Ok, so in one published post already, and in many more subsequently I discussed recommendations and the various minefields involved, and why the whole business of stock recommendations is a 'tangled web' which at the same time needs some 'unpicking', but is a tangled web for a reason.
But what about the practical point of how to kick off a 'Strategy Product' in an imperfect world, which is not going to get perfect any time soon.
As you pointed out, you want Jefferies USP to be 'bottom-up' research, you don't want some big 'ego' 'Strategist' coming in and upsetting the boat, but you still want a strategy product.
So how can you go about it?
Posing questions not giving answers
One approach which is not a bad starting point is to start out not as a 'guru' but as a 'student', a seeker of truth.
'Ego' is an interesting thing. It is ultimately all about power and how you want to be seen an influence the world. 'Masters' are accepted as such. People seek them out, defer to their opinions and respect them. Natural students suppress their egos in the hope that 'masters' will instruct them. So far, no 'Egos'. The problem is always when students feel they want to start asserting themselves, proving themselves to their masters if you like. Or when people aspire to be 'masters' and compete to get recognition. If only it were like the great David Caradine's 'Kung Fu' series and it was just being a question of 'snatching a pebble from my hand' to determine when student became 'master' and then just pissed off when told 'time for you to go'. As we all know in the City, as just about any where outside the idealised Buddist Martial Arts Monastery, 'Masters' have plenty of people willing to slag them off as rubbish when they get it wrong, and 'Students' have headhunters willing to stoke their impatient for a higher basic and/or bonus!
Nevertheless, it is worth bearing in mind the old 'Eastern Philiosophy' trick of approaching things with humility. A strategy document, at least initially, could basically be set up in terms of posing questions, rather than giving answers.
What you may find here is that this is a good start, but not where you are going to end up. Look at your document as 'lighting a candle to find the way' for the rest of the department.
Monday 29 November 2010
Illogical Semantics - Part 2
The arguments always come up over 'Recommendations' don't they...
Ok, I'll put my hand up. I'm just an ol' fashioned boy, in an ol' fashioned world (dreaming of one day being a millionaire)..
...and as an old-fashioned boy I had to study Latin - which in fact I was cr*p at-
...But to begin to get anywhere understanding a sentence of Latin, you need to be able to be able to tell a noun from a verb, and both from an adjective.
Let us start with a few basic facts:
BUY and SELL are verbs...They are therefore by definition and ACTION recommendation...
ADD and REDUCE are also verbs and therefore can also be used as an action recommendation...
OVERWEIGHT - Is actually an adjective, but in market jargon and the slurring of nouns/adjectives that can occur in languages - eg. to hoover- could just concievably make it to the 'bastard' verb status...
...although only in the context of 'weighting' a portfolio.
But there is no way that UNDERPERFORM or OUTPERFORM can in any shape or form be described as ACTIVE VERBS. They are not an ACTION recommendation. They are at best a 'prediction' and they refer to the expect action of the share, not a call to action from the reader.
You can shout 'Buy!' in the imperative form and it means something. Try shouting 'Underperform!' and you can see it is meaningless...
__________________
So why do we use a mixture of these terms in published recommendations?
The reason is clear - to 'obfusticate' to 'cloud' and 'confuse', to give us a smokescreen to hide behind.
______________________
So please, please, please, please....do not let anyone drag us down the route of having a 'logical' recommendation system...certainly not one which goes beyond 'Buy', 'Sell'' 'Hold'
Analysts will always pull that one, because deep down they do really know that it is a bit like debating the number of angels that you can get on a pin-head...a great way of wearing you down... and basically a brilliant 'fillibuster' to keep anything from changing.....
Ok, I'll put my hand up. I'm just an ol' fashioned boy, in an ol' fashioned world (dreaming of one day being a millionaire)..
...and as an old-fashioned boy I had to study Latin - which in fact I was cr*p at-
...But to begin to get anywhere understanding a sentence of Latin, you need to be able to be able to tell a noun from a verb, and both from an adjective.
Let us start with a few basic facts:
BUY and SELL are verbs...They are therefore by definition and ACTION recommendation...
