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!!!!
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