Compliance and Best Practices


New York – A recent ‘how-to’ book by a sell side equity analyst provides insights on what makes a good analyst.  First on author James Valentine’s list is to ‘identify and monitor the critical factors most likely to influence a stock.’  The recent insider trading investigation highlights some of the risks associated with this task.  Ethics, always a big part of the analyst’s job, has gotten bigger.

James Valentine was an Institutional Investor-ranked analyst covering the transportation sector most recently at Morgan Stanley where he was also the Associate Director of North American Research.  After Morgan Stanley, he set up a training business, AnalystSolutions, which offers training programs for analysts and research departments.  He also authored a 400-page book, Best Practices for Equity Research Analysts, which was published by McGraw-Hill in December.

In a recent article in CFA Magazine, he outlines the key skills mastered by great analysts.  The first key skill is identifying and monitoring critical factors, which entails focusing on two to four for each stock.  Focus allows the analyst to “dig more deeply than their competition on a few key factors so as to develop a better view than consensus.”   This gets to the nub of the issue surrounding primary research.  Primary research is all about digging up information which is not widely known, and often not yet public.

This process has gotten dicier for analysts.  The difficulty is in knowing where non-public information crosses from non-material to material.  The insider trading investigation highlights examples of analysts who have pleaded guilty to trafficking in material non-public information.  Unfortunately, these examples have made it more difficult for analysts who are trying to do their jobs legally and ethically.  In some cases, analysts are pulling back on primary research altogether, further eroding the overall quality of equity research.

Valentine’s book and his business are targeted to address a general decline in the training and experience of equity analysts.  As one Amazon reviewer (a former colleague of Valentine’s) put it:

“Wall Street has a big, big talent problem. During the boom years where even an average analyst brought home 7-figures, there was usually enough cash to go around such that an average or aspiring analyst could find a mentor from which to learn all the tricks and tools of the trade. But it’s 2011…good luck finding the economics of old, and unfortunately, that has taken its toll on talent. Less capital means that the ‘Top Dog’ analysts were plucked away by Hedge Funds, private equity, or have started advisory businesses on their own. Some very good analysts remain in the business, but with weaker long term economics and increased volatility in employment, many analysts do not have training and development of their team as a first priority.”

Great analysts will continue to leverage primary research to gain insights on key factors that move stocks.  In the current context, they will need to be more diligent in understanding and following proper ethical and legal procedures.  Compliance, usually an afterthought, has now come front and center in any discussion of research best practices.

To read an excerpt from Valentine’s book, on forecasting and valuation, click here.




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