An analyst tells Joris Luyendijk that his job is a lot like being a journalist, only better
"Do I deserve a million? Well, do you and I deserve to live in the first world? Currently I am at director level, with about £150,000 in salary, plus a bonus which last year came to $1m (about £650,000 at the time). This was my best year ever by the way, by at least a factor of two.
"Do I think the balance between skill and pay is right? If a client is managing a £10bn fund and you stop him from making a mistake that would have cost him 2%, and you do that two or three times a year… That is worth a lot.
"It is crucial not to use your bonus to upgrade your lifestyle. When you begin to rely on a bonus to make ends meet, this changes your psychology and affects the quality of your judgment. You will be tempted to tell yourself markets will go up – as such a "bull" market increases the chances of a new bonus next year. The private school fees treadmill is a real killer, in this respect, if you start using your bonus to pay for these.
"My job is a lot like being a journalist, only better. When I hear hacks talk about their frustrations, it's usually they lack resources to go deep, they don't get paid enough, their readership doesn't pay attention. I get to follow seven or eight banks really thoroughly while the 2,000 people or so who get sent my work do read it as they pay tens of thousands of pounds for it.
"It's a limited circle, banking equity analysts, around 20 to 25 teams, with 10 to 15 belonging to smaller brokerage firms that don't really matter. It's the top 10 bellwether analysts who can move the market (cause share prices to go up or down). We have 'buy', 'hold' or 'sell' recommendations for the banks we follow, and we can adjust these in light of new information. We write research and issue forecasts. It is full stop illegal to announce to a client you're about to change a recommendation – as such a change may move the market.
"People rarely go from 'buy' to 'sell' or vice versa – as this would amount to admitting you were wrong. You go to 'hold' first. Sometimes I see the stock for one of my banks move in the morning and it turns out a major analyst has changed his recommendation. I try to avoid looking at what other analysts are doing, not get caught up in that game.
"The most shocking thing if readers saw what I see? What jolly good fun my job is. Your interviewees seem so depressed. I love what I do, and take care not to take it overly seriously. The work is very interesting, with a bit of the fruit machine dynamic, the instant enforcement mechanism when the market vindicates something you said.
"I suspect some interviewees go on about how meaningless it all is because they think this is what readers want to hear. I will say it's an amazing pain to start your working day so early. It's 5.30am on a wet winter morning and you drag yourself to work after your biggest buy recommendation just had a profit warning… But on a bright day in summer when it's light at 5.30am and the market is going your way, it's the best job in the world.
"The day starts at 6.30am in the office when I get a cup of coffee and switch on the computer. Look at the overnight news, see if there are results (banks reporting on earnings). Then the morning meeting, where you need to tell the traders and salespeople if anything big is about to happen. If I have written a big research note to investors I will get five minutes. You speak into a microphone so the euro-offices can listen in. For our US office it's taped.
"Next I will be calling my clients – portfolio managers at hedge funds and pension funds etcetera who invest in bank stocks (equity). When there's news during the day fund managers just want the headline and why it's important. The guy working for those managers will want to know everything.
"A big news days means 50 to 60 phone calls so they can't be long. Some analysts leave voicemail messages of two to three minutes with clients. I don't like that even though the alternative is picking up that phone and keep calling people.
"Analysts use models to forecast earnings for banks. That research is done in the afternoon. Other stuff is looking up something for a client, write a research note, then pass it to editorial and compliance and deal with their questions.
"You need clients to read your stuff. That's basically it. Supply them with something they won't hear anywhere else and get yourself listened to. I imagine it's the same thing with newspaper columnists. If you say something no one else is saying, it can still be valuable even if it proves wrong.
"Client entertainment? Very little, there's no budget! More and more portfolio managers are barred from accepting any. The Norwegian Petroleum fund will even pay for their coffee and if you bring sandwiches they won't touch them. Every now and then I will call up a client and say, hey we haven't seen each other for such a long time, let's go out for dinner or go golfing for an afternoon.
"We don't charge for our research. There's a gentlemen's agreement that people acting on it direct trades our way – though this is not always easy as they must find the most competitive execution for a trade.
"The real money comes from a pool put together by portfolio managers. They vote on the value of our stuff relative to that of other analyst teams, and allocate a proportionate share of the pool. It's a tournament reward structure where the top takes in a lot. You are number one, 'in the top three', 'top five' or 'top 10'. If my team were only top 10 with a major client, our management would consider that a problem.
