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An overview of the process of producing an equity research report. I use these slides as part of specialist training and coaching.
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Welcome to Welcome to Writing an equity Writing an equity research reportresearch report
Alan BarkerAlan BarkerKairos Training LimitedKairos Training Limited
www.kairostraining.co.ukwww.kairostraining.co.uk
Vital statistics: your reports Vital statistics: your reports in the marketin the market
A large investment broker A large investment broker prints about 1,000 pages of research prints about 1,000 pages of research and about 1,000 pages of and about 1,000 pages of electronic research each week.electronic research each week.
Vital statistics: your reports Vital statistics: your reports in the marketin the market
A large fund management house receives 7,000 A large fund management house receives 7,000 envelopes of research in the mail every Monday envelopes of research in the mail every Monday morning.morning.
The need to be uniqueThe need to be uniqueYou are probably competing with up to You are probably competing with up to 500 different brokers and research houses 500 different brokers and research houses for your reader's attention.for your reader's attention.
Every has access to the same information Every has access to the same information (presumably).(presumably).
The need to be uniqueThe need to be uniqueWhat will make your report stand What will make your report stand out?out?
Time constraintsTime constraintsWe’re all busy.We’re all busy.Yet our reports are a vital Yet our reports are a vital element in our client element in our client relationships.relationships.How long do you have to create How long do you have to create your report?your report?
You have longer than you think!You have longer than you think!
Why are you writing?Why are you writing?WriterWriter
You've been told toYou've been told toYou are required to You are required to informinformYou want your clients You want your clients to dealto deal
ClientClient
An investment ideaAn investment ideaMarket perspectiveMarket perspectiveIn-depth analysisIn-depth analysisValuation toolsValuation toolsImpression of direct Impression of direct contact with corporate contact with corporate managementmanagement
Why do reports fail?Why do reports fail?ClientClient
The reader gets lostThe reader gets lost Story-tellingStory-telling Too much detailToo much detail Repeated informationRepeated information Sentences too longSentences too long Lack of structureLack of structure Incoherent logicIncoherent logic
WriterWriter Lack of timeLack of time Delayed informationDelayed information Ambiguous informationAmbiguous information Managerial or peerManagerial or peer
interferenceinterference Lack of focusLack of focus Confusion between Confusion between
researchresearch and report writingand report writing
An effective research An effective research report:report:
persuades the client to dealpersuades the client to deal
An effective research An effective research report:report:
delivers a clear delivers a clear investment ideainvestment ideastructures its argument structures its argument clearlyclearlyexpresses itself conciselyexpresses itself concisely
An effective report does not:An effective report does not:
tell the client simply what happenedtell the client simply what happenedgive the definitive history of the subjectgive the definitive history of the subjectact as PR for the companyact as PR for the company
The challengeThe challengeA high quality reportA high quality report
vs
Time constraintsTime constraints
How to square the circle?How to square the circle?Adopt a systematic Adopt a systematic
approachapproach
PlanningPlanningDraftingDraftingEditingEditing
What’s the big idea?What’s the big idea?Doing the Doing the
researchresearch Writing the reportWriting the report
Doing the research is not writing the report.
data
information idea
Investment idea
Supporting idea
Supporting idea
Supporting idea
Doing the researchDoing the researchKnow the company.Know the industry.Know the government views about company and industry (national and international).Know what the market thinks about the company and the industry.Know what your clients are looking for in terms of investment ideas.
Doing the researchDoing the researchKnow the company.
Its accounts Its products and services Its management Its selling practices How well it manages its own business Its relations with customers and suppliers Its R&D capacity
Doing the researchDoing the researchKnow the industry.
Customers Competitors The international picture The emerging names and new entrants New trends, products, innovation Who is in trouble and why
Doing the researchDoing the researchKnow what the government thinks about
the company and the industry.
Political developmentsPower shiftsNew regulationsThe international political dimension
Doing the researchDoing the research
Know what the market thinks about the company and the industry.
What’s the current majority position?Where are the minority reports?Who is right and who is wrong?Why?How come you know better than the market?
Doing the researchDoing the researchKnow what your clients are looking for in
terms of investment ideas.
Their strategyTheir recent successes and failuresTheir mood
Assessing riskAssessing riskYou must assess the risks associated with You must assess the risks associated with
your investment idea.your investment idea.
Assess:Assess:economic riskseconomic risksliquidity risks liquidity risks political, legal, and environmental riskspolitical, legal, and environmental risksbusiness and management risksbusiness and management risksfinancial risksfinancial risks
The birth of an investment The birth of an investment ideaidea
What are the market’s assumptions?
Do I have new information?
Do I disagree with market assumptions?
Do I believe the market’s assessment of risk/reward?
What is the key question arising from my position?
Answer:My message
What is it worth?
Where is it going?
Characteristics of an effective Characteristics of an effective messagemessage
a sentencea sentenceexpressing a single expressing a single ideaideano longer than 15 no longer than 15 words longwords longself-explanatory to the self-explanatory to the readerreader
Use a verb
Avoid local humour
Keep it short
Thinking about planningThinking about planningYou can structure your ideas using a You can structure your ideas using a logical process.logical process.
