ENTER™ to Win Praise from PMs and Clients
Did you ever get a class grade or test score below your expectations? It happened to me when I received my CFA level 3 results, which politely told me I failed. My initial reaction was, “This can’t be right!” In fact, that was my belief for at least two months, until I received a “fail analysis” from the CFA Institute that explained my financial logic was sound, but I hadn’t answered the stated questions. Doh! I hadn’t followed the instructions. It was even more painful for me because Michael Jordan was leading the Chicago Bulls (from my home town) to national championships during the weeks in May each year while I was studying for the exams.
If someone were to tell you your research is of little value, you might have a similar “implausible!” response as I had to my CFA test failure. But similar to my response above, that reaction may be unwarranted, because my interviews with PMs around the world show they evaluate 80% of research (buy-side and sell-side) as useless in helping them in their job. Could it be that maybe we’re not as good as we think we are? Or maybe, like my fail analysis, we’re just not following the instructions?
As analysts, we expect the companies we follow to have rigorous quality processes, and yet we lack them for our own work
What are these “instructions” for conducting research? Given all of the requests I’ve had over the years to help analysts improve the quality of their research, I created the ENTER™ quality framework below. I tell analysts and their managers, “In communicating a stock call, before the first letter is pressed on the keyboard or the first pen stroke set to paper, make sure the research meets or exceeds the ENTER™ framework.”
ENTER™ Quality Framework
| Philosophy | Put into Action |
|---|---|
| Expectational: Always be thinking about the future, all in an effort to convey how your expectations differ from consensus, and resist the temptation to focus on the past. Understanding historical trends is important (and much easier than forecasting the future), but only spend time in this area if it helps in forecasting a future stock price move. Think of all of the pointless quarterly write-ups that are the equivalent of reporting last week’s weather (rather than predicting future trends). |
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| Novel: Identify the piece of information you have that’s not in the consensus view, or if responding to news flow, ask yourself, “How is the market misinterpreting the information?” If a company’s quarterly results don’t change your future view, how is spending time beyond digesting the information helping others? (It’s probably not). |
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| Thorough: Ensure the thoroughness of your research is commensurate with the potential impact on your stock(s) by obtaining insights to accurately forecast critical factors. Most analysts are employed by firms that ask clients to pay for their thorough research…which should go beyond just accepting management guidance. |
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| Examinable: The best way to raise the quality of any piece of professional work is to expose it to talented peers. It’s not necessary to reveal proprietary sources, but effort should be made to provide enough depth to others (investment committee, trusted colleague, etc.) to see if they would draw the same conclusion. |
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| Revealing: Identify specific risks not in your base-case scenario, both positive and negative, by determining why the market believes the stock’s current price is more correct than your price target. For an out-of-consensus stock call, assess your conviction level to allow others to gauge the risks to your thesis. |
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I’m hopeful all of your work already meets or exceeds the ENTER™ framework above, but according to PMs, 80% of analysts out there need help. I wish I could tell you satisfying the PM’s needs is just a one-step process, but as with so many things in life, if it were that easy, everyone would be doing it.
If you find you don’t focus enough on the future (the first “E” of ENTER™), it could be you haven’t identified the critical factors for your stocks, which we address in our workshop Identify and Monitor a Stock’s Critical Factors. If you find you rarely have something new or lack sources of information to be more thorough and revealing (“N”, “T” and “R” of ENTER™), see our workshop Generate Differentiated Insights Through Better Discovery, Questioning, and Influencing. And if you’re challenged to communicate your stock calls in a way that leverages the ENTER™ framework, see our workshop Communicate Unique Stock Calls Successfully So Others Take Action.
This Best Practice Bulletin™ targets #1. Generate Informed Insights, #2. Accurately Forecast, #3. Make Accurate Stock Recommendations and #4. Motivate Others to Act of GAMMA PI™, within our Pathway to Success Framework
Let me know if this Best Practices Bulletin™ helps and how I can improve upon this best practice.
Improve you or your team’s stock picking and communication skills with our equity research analyst training tools, which includes workshops such as the one above, as well as our GAMMA PI™ assessment and one-on-one coaching. Also, consider ordering the book that inspired the founding of AnalystSolutions and the Best Practices Bulletin: Best Practices for Equity Research Analysts.
Visit our new Resource Center to find more helpful articles, reference cards, and advice towards your growth as an Equity Research Analyst.
©AnalystSolutions LLP All rights reserved. James J. Valentine, CFA is author of Best Practices for Equity Research Analysts, founder of AnalystSolutions and was a top-ranked equity research analyst for ten consecutive years