"With the voting, there is a lot of 'who do I like?'. I don't think clients are really realising, 'my vote means £10,000 to this or that team'. Voting happens through the year, so you have reviews coming through nearly every day. You perk up: I wonder how we did on that one? The votes are on a team basis, though individuals can be named.
"There is also the Institutional Investor Magazine who asks clients worldwide to vote and chases them so they actually do. Come out on top and you have serious bragging rights.
"An analyst's real added value lies in calling your guys in the morning, the important clients, and talk them through what's going on. It's about allocating time. The more business a client brings, the more time he gets.
"Account managers (salespeople) keep track whether clients bring in a lot, and if they pay for the research. Sometimes you're told to cut somebody off with whom you have established a good working relation. It's about respecting yourself, saying, if you value my stuff you need to pay for it.
"It's quite horrible if the person is a really nice guy and it was outside his influence that his firm stopped paying you. Incidentally, you should be careful in downgrading personal contacts. Next thing you know, somebody shows up at the biggest hedge fund and you have to call him up, 'hey, remember me?'
"You might say analysts sit between traders and interdealer brokers on the one hand and the mergers & acquisitions and advisory bankers on the other. The former work shorter hours than us while under huge pressure. The latter have far longer hours but can waste a lot of time doing nothing.
"At least once every quarter we meet with finance directors (or chief financial officers – CFOs) of the major banks. With European banks it's usually conference calls, with UK banks face to face. Over time extreme familiarity develops, yes.
"A special specimen here is the investor relations manager. He is the gatekeeper to the CEO and CFO, and probably what a PR operative is for journalists.
"Life and death for corporations and banks is the 'consensus' – the arithmetic average of earnings forecasts by analysts. We all arrive at slightly different numbers. Then it's 'results day' and the bank announces its actual quarterly earnings. Now, if we all had a much higher number, the results would be cast as 'disappointing'. That is terrible for the bank so if an analyst is very high, the investor relations managers will try to talk that number down.
"There is such a thing as 'capture', where you lose your distance and adopt the sector's blind spots. It helps if analysts are not managing money themselves. You can change your mind more easily.
"The cult surrounding Fred Goodwin is an example of capture. Around Northern Rock. Around the Irish banks, even more. A lot of analysts will admit in retrospect that somewhere in their minds they knew things were dodgy all along. But everyone bought into the myth. Remember, for four, five years these banks produced only good news. It takes some balls to call up 50 guys every morning and tell them the entire stock market is wrong.
"Which ties into a point that hasn't come up on your blog; the growing uniformity in banks. In the old days you got people who had applied in their last year at university or who had other careers, in the industry or in trade papers. These days you get people who have started working at getting that job from the first year of university. The recruitment process has been industrialised and professionalised, it's become so difficult to get in.
"The result is paradoxical. Diversity has increased, with far more women and ethnic minorities than before. On the other hand it's become a terribly homogenous bunch of people. You don't get graduates who did not at 18 want to work at a bank. You only get people who spent their summers in internships at banks, who went straight from college into the bank. Their biggest exposure to the world outside is… business school.
"This homogenous bunch deals quite badly with paradigm shifts. Quarter to quarter they are really, really good at cleaning out a bank's books, digging up the one-offs, accounting tricks. What they're missing is the big picture.
"Also, they are not sufficiently cynical. Quite a lot of regrettable stuff was written in the last years of Lehman Brothers. This was in part because the young people writing it were unable to take a step back, psychologically, and ask themselves if they were being lied to, flat out.
"The equity capital markets (ECM) guy you interviewed is right about the antagonism between analysts and ECM bankers. He claims that in an IPO [initial public offering] all major banks are brought on board so that none of their influential analysts voice dissenting opinions. I'd say pre-2000 this made sense. Today's world is different. However, there's an anachronistic reflex among investors who will ask: why isn't that major bank involved, too? Do they know something?
"This is particularly true with deals in smaller countries. If a Swedish stock is being floated, the company will want all Swedish banks on board else investors think the missing bank has for some reason refused.
"The IPO side is a tiny part of my life because, let me ask you: how many new banks have gone public recently?"
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