ADD and REDUCE are also verbs and therefore can also be used as an action recommendation...
OVERWEIGHT - Is actually an adjective, but in market jargon and the slurring of nouns/adjectives that can occur in languages - eg. to hoover- could just concievably make it to the 'bastard' verb status...
...although only in the context of 'weighting' a portfolio.
But there is no way that UNDERPERFORM or OUTPERFORM can in any shape or form be described as ACTIVE VERBS. They are not an ACTION recommendation. They are at best a 'prediction' and they refer to the expect action of the share, not a call to action from the reader.
You can shout 'Buy!' in the imperative form and it means something. Try shouting 'Underperform!' and you can see it is meaningless...
__________________
So why do we use a mixture of these terms in published recommendations?
The reason is clear - to 'obfusticate' to 'cloud' and 'confuse', to give us a smokescreen to hide behind.
______________________
So please, please, please, please....do not let anyone drag us down the route of having a 'logical' recommendation system...certainly not one which goes beyond 'Buy', 'Sell'' 'Hold'
Analysts will always pull that one, because deep down they do really know that it is a bit like debating the number of angels that you can get on a pin-head...a great way of wearing you down... and basically a brilliant 'fillibuster' to keep anything from changing.....
Sunday 28 November 2010
Entirely 'off-topic' -If you are still having trouble in the Biotech area, have you talked to the Ravster...
Not really the subject of any of these blogs, but the last time we were talking you were have trouble with a Biotech New Issue going tits u...well not too well...
...i guess that this issue could already be well behind you...
...and you could have the star 'biotech' team in place in Europe already...
But if not, you could do far worse than turn to help/advice/a shoulder to cry on/... or even a possible target for recruitment to my former friend and colleague (at least he is a former colleague...not so sure if current or 'former friend) than the Ravster...
Who is the Ravster?
Well, one answer is Dr Ravi Mehrotra, PhD Genetics etc. etc.,
The other is my mate 'Rav', Bolton-born, beer-swilling, page 3 of the Sun reading and all-round 'good-egg', who was seduced by pots of money to work for SG Cowen for three years.
Dr Ravi Mehrotra PhD, aka the Ravster, was subsequently headhunted with specialist salesman Andrew Sinclair to Steve Plagg's team at Credit Suisse, where he is currently the No.1 rated European Biotech Analyst.
I spoke to him last August and it was pretty clear that he was really HATING IT at CSFB.
Would the Ravster interested in joing Jefferies? Dunno? Would he want to move from a No.1 rated house to a number 35 rated one. Dunno? Would he want an absurd amount of money? Probably.
But most importantly, would you and he have a great laugh over a few beers, with personality - yours and his-be more likely to sway things than would otherwise be the case....definitely!!!
I see chemistry here.
..and possibly a free lager or too in payment,
Pete
...i guess that this issue could already be well behind you...
...and you could have the star 'biotech' team in place in Europe already...
But if not, you could do far worse than turn to help/advice/a shoulder to cry on/... or even a possible target for recruitment to my former friend and colleague (at least he is a former colleague...not so sure if current or 'former friend) than the Ravster...
Who is the Ravster?
Well, one answer is Dr Ravi Mehrotra, PhD Genetics etc. etc.,
The other is my mate 'Rav', Bolton-born, beer-swilling, page 3 of the Sun reading and all-round 'good-egg', who was seduced by pots of money to work for SG Cowen for three years.
Dr Ravi Mehrotra PhD, aka the Ravster, was subsequently headhunted with specialist salesman Andrew Sinclair to Steve Plagg's team at Credit Suisse, where he is currently the No.1 rated European Biotech Analyst.
I spoke to him last August and it was pretty clear that he was really HATING IT at CSFB.
Would the Ravster interested in joing Jefferies? Dunno? Would he want to move from a No.1 rated house to a number 35 rated one. Dunno? Would he want an absurd amount of money? Probably.
But most importantly, would you and he have a great laugh over a few beers, with personality - yours and his-be more likely to sway things than would otherwise be the case....definitely!!!
I see chemistry here.
