Yesterday I published my review of James Valentine’s new book Best Practices for Equity Research Analysts. A reader emailed me another review that I thought might be worth a read for anyone interested in yesterday’s review.
[A]nalysts must identify the few factors that account for 80% of the performance in a given industry, and focus on those intensely. It helps to get into the industry organizations, which can help drive insight into the industry as a whole, and provide a backdrop for questions to ask when talking with executives in the industry.
Learning this will give an analyst a leg up on other analysts. Analysts should also understand the basic accounting structures of their industry so that they can identify companies that are not playing fair — over-reporting income. I would add don’t get negative too quickly. Frauds can develop a momentum of their own. Wait until the fraud gets large relative to the size of the industry before issuing a sell call — wait for price momentum to go to zero. (Note: for investigative journalists, this does not apply. Jump on early, so that you can say that you warned everyone.)
Basic forensic accounting skills help, as do modeling skills, and basic statistical skills. I was surprised to learn a bunch of Excel shortcuts that I haven’t seen elsewhere, and I have used Excel for nineteen years at a high level. The summary of accounting deviations is cogent, as well as pointing readers to Mulford and Schilit.
One idea that I heartily agree with: set up your spreadsheets to differentiate data and formulas. Cells with data series should only contain data. Formulas should have no numbers in them, unless they are trivial. This makes analysis a lot easier and cleaner in the long run.
Read the full review here.
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