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The Best Research Is by Individuals or Small Teams

Individuals and small teams concentrate on a modest range of stocks or a limited segment. Research analyst teams are universal, but the big team approach has been overdone and a shift back toward more individual coverage seems warranted. Teaming enables a far deeper level of detail, earnings models, the nth degree of information, and more immediate response to developments. There are enough bodies to do in-depth reports. The problem is that investors, the sales force, traders, and all the other audiences are unable to absorb this amount of trivia. Analysts get sidetracked, bogged down in all the fine points. It’s overkill. Teams are a conundrum for analysts. They both free up senior analyst time from minutiae to ponder bigger picture trends, and also require more attention to details and necessitate oversight, review, coordination, and supervision. The Street is trending toward smaller teams tracking more stocks per person. This is commoditizing research, as analysts are burdened with a greater breadth of coverage. Junior, inexperienced analysts are conducting the research. The heavyweight senior analyst spends most of the time marketing, meeting, and calling on institutions. Analysis is a mile wide and an inch deep. It should be quality, not quantity, that counts.

Analysts may be error prone if they are not concentrating on a narrow industry segment. During my eight-year span at Salomon Brothers in the mid-1980s, I covered the entire computer industry. The mistake was that I, instead of specializing, was attempting too broad a reach. I learned a valuable lesson. I didn’t think to specialize in computer services and software until three years after the establishment of a separate category for that sector in the preeminent annual Institutional Investor (I.I.) analyst poll. Once I made that shift, I immediately vaulted to a #1 ranking and retained I.I. All-American team status for 19 straight years.

On the other hand, narrow sector concentration can cause more bias. If analysts cover too few stocks, they have no alternative stocks to recommend when their group sours. While the current Street norm of broader coverage by less-seasoned analysts may leave them open to mistakes, the flaw in the opposite approach is that analysts with a field of coverage that is too limited tend to have a constant positive stance. They can’t be left without anything to propose to investors, and institutions do not want to hear negative views on the stock they own.

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