You want a new phone. You fix a budget, shortlist brands, compare battery and camera, and pick one. That is research and analysis. An analyst does the same thing for shares and bonds, on behalf of clients.
The job has two halves.
Research means collecting information from many sources.
Analysis means processing that information to reach a decision.
Legal definitionUnder the SEBI (Research Analysts) Regulations, 2014, a research analyst is a person who, for consideration (that is, for a fee), is in the business of providing research services. It includes a part-time research analyst.
Where the data comes fromFour levels, each with its own sources
Economy
Inside India
Government statistics
Reserve Bank of India (RBI)
Global
World
IMF
Asian Development Bank
World Bank
Other global development finance bodies
Industry
Sector
Industry journals
Industry publications
Company
The firm
Annual reports and filings
Meeting authorised officials
Plant and factory visits
Market surveys
Employee and stakeholder interviews
From data to a decision
Collect
Economy, industry and company data
Analyse: qualitative
Efficiency, competitiveness, business plans, management ethics
Analyse: quantitative
Revenue, costs, profit, and the risks to these numbers
Decide
Buy, hold or sell
Three types of analyst
Analysts are sorted by who they work for and who reads their work.
Sell-side, buy-side, independentThe key difference: who gets to read the report
Boutique research firms, separate from full-service firms
Who reads it
The public. Reports are published.
Only insiders. Fund managers and top management.
Paying subscribers. Investors, institutions, investment bankers, regulators, exchanges, fund managers.
What it contains
Buy, hold or sell call, expected earnings, and a price target
Which securities the fund should buy, hold or sell
Research, plus custom reports on request (competition, mergers and acquisitions)
Picture three food critics. The sell-side analyst writes a newspaper review anyone can read. The buy-side analyst is the head chef's own taster, and only the kitchen hears the verdict. The independent analyst runs a paid food newsletter.
Besides these three, newspapers, media and information consolidators also publish research.
The book sums up the role in one word: the analyst is a selector. They study the company's past, judge its future, and recommend.
Buy-side reports are not in the public domain. The price target belongs to the sell-side description.
1.2
What do they study?
Analysts work top down. First the economy, then the industry, then the single company. Each layer sets the stage for the next.
The top-down funnelLater chapters cover each layer in depth
Economy
National income, inflation, interest rates, unemployment. Fiscal and monetary policy. FDI and FPI flows. Savings and investment. Global trade effects on GDP.
Chapter 5
Industry
Regulation, business models, competition, operating factors, how demand reacts to price, consumer behaviour.
Chapter 6
Company
Qualitative side and quantitative side.
Chapters 7 and 8
Why the economy first?
Company growth depends on the economy around it. The book quotes John Maynard Keynes (1883 to 1946): governments can change economic performance by adjusting tax rates and government spending.
Why the industry next?
Each industry has different problems and different growth drivers. A bank and a cement maker live by different rules.
Why each company separately?
Rahul Dravid and Virender Sehwag were both great batsmen. One was defensive, one was aggressive. Who does better depends on the pitch and the bowlers, and even then only as a probability. Companies in the same industry also play very differently.
Market share and capacity utilisation are not money figures, but they are still quantitative. Brand power and management quality are qualitative.
1.3
How do they talk to people?
The internet gives a lot of data. It still cannot replace talking to the company directly. But there is a catch.
Why cross-check?Management may paint a rosy picture so analysts write positive reports and push the share price up. So the analyst must cross-verify management's claims before recommending.
Meeting management is like interviewing a job candidate. You read the CV first, you bring prepared questions, you call references, and you do not believe everything you hear.
Four rules for meeting a company
Before
Pre-meeting research
Meetings are rare, so use them fully. Learn the products, industry, competitors and financials. Read past annual reports. Check whether the company hit the goals it set.
Before
Clarity of questions
Go with a clear, specific questionnaire.
During
Independence and neutrality
Stay unbiased. Base views on facts, not personal leanings. Tell management not to reveal information that is not public.
Around
Network
Talk to experts, competitors, suppliers, distributors, retailers and customers. The best contact is the person who knows the heartbeat of the company. That may not be top management.
Five rules for writing to clients
Be realistic
Facts and figures. No optimistic or pessimistic bias.
Be simple
Reports should be simple, clear and concise.
Disclose conflicts first
If the analyst holds shares of the company, say so beforehand.
State assumptions
Write down every assumption clearly.
Explain jargon
Avoid abbreviations and jargon, or explain them in plain words.
Record with consent
Recording devices are fine for meetings and client calls, but only after taking consent.
The overall expectation: work with sincerity, honesty and ethics, without bias, and follow SEBI rules in letter and in spirit.
Conflict of interest is disclosed before, not after. Recording needs consent. The key contact is not always a top manager.
1.4
What makes a good one?
The job needs both number skills and judgement. A good analyst is methodical, has an enquiring mind, knows where to find relevant information, and understands business models and competition.
The seven qualities listed in the book
Good with numbers
Excel and data tools
Clear on finance concepts
Reads financial statements
Asks pertinent questions
Attention to detail
Written and verbal communication
Exam tip
The test centre has Excel or LibreOffice Calc. Practise both for numericals.
All exam traps in this chapter
The role of an analyst is to help clients take informed decisions. Financial planning is a different job (investment adviser).
The SEBI definition says for consideration and includes part-time analysts.
Sell-side: public reports with a price target. Buy-side: internal only. Independent: sold by subscription.
Economic data: government and RBI. Global data: IMF, ADB, World Bank.
Keynes: governments change performance through tax rates and government spending.
Market share and capacity utilisation are quantitative, even though they are not money figures.
Always cross-verify management claims. Management may exaggerate.
Ask management not to share non-public information.
The most useful contact may not be from top management.
Disclose conflicts beforehand. Record only with consent.
For the group discussion
Pick a real company. Which of the four data levels would you check first, and why?
A sell-side analyst's firm also runs that company's IPO. What could go wrong? How do the client-writing rules help?
Name one qualitative and one quantitative factor for a company you know. Swap and check each other.
Management tells you sales will double next year. List three people outside the company you would call to check.
Answer
Tap the card to flip. On a keyboard: space flips, right arrow = got it, left arrow = again.
Test yourself
Scoring works like the real exam: +1 for a right answer, minus 0.25 for a wrong one, 0 for a skip. Skipping is allowed.