..and possibly a free lager or too in payment,
Pete
Recommendations & Recommendations changes ....ever thought of what you'd actually want to have?
In all the years of my career, and through all the hours of sterile circular debate I have sat through about
1. How to make recommendations
2. What to call our recommendations
3. What methodology should underlie our recommendations
4. How recommendations and target prices should work together....
5. Ecetera...
6. Ecetera...
...Yawn...
I am persistently struck by the failure to ask some absolutely obvious points...like ...why are we making these things...how often do we want to change them...when would we like to change them...in an ideal world what would be the ideal for portofolio of Recs for US as a commercial operation whether we define ourselves as a stockbroker/investment bank....
....Look stuff whether they are called Buys/Sells/Add/Reduce/Overweight/Underweight/Superweight or Half weight...
...Stuff whether they are absolute, relative to a sector index, country index, regional index or the price of fish!
.... Stuff if they are based on DCF targets, EVA targets, three month rolling outperformance targets or Chinese astrology...
WHY ARE WE MAKING THEM?
HOW OFTEN WOULD WE LIKE TO CHANGE THEM?
WHEN WOULD WE LIKE THESE RECOMMENDATIONS CHANGES TO BE MADE?
WHAT WHEN ALL SAID AND DONE IS A PORTFOLIO OF PUBLISHED RECOMMENDATION SUITS US - Not client x, y, z or the SEC, FSA or the FBI...but the bloody people paying the bills, your employers!
So here's my take:
WHY ARE WE MAKING THEM?
To generate business...well, aren't we?
Stuff what it says in the CFA handbook, if there was no bottom-line point would we be bothering?
...Any arguments ...no I thought not...
HOW OFTEN DO WE WANT TO CHANGE THEM?
A slightly more complicated one that, so lets try some extremes.
How about every day?
Would generate more biz?
...Well probably not. Might for a week or too, but I think the clients would see through that one pretty quickly!
So once a week, then? ...yes the same... traders might be happy... but even they might get a bit jaded...
Once a month....Yes, I can see you purist CFA types still look a bit queasy.... so lets leave it there at the short extreme....
So lets move to the long end....
...How about...never...yes, I know a silly question, but I've established a point...never wouldn't work as a 'concept'...
...So what about once every five years? Bit of an earthquake event that one. I'm sure some people might be happy, but certainly not the sales team....
So what about once a year?...Well sounds a bit sticky, but let's review where we are...
....The average period that we would like IDEALLY between recommendations is LONGER than a month...but not NORMALLY as long as 12 months ...unless its going well, ecetera....
....So we've narrowed it down to to 2-12 months, not bad...this I'll come back to later....
WHEN WOULD WE LIKE THIS RECOMMENDATIONS CHANGES TO BE MADE?
OK, so we are proceeding by 'reductum ad absurdum'..
Would we all like to change them all once a year on the same day, say Jan 1st?
.. No I thought not...
OK so ruling out a fixed day...do we want them all on the same day whenever the market seemed to give us a green light?
... Some morning meeting!
"I'd now like to kick off the meeting with a contribution from Aaron Aaronson and we will move in alphabetical order ... to ZZebulon ZZ......
...no I don't think so...
Point No. 1: So basically not all at once.
So moving around a bit...how about all on December 25th?... eh... market closed ... no-one around...thin market...
OK So,
Point No 2: When there is an active market...
Let's leave that one and come back to it again.
WHAT WHEN ALL SAID AND DONE IS A PORTFOLIO OF PUBLISHED RECOMMENDATION SUITS US
Ok. Again by 'reductum adsurdum':
'All Buys' - Corporate Finance: 'Yes, Please'; Investment Clients:'Thanks for the guidance, NOT'
'All Sells' - Corporate Finance: 'Your joking!!!' Investment Clients:'Thanks for the guidance, NOT'
Before we move any further let's remember:
1. Turkeys don't vote for Christmas
2. Estates agents don't tell you not to buy houses
....3. So why should stockbrokers tell you not to buy stocks?
OK we need some BUYS, some SELLS, but 50/50 is half way to cutting our own throats and you won't get any thanks from clients.