Your thinking must be unique.Your thinking must be unique.– What marks you out from What marks you out from
the competition?the competition?– What will make your client take notice?What will make your client take notice?
Grouping and summarisingGrouping and summarisingReport formats are designed to help you Report formats are designed to help you group and summarise ideas.group and summarise ideas.- front page: headline; ‘black box’; summary - front page: headline; ‘black box’; summary paragraphsparagraphs- margin comments- margin comments- headings and sub-headings- headings and sub-headings
Designing the structure Designing the structure first first will save you will save you time time and and improve the quality of the report.improve the quality of the report.
Anatomy of a front pageAnatomy of a front pageHeadline: investment Headline: investment
ideaidea
summary of summary of investment caseinvestment case
Key dataKey data
Key pointsKey points
Organising ideas coherentlyOrganising ideas coherentlyMessageMessage
New question: Why?
Key point Key point Key point Key point
SPQR: useful for introductionsSPQR: useful for introductionsSituationSituation What does the reader know?What does the reader know?
ProblemProblem What has changed?What has changed?
QuestionQuestion What would the reader ask you What would the reader ask you as a result?as a result?
ResponseResponse Your messageYour message
Argument: core techniquesArgument: core techniques
DeductiveDeductive
InductiveInductive
You should buy if the market is failing to factor element x into McCrackle’s share price.
The market is failing to factor element x into McCrackle’s price.
Buy McCrackle.
(and) (therefore)
You should buy McCrackle.
McCrackle’s new risk mitigation system is not factored into its current price.
McCrackle is improving its debt profile rapidly.
McCrackle is expanding into profitable markets.
Explanation: six typesExplanation: six typesExamplesExamples
CategorisationCategorisation
Process Process
DefinitionDefinition
Cause and effectCause and effect
Comparison and contrastComparison and contrast
Drafting: top tipsDrafting: top tipsWrite quickly. Write quickly. Write in your own voice Write in your own voice Write without interruption. Write without interruption. Write without editing.Write without editing.Keep to the plan of your Keep to the plan of your outline.outline.
Why edit?Why edit?
To make reading easierTo make reading easierTo create quality more quicklyTo create quality more quicklyBecause you must Because you must (you can’t get it right first time)(you can’t get it right first time)
Editing efficientlyEditing efficientlyEdit on three levels:Edit on three levels:- paragraph- paragraph- sentence- sentence- word- word
Use a colleagueUse a colleague
Take a breakTake a break
Readability statisticsReadability statisticsInstantly indicate the quality of your Instantly indicate the quality of your writingwritingGive an objective measure of qualityGive an objective measure of qualityNot absolutely reliableNot absolutely reliable
For more, go to:For more, go to:http://justwriteonline.typepad.com/just-write-online/http://justwriteonline.typepad.com/just-write-online/
- and find [ctrl+F] ‘Readability’- and find [ctrl+F] ‘Readability’
Effective paragraphs: Effective paragraphs: four characteristicsfour characteristics
UnityUnityTopic sentenceTopic sentenceCoherent supportCoherent supportAdequate Adequate developmentdevelopment
UnityUnity
A paragraph should be about A paragraph should be about one topicone topic
A topic (Greek A topic (Greek topostopos, ‘place; , ‘place; location’) is your position on the location’) is your position on the subject of the paragraph: your subject of the paragraph: your point of viewpoint of view
What do you want to What do you want to say say about about the subject?the subject?
Topic sentencesTopic sentencesKey characteristics:Key characteristics:– Single ideaSingle idea– What you want to say about the What you want to say about the
paragraph’s subjectparagraph’s subject– 15 words maximum15 words maximum
In a draft paragraph, look for a potential In a draft paragraph, look for a potential topic sentence at the topic sentence at the endend
Coherent supportCoherent supportCreate Create coherencecoherence by using transitional by using transitional devicesdevices
For a list of transitional devices, go to: For a list of transitional devices, go to:
http://owl.english.purdue.edu/owl/resourcehttp://owl.english.purdue.edu/owl/resource/574/02//574/02/
Coherent supportCoherent supportUse the topic sentence to identify how you Use the topic sentence to identify how you
will develop the topic. will develop the topic.
Are you Are you arguingarguing or or explainingexplaining in the paragraph? in the paragraph?
What type of argument or explanation are you What type of argument or explanation are you using?using?- - argumentargument: deductive or inductive?: deductive or inductive?- - explanationexplanation: which of the six types?: which of the six types?
