Caveat Emptor


A recent post from a buy side analyst is a good illustration of the investment process and the tension between the buy and sell side.  All buyers need to understand why a seller is selling, and for investors it is no exception.

The author of Distressed Debt Investing is a buy side analyst with 7 years’ experience in high yield and distressed debt investing.  Although he is a fixed income analyst, his process is similar to equity analysts:

“When I am researching a situation, this is a typical sequence of events:

  1. Read all Ks, Qs, 8ks, proxies
  2. Read all transcripts from quarterly reports, events, etc
  3. Read news items about specific company and competitors going back the past year +
  4. Talk to competitors, people in the supply chain, former employees, etc
  5. Determine a reasonable set of assumptions for business and the associated value of the business. Write these numbers down before proceeding to step 6.
  6. Talk to the sell side/ read sell side reports to see if the “market” assumptions are dramatically different than my own
  7. Buy / Sell

Of course, this is somewhat simplified, and I can’t give away all my tricks, but the reader gets the point. In no way, shape or form, am I using a sell side recommendation of overweight, underweight, buy, sell, etc in my purchase decision. Instead, I am using the sell side to provide the market sentiment on a particular name which is inclusive of concerns the larger investment community might have for a situation, assumptions for growth going forward, opinions on future capital allocation decisions, etc.”

Many of the equity analysts we speak with have a similar perspective on bulge bracket equity research, using it primarily to understand market sentiment.  The author of the blog finds that a healthy skepticism of the sell side is prescribed in Benjamin Graham’s Security Analysis:

“Advice from Investment Banking Houses: There are objections of another kind to the advisory service of an investment banking house.   An institution with securities of its own to sell cannot be looked to for entirely impartial guidance.   However ethical it aims may be, the compelling force of self-interest is bound to affect its judgment.  This is particularly true when the advice is supplied by a bonds salesman whose livelihood depends on persuading his customers to buy the securities that his firm has ‘on its shelves’.”

So what makes a great sell side analyst?  The author’s list:

  • Instead of conflicts, he/she would always be independent
  • Instead of opinions, he/she would provide the most salient, unearthed facts that no one else was talking about
  • Instead of hugging the consensus or guidance, he/she would step out and make a call that was bold and unique
  • Instead of pitching the same ideas investors hear every day, he/she would present unique situations to investors
  • Etc Etc

For the full blog, go to


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