March 4, 2007

Career Profile: Wall Street Equity Research Analyst

Want to know what a Equity Research analyst on Wall Street does? Me too. I had the good fortune of interviewing one of these analysts. Check out the interview below:

The Skinny

Title: Equity Research Associate
Length of time in field/profession: 4 years
Location: NYC


Mr. Honcho: So, what do you do for a living?
Wall Street Guy: I work for a brokerage firm where I write research analyzing companies and forecasting stock prices.

Mr. Honcho: You're a stock picker?
Wall Street Guy: Sort of. My company manages assets for high net-worth individuals. I don't actually sell products or manage any client's particular portfolio. Rather, I research individual companies and generate investment ideas and recommendations.

Mr. Honcho: What kind of companies do you research?
Wall Street Guy: Gas utilities and specifically natural gas distribution companies.

Mr. Honcho: Why gas utilities?
Wall Street Guy: I'm interested in the energy sector, especially new developments that will help promote the conservation of natural gas. Energy is an important aspect of our economy, and at the same time, the generation of electricity accounts for 1/3 of our country's greenhouse gas production.

Mr. Honcho: What kind of skills do you need to do your job?
Wall Street Guy: Accounting and finance, particularly an understanding of financial ratios. Also, I read a lot, and careful reasoning skills are important.

Mr. Honcho: What type of education do you have? Is that where you developed the formal skills to become an equity research analyst?
Wall Street Guy: I went to an Ivy League college where I studied economics. College was helpful for developing a certain mindset, getting the background for how the economy and stock market work. For my day-to-day work, it's mainly important to be analytical - both mathematically and verbally.

Mr. Honcho: So, what do you think about the big drop in the stock market this past week?
Wall Street Guy: Well, I lost a lot on my investments, especially because I'm in a China exhange traded fund (FXI).

Mr. Honcho: Was the fall in stock prices justified or was this an aberration?
Wall Street Guy: A significant protion of the financial community thinks that stock prices have been way too high and a correction was necessary and in order. Part of how stocks trade is based on fundamentals and part is based on psychology. The high stock prices we have seen have not been justified by the fundamentals, but the prices stayed high as long as investors were optimistic.

Mr. Honcho: Do you have any predictions moving forward?
Wall Street Guy: My guess is that investors are going to wait for prices to come down further before they're ready to buy. The world economy is currently enjoying healthy growth, and continued growth is forecasted for 2007. I don't expect stock prices in China to return back to levels from before this week for at least several months.

Mr. Honcho: What do you think about the Efficient Markets Hypthosis?
Wall Street Guy: It's nonsense. The general public is on a certain playing level, but then there are the elites who are on a whole other level. The elites are elite in that they have access to all kinds of information that the general public doesn't or if they do, don't know how to use the information.

Mr. Honcho: What kind of information or resources do you have that the general public doesn't?
Wall Street Guy: The average person relies on the news to get their financial information. To be a good investor, you have to have a strong background in accounting and finance. Also, as part of an institution, I have access to all industry publications, which for my coverage area is about a dozen publications. The general public does not have access to these types of publications unless they pay top dollar. At my company, we have access to extensive databases of information that the average individual can't access unless they're willing to pay thousands of dollars a month.

Mr. Honcho: Maybe the average investor like myself doesn't have the research capabilities that you have, but what about the mutual funds that average folks can invest in? By pooling our resources with the mutual funds, don't the mutual funds even out the playing field for average folks?
Wall Street Guy: Maybe, maybe not. Most mutual fund managers are generalists - they know a little about everything.

Mr. Honcho: Why should I invest money with an asset manager or actively-managed mutual fund when I could be putting my money in an index fund or ETF?
Wall Street Guy: For the average investor, you want to go with a passive fund since most actively-managed mutual funds do not beat the market after accounting for expenses.

Mr. Honcho: Ok, last question. What do you think about last year's record Wall Street bonuses?
Wall Street Guy: Well, it reflects the M&A (mergers and acquisitions) boom, which most of my banker colleagues believe will probably continue for a while.

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