling work schedule. Theirs is a dawn-to-dusk lifestyle that requires a workaholic with an outsized ego.
The typical analyst is at her desk well before the market opens each day, which means that the growing number of California-based analysts catering to the technology sector typically have sprung to action well before six in the morning. The analyst is expected to be the eyes and ears on her industry for their various constituents, primarily the brokerage's sales force and institutional clients. That means reading the daily press, combing through industry trade publications, checking in regularly with companies under coverage and then disseminating that information in the form of notes to clients as well as conference calls with brokers. A time-honored practice on Wall Street is one in which brokers call their clients with the ideas supplied to them by analysts on the morning's "squawk."
What follows is an endless cycle of tending whichever master needs attention next. Analysts field calls from institutional investors demanding the latest inside skinny on companies in their portfolios. They listen to pitches from investor-relations departments eager to spin the company's story. And many spend a considerable amount of time every day keeping their mugs on TV and their quotes in print. After all, in general an analyst recognized in the media as an expert is more likely to impress all potential constituents and be more likely to win business for the firm.
Like the business journalists who hang on their every word, top analysts are always on deadline. If you're a chip-industry guru, you are responsible for knowing everything that's happening in semiconductors everywhere at every minute and you're supposed to be able to spit out instant -- and accurate -- analysis. So wherever you go, you have to be in touch, to assess the impact of an earthquake in Taiwan, an earnings surprise at
Advanced Micro Devices
or a giant order that went to an upstart, not the incumbent.
Then there's travel. Aggressive analysts say they spend a minimum of a third of their working days on the road. Even relatively laid-back analysts are always on the go, visiting companies and attending trade shows and analyst-day meetings. On top of that, they are frequently called upon to help the firm's marketing efforts.
That makes them latter-day circuit riders, shuttling between New York, Boston, Philadelphia, Denver, Los Angeles and San Francisco to meet with big institutions and mutual funds. In these marketing meetings, an analyst will present clients with his best ideas, otherwise known as stock picks. If the client likes the "story," the presumption is that the client will buy shares through the analyst's firm, generating trading commissions.
Analysts are also pressed into service to win underwriting business. They are key players in a "bake-off," the final competition for the deal, which involves a presentation by each bank to convince the would-be client that it will provide the best service. The analyst is the crucial player in these proceedings because companies want to know what kind of "support" they'll receive from the analyst after the IPO.
To put it bluntly, companies planning to issue stock want to hear what the analyst will do to convince investors to buy its shares.
That's not exactly empirical research, but it is part of what makes an analyst so valuable to his or he firm. The multi-million-dollar fees from underwriting an IPO -- and the promise of future fees -- is of paramount importance to the firm. Once chosen to manage a deal, the firm's analyst is available to help the company through every stage of the IPO process, including taking calls from institutional clients trying to understand the story better in advance of the IPO.
Says Merrill Lynch Internet analyst Henry Blodget: "The best sell-side analyst finds ways to be helpful to the widest variety of constituencies."
Oh, there is one other function analysts perform: the old one of writing research reports for investors. These reports run the gamut from brief missives to investors (known as "First Call notes" because they are distributed over
First Call/Thomson Financial's
proprietary electronic system) to full-fledged research reports published in book format. Bringing out a major report can be a bit like publishing a would-be bestseller. The analyst will follow up the release with conference calls, television appearances and investor seminars to promote the report.
For all the glamour and rewards, the analyst job is a grind that gets old fast. As the demands have escalated, in fact, many of Wall Street's more experienced analysts have decided to take a pass on the grueling hours and pressure-cooker conditions. In the last year alone, senior Internet-industry analysts from
Hambrecht & Quist
Credit Suisse First Boston
(Lise Buyer) and
(Brian Oakes) all have left influential perches for the venture-capital world. On the venture-capital end of the business, they can count on a more manageable lifestyle and hope for far greater upside potential.
What troubles veteran investors, however, is the relative youth of the analysts who remain. Many analysts, especially those breaking into the business covering the Internet companies, are following untested business plans and lack the perspective of their elders. They have not seen what happens when industries reach maturity. Nor have they experienced a prolonged bear market; some weren't even out of business school when the last U.S. recession ended in 1992.
"It's more the inexperience than the age that matters," says Andrew Kessler, a fund manager in Palo Alto, Calif., who is a former sell-side analyst and an occasional columnist on
. "I get some guy who says this is the greatest thing since sliced bread and I have to say, 'Whoa, you don't know the meaning of sliced bread.'"
This isn't to say that a young person can't be insightful, but presumably wisdom and experience are key ingredients in analysis. Analysts say the fact of the matter is that the Wall Street analyst game simply isn't a game for oldsters or people with young families who want to keep their marriages intact.
So the analyst game presents a conundrum. The job is too grueling for most to keep at it for a long time. Yet, what investors value most are analysts with perspective on their areas of coverage. So, as long as analysts remain so critical to the investment-banking operations of their firms, they're likely to continue work at a burn-out pace -- and running through the revolving door of Wall Street jobs that utilize their skills.