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The Best Research Is Done by Individuals or Small Teams

Individuals and small teams concentrate on a modest range of stocks or a limited sector. They do not attempt to cover the waterfront, but rather do focused research on a select number of companies. Small teams tend to emphasize quality research rather than quantity. The tendency with big research teams is to generate a deep level of detail, extensive earnings models, the nth degree of information, and a plethora of reports. It is overkill. Investors, the sales force, traders, and all the other audiences are unable to absorb this amount of trivia. With big teams analysts get sidetracked, bogged down in all the fine points.

Although senior analysts should be freed up to ponder bigger picture trends, instead they spend most of their time marketing, meeting, and calling on institutional clients. Senior analysts are distracted by all the oversight, review, coordination, and supervision. Junior, inexperienced analysts are conducting the research. Analysis is a mile wide and an inch deep. Small groups or individual analysts avoid these pitfalls and their research is superior.

Analysts might 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. Instead of specializing, I was attempting too broad a reach. I did not 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 (II) analyst poll. After I made the shift, I immediately vaulted to a #1 ranking and retained II All-America team status for 19 straight years.

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