SUMMARY
So this is still very rough and ready, and in need of further refinement but we can conclude:
1. How to make recommendations
2. What to call our recommendations
3. What methodology should underlie our recommendations
4. How recommendations and target prices should work together....
5. Ecetera...
6. Ecetera...
...Yawn...
I am persistently struck by the failure to ask some absolutely obvious points...like ...why are we making these things...how often do we want to change them...when would we like to change them...in an ideal world what would be the ideal for portofolio of Recs for US as a commercial operation whether we define ourselves as a stockbroker/investment bank....
....Look stuff whether they are called Buys/Sells/Add/Reduce/Overweight/Underweight/Superweight or Half weight...
...Stuff whether they are absolute, relative to a sector index, country index, regional index or the price of fish!
.... Stuff if they are based on DCF targets, EVA targets, three month rolling outperformance targets or Chinese astrology...
WHY ARE WE MAKING THEM?
HOW OFTEN WOULD WE LIKE TO CHANGE THEM?
WHEN WOULD WE LIKE THESE RECOMMENDATIONS CHANGES TO BE MADE?
WHAT WHEN ALL SAID AND DONE IS A PORTFOLIO OF PUBLISHED RECOMMENDATION SUITS US - Not client x, y, z or the SEC, FSA or the FBI...but the bloody people paying the bills, your employers!
So here's my take:
WHY ARE WE MAKING THEM?
To generate business...well, aren't we?
Stuff what it says in the CFA handbook, if there was no bottom-line point would we be bothering?
...Any arguments ...no I thought not...
HOW OFTEN DO WE WANT TO CHANGE THEM?
A slightly more complicated one that, so lets try some extremes.
How about every day?
Would generate more biz?
...Well probably not. Might for a week or too, but I think the clients would see through that one pretty quickly!
So once a week, then? ...yes the same... traders might be happy... but even they might get a bit jaded...
Once a month....Yes, I can see you purist CFA types still look a bit queasy.... so lets leave it there at the short extreme....
So lets move to the long end....
...How about...never...yes, I know a silly question, but I've established a point...never wouldn't work as a 'concept'...
...So what about once every five years? Bit of an earthquake event that one. I'm sure some people might be happy, but certainly not the sales team....
So what about once a year?...Well sounds a bit sticky, but let's review where we are...
....The average period that we would like IDEALLY between recommendations is LONGER than a month...but not NORMALLY as long as 12 months ...unless its going well, ecetera....
....So we've narrowed it down to to 2-12 months, not bad...this I'll come back to later....
WHEN WOULD WE LIKE THIS RECOMMENDATIONS CHANGES TO BE MADE?
OK, so we are proceeding by 'reductum ad absurdum'..
Would we all like to change them all once a year on the same day, say Jan 1st?
.. No I thought not...
OK so ruling out a fixed day...do we want them all on the same day whenever the market seemed to give us a green light?
... Some morning meeting!
"I'd now like to kick off the meeting with a contribution from Aaron Aaronson and we will move in alphabetical order ... to ZZebulon ZZ......
...no I don't think so...
Point No. 1: So basically not all at once.
So moving around a bit...how about all on December 25th?... eh... market closed ... no-one around...thin market...
OK So,
Point No 2: When there is an active market...
Let's leave that one and come back to it again.
WHAT WHEN ALL SAID AND DONE IS A PORTFOLIO OF PUBLISHED RECOMMENDATION SUITS US
Ok. Again by 'reductum adsurdum':
'All Buys' - Corporate Finance: 'Yes, Please'; Investment Clients:'Thanks for the guidance, NOT'
'All Sells' - Corporate Finance: 'Your joking!!!' Investment Clients:'Thanks for the guidance, NOT'
Before we move any further let's remember:
1. Turkeys don't vote for Christmas
2. Estates agents don't tell you not to buy houses
....3. So why should stockbrokers tell you not to buy stocks?
OK we need some BUYS, some SELLS, but 50/50 is half way to cutting our own throats and you won't get any thanks from clients.