Adequate developmentAdequate developmentTo develop your topic To develop your topic adequatelyadequately::
lay out the terms of the argument (deductive or lay out the terms of the argument (deductive or inductive)inductive)use examples and illustrationsuse examples and illustrationscite data (facts, statistics, evidence, details, and others)cite data (facts, statistics, evidence, details, and others)quote testimony (what other people say or write)quote testimony (what other people say or write)use an anecdote or story (but keep it brief)use an anecdote or story (but keep it brief)define termsdefine termscompare and contrastcompare and contrastexplain causes and reasons, or effects and explain causes and reasons, or effects and consequencesconsequencesoffer the chronology of an event offer the chronology of an event
Editing paragraph sequencesEditing paragraph sequencesTopic sentences should make sense in orderTopic sentences should make sense in order
Use topic sentences asUse topic sentences as– Margin summariesMargin summaries– Sequence of sentences Sequence of sentences
in the summary black boxin the summary black box– Supporting text for graphicsSupporting text for graphics
Managing your sentencesManaging your sentencesFollow the ‘15-25’ ruleFollow the ‘15-25’ rule
15 words maximum for all messages, 15 words maximum for all messages, key points and topic sentenceskey points and topic sentences
25 words maximum for all other 25 words maximum for all other sentencessentences
Deal with long sentences Deal with long sentences by:by:
cutting long sentences cutting long sentences into separate sentencesinto separate sentences
separating ‘multiple’ separating ‘multiple’ sentencessentences
cutting down long cutting down long sentencessentences
making non-sentences making non-sentences grammatically correctgrammatically correct
finding strong subjects finding strong subjects and verbsand verbs
Plain EnglishPlain EnglishMake your average sentence length 15 to 20 words.Make your average sentence length 15 to 20 words.
Use only the words that your reader is most likely to Use only the words that your reader is most likely to understand.understand.
Use only as many words as you need.Use only as many words as you need.
Use the strongest, clearest and most specific verbs you can.Use the strongest, clearest and most specific verbs you can.
Say what you mean. Say what you mean.
Punctuate clearly and simply.Punctuate clearly and simply.
Active and passive verbsActive and passive verbsActive verbs are:Active verbs are:
usually shorterusually shorter easier to understandeasier to understand more direct expressions of who did whatmore direct expressions of who did what
The stock The stock has been purchasedhas been purchased by the investor.by the investor.The investor The investor has purchasedhas purchased the stock. the stock.
It It is anticipatedis anticipated that additional monitoring that additional monitoring may be neededmay be needed..We We anticipateanticipate that managers that managers may needmay need to monitor progress to monitor progress
further.further.
Abstract nounsAbstract nounsWatch for standard Watch for standard
endingsendings--ionion-ment-ment-ance-ance-ence-ence
--ityity-ure-ure-al-al-age-age
Convert to verbs or adjectivesConvert to verbs or adjectives
Abstract nounsAbstract nounsI shall make my I shall make my decisiondecision on Friday. on Friday.>>>>I I shall decideshall decide on Friday. on Friday.
The The measurementmeasurement of results will begin on Monday. of results will begin on Monday.>>>>We shall begin We shall begin to measureto measure results on Monday. results on Monday.
It is my It is my responsibilityresponsibility to monitor progress. to monitor progress.>>>>I am I am responsibleresponsible for monitoring progress. for monitoring progress.
Bringing your writing to lifeBringing your writing to lifeBe preciseBe precise
Use numbers sparinglyUse numbers sparingly
Qualify general statements with specific informationQualify general statements with specific information
Look forwardLook forward
Indicate catalysts for changeIndicate catalysts for change
Using numbersUsing numbersUse numbers very sparingly.Use numbers very sparingly.
Use no more than Use no more than one one number in any topic number in any topic sentence of a paragraph.sentence of a paragraph.
Try to use no more than Try to use no more than two or three two or three numbers numbers in any other sentence.in any other sentence.
Using numbersUsing numbers
Always subordinate numerical information to a non-Always subordinate numerical information to a non-numerical idea. numerical idea.
Used vehicle prices have almost certainly Used vehicle prices have almost certainly turned the corner. According to the Manheim turned the corner. According to the Manheim Index, prices rose 0.7% in November, Index, prices rose 0.7% in November, reversing a nine-month decline.reversing a nine-month decline.
Explaining riskExplaining riskYou mustn’t evade your responsibility to clarify the You mustn’t evade your responsibility to clarify the
risks associated with your investment idea.risks associated with your investment idea.
Consider placing risks together in a clearly headed Consider placing risks together in a clearly headed section – probably towards the end of the report.section – probably towards the end of the report.
Explain:Explain:economic riskseconomic risksliquidity risks liquidity risks political, legal, and environmental riskspolitical, legal, and environmental risksbusiness and management risksbusiness and management risksfinancial risksfinancial risks
Keeping it legalKeeping it legal
unsubstantiated rumoursunsubstantiated rumoursunsubstantiated reportsunsubstantiated reportsflamboyant, gambling or tasteless languageflamboyant, gambling or tasteless languagepossible compromised analysispossible compromised analysisfront-runningfront-runningpre-announcementspre-announcementspromissory wordingpromissory wording
Avoid:
Want to know more?Want to know more?We regularly run workshops for We regularly run workshops for equity analysts on this important equity analysts on this important skill.skill.
For more information, please contact For more information, please contact us through our website:us through our website:
www.kairostraining.co.ukwww.kairostraining.co.uk