The Game: How the World of Finance Really Works - part 3: research

In the third of four extracts from his bestselling book about the City and beyond, Alex Buchanan introduces research

Don't be under any illusions - brokers and traders don't have it all their own way in the race to claim the title of City Bluffer Par Excellence. Much of the ammunition with which they do battle is provided by the analyst community, a less exotic but equally essential cog in the City smoke screen. In many ways the analyst is the investor's most duplicitous friend - objectivity is all too often compromised by the meddling of other people or the need to play politics. What an investor sees is not always what he gets.

Analysts don't always believe what they write (and vice versa). Badgered all day long by brokers, traders and corporate financiers, if they want an easy life they do what they're told. Analysts are purveyors of propaganda, essayists in the pay of an evil regime - if they're required to bend the truth, then bend it they will.

In a Nutshell

Research departments are the in-house libraries of broking firms and are where brokers, traders and investors go when they require information on a particular stock or sector. As an analyst you will research ("cover") a clutch of companies in a certain industry or sector. You must have an in-depth knowledge of how that industry works, be able to estimate a company's likely financial performance and have a view as to whether investors should buy or sell a given stock.

Hit the Snooze Button

Analysts arrive at the office at a similarly uncivilised hour to their counterparts in equity sales, but while brokers can get away with sleeping off the previous night's excesses at (or under) their desks, an analyst is afforded no such luxury. Most company announcements, scheduled or otherwise, comes across the news wires at 7am or just after in the form of an "RNS", and you have to be ready to interpret them in time for the morning meeting. This means you must arrive in good time, especially when you expect one of the companies you cover to be contributing something that day. It goes without saying that pleading illness/planning holidays on such occasions will not be well received.

In most firms the analysts will sit on a separate floor to their colleagues in sales and trading. If a dealing room is a hum regularly punctuated by whoops of exultation or machine-gun-fire expletives, an analyst department is a quite different experience, more akin to a cathedral or university library. Analysts do use the telephone - we'll come to this in a moment - but more often than not will stare for hours on end at their computer screens in silent concentration.

Most mornings you'll be prepared for what's coming. On occasions, however, companies will be forced to reveal secrets they have been keeping from the market, thereby dropping time bombs on an unsuspecting City.

Many company announcements will be scheduled - companies like to make life easy for analysts and investors by giving prior warning as to when they will say something of importance. Companies report results two or four times a year, and more often than not reporting periods correspond to the calendar year (i.e. Quarter 1 or "Q1" is typically January-March). For this reason results come in clusters and you will find that certain times of the year are especially hectic. Other scheduled announcements include trading statements and Annual General Meetings (AGMs) - both are ways of keeping the market up to date between results announcements. When a company reports its results you have to stand up and tell the brokers and traders how these results compare to your expectations.

What a company has or hasn't said one morning will be being scrutinised by a million other eyes - investors, brokers and traders will be all be watching, reading and expecting you to tell them what is going on. If one of the companies you cover says something unexpected, a trader or investor with $20m riding on the strength of your advice might call you and say,

"What the hell do these numbers mean? Revenues look OK but they've missed on the earnings. What's all this about a write-down in the US?'

Now you might have arrived at work at 6.49am, boiled the kettle at 6.53am and dug your spoon into your cereal at 6.59am. The numbers might then have been published at 7.01am, you started reading at 7.02am, spilled milk on your trousers at 7.03am and received the call at 7.05am. The statement is 20 paragraphs long and you're a slow but thorough reader. By the time the call comes in you're only on paragraph seven.

Much of the time the answers,

"I'm still having a look. Give me five minutes, won't you?"


"Wait for the morning meeting",

will suffice, but in the City people aren't always known for their patience, especially if they're senior, well paid and endowed with a stratospheric self-regard.

"You've got five seconds, not five minutes. I've got a client on hold and he needs to know the answer NOW!"


"You got me into this crap. Now find out what the fuck's going on."

In the old days - that is, the really old days when you could smoke at your desk and morning meetings began after dawn (back in the 80s) - there wasn't the same need for instant gratification. Either everyone knew the answer already (confidential or "inside information" could be passed from corporate financier to broker, trader or analyst without penalty - internal barriers, or the so-called Chinese Walls, didn't yet exist) or people were more patient. These days, however, analysts must learn the art of appeasement, keeping investors and traders sweet while encouraging finance directors to spill the beans.

In high finance, time + information = money. The sooner you have a piece of information the more quickly you can act on it. Most of the time information doesn't flow directly from originator to end-user but via a long and fractious chain, like a giant game of Chinese Whispers. What a chief executive says and what he means can be two quite separate things. Imagine how much more distorted things can become by the time his words reach an investor!

Drama School

If you have a taste for the theatrical then the morning meeting is your stage. For a young analyst forced to appear before his elders and betters this can be a daunting occasion, particularly in large firms when you must stand alone at a microphone and read from a script in front of row upon row of hatchet-faced brokers, your image beamed from and projected on to screens on dealing floors all over the globe. Even in the smaller, more collegiate firms where brokers, traders and analysts gather together in one room to hear that morning's pronouncements, the experience can be far from agreeable. Colleagues will do anything to discourage you from talking, from feigning disinterest, snapping pencils or sighing, to fixing you with the most hostile of stares.

At the start of your career you'll be assigned a sector and let loose on the stocks that don't matter. Sometimes your academic/industrial background will be a key determinant (e.g. a science degree might lead you into the chemical or pharmaceutical arenas), and if you don't have a specific expertise then you will be used to plug gaps in the department's portfolio. Sector teams are always on the lookout for lackeys, and junior analysts are useful for performing the menial tasks everyone else would rather avoid (such as filling in spreadsheet upon spreadsheet of historical coal prices).

Depending on the sector you cover, analysts receive a range of different perks. While airline analysts have historically enjoyed the luxury of a gold card and hotel analysts have been whisked off to some of the world's most glamorous destinations, chemical or engineering analysts have been somewhat short-changed, forced to feign gratitude as they pocket yet another useless widget or test tube.

But perks aren't always what they seem. One leisure analyst was invited to Manchester to take part in a football match between City representatives and Manchester United employees (of the non-playing variety). Intent on proving his prowess, he rose high at a corner, cleared the ball but rammed his head straight into the nose of the club's then finance director. He watched in horror as his client crumpled to the ground, blood spurting in every direction, his nose a broken and mangled mess.

Once you have been assigned to a team you will then work your way slowly but surely towards covering companies by yourself. At first there is much to learn in terms of both process and method, and you will spend hours observing, reading and entering numbers into spreadsheets. Forget all notions of intellectual rigour - writing research is all about process, and you'll soon get the hang of what is and isn't relevant. There's no point getting bogged down in something you think is fantastically clever if it makes no one any money.

When you are deemed ready (a state you will reach after several months unless you are especially backward), you will be allowed to "initiate" (publish research) on a company. This procedure is equally painstaking and will involve much background reading, several meetings with the company management and endless checking and double-checking by your elders and betters. Then, and only then, will you be allowed on to the microphone and into the lion's den.

**The Game: How the World of Finance Really Works****(E&T Books, £9.99) was published in summer 2013.