SUMMARY
So this is still very rough and ready, and in need of further refinement but we can conclude:
WHY ARE WE MAKING RECOMMENDATIONS? - To generate biz
HOW OFTEN WOULD WE LIKE TO CHANGE THEM? - Not as often as once a month, but not generally leave them unchanged for as long/or at least reviewed for as long as 12months
WHEN WOULD WE LIKE THIS RECOMMENDATIONS CHANGES TO BE MADE? - Certainly not all at once, and preferably when their is an active market to deal in
WHAT IS A PORTFOLIO OF PUBLISHED RECOMMENDATION SUITS US - Not all Buys, and DEFINITELY not all Sells. Probably something a 'north' of 50/50.
....this is not the end of the discussion but I think it is useful to start out with in terms of defining the parameters
...And a lot less futile/sterile than debating valuation methodology!!!!
'Research', 'Analysts', 'Recommendations' ....'illogical' says Dr Spock!
They generally call the department 'Research'...
They generally call the people who work in it 'Analysts'...
'Analysts' are generally expected to publish 'Recommendations'...
---------------------------------------------ooooooooooooo---------------------------------------
But if it is called 'Research', why are they called 'Researcher' and why don't they just publish 'research'?...
...Or if they are 'Analysts' why isn't the department called 'Analysis' and the output 'Analysis'?...
...And should 'Researchers' or 'Analysts' be making 'Recommendations'....isn't that the job of 'Investment Advisors?
And isn't the first rule of 'investment advice' that it is supposed to be that it is tailored to the client? ...
...And does it make sense to 'publish' recommendations, when it they are supposed to be investment advice, which is supposed to be tailored to the individual client?
...So shouldn't 'Recommendations' be handed out to the handed out by 'Investment Advisors' working in, say, a department called 'Investment Advice'?
---------------------------------------------ooooooooooooooo----------------------------------------
In a logical world maybe, but this is the cut and thrust world of investment, of investment banks and stockbrokers, institutional investors and hedge funds......
.....so before you start to try and think how to tie together 'top down' strategy with 'bottom up' stock research you need to sit back and think a bit about how we have got this jumble...and why it is in a jumble...
...For clear thinking we maybe need to straighten things out....
...but for the 'real world' we might need to tangle them back up....
....Either way if you are reconfiguring how 'top down' strategy' and 'bottom up' research work together you'll need to probably do both!
They generally call the people who work in it 'Analysts'...
'Analysts' are generally expected to publish 'Recommendations'...
---------------------------------------------ooooooooooooo---------------------------------------
But if it is called 'Research', why are they called 'Researcher' and why don't they just publish 'research'?...
...Or if they are 'Analysts' why isn't the department called 'Analysis' and the output 'Analysis'?...
...And should 'Researchers' or 'Analysts' be making 'Recommendations'....isn't that the job of 'Investment Advisors?
And isn't the first rule of 'investment advice' that it is supposed to be that it is tailored to the client? ...
...And does it make sense to 'publish' recommendations, when it they are supposed to be investment advice, which is supposed to be tailored to the individual client?
...So shouldn't 'Recommendations' be handed out to the handed out by 'Investment Advisors' working in, say, a department called 'Investment Advice'?
---------------------------------------------ooooooooooooooo----------------------------------------
In a logical world maybe, but this is the cut and thrust world of investment, of investment banks and stockbrokers, institutional investors and hedge funds......
.....so before you start to try and think how to tie together 'top down' strategy with 'bottom up' stock research you need to sit back and think a bit about how we have got this jumble...and why it is in a jumble...
...For clear thinking we maybe need to straighten things out....
...but for the 'real world' we might need to tangle them back up....
....Either way if you are reconfiguring how 'top down' strategy' and 'bottom up' research work together you'll need to probably do both!
Adding Strategy to the Product List: You can please some people some of the time. You can please some people all of the time. You can please all of the people some of the time...
As we discussed, strategy research is a potential minefield within a stockbroking operation, mainly because of three things- egos, egos and egos!
Here are my insights based on some 20 years of navigating across this minefield. I hope they help with the brainstorming process....
Here are my insights based on some 20 years of navigating across this minefield. I hope they help with the brainstorming process....
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