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Welcome to Welcome to Writing an equity Writing an equity research report research report Alan Barker Alan Barker Kairos Training Limited Kairos Training Limited www.kairostraining.co.uk www.kairostraining.co.uk
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Writing an Equity Research Report

Sep 03, 2014

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Alan Barker

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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Page 1: Writing an Equity Research Report

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

Page 2: Writing an Equity Research Report

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.

Page 3: Writing an Equity Research Report

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.

Page 4: Writing an Equity Research Report

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).

Page 5: Writing an Equity Research Report

The need to be uniqueThe need to be uniqueWhat will make your report stand What will make your report stand out?out?

Page 6: Writing an Equity Research Report

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!

Page 7: Writing an Equity Research Report

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

Page 8: Writing an Equity Research Report

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

Page 9: Writing an Equity Research Report

An effective research An effective research report:report:

persuades the client to dealpersuades the client to deal

Page 10: Writing an Equity Research Report

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

Page 11: Writing an Equity Research Report

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

Page 12: Writing an Equity Research Report

The challengeThe challengeA high quality reportA high quality report

vs

Time constraintsTime constraints

Page 13: Writing an Equity Research Report

How to square the circle?How to square the circle?Adopt a systematic Adopt a systematic

approachapproach

PlanningPlanningDraftingDraftingEditingEditing

Page 14: Writing an Equity Research Report

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

Page 15: Writing an Equity Research Report

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.

Page 16: Writing an Equity Research Report

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

Page 17: Writing an Equity Research Report

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

Page 18: Writing an Equity Research Report

Doing the researchDoing the researchKnow what the government thinks about

the company and the industry.

Political developmentsPower shiftsNew regulationsThe international political dimension

Page 19: Writing an Equity Research Report

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?

Page 20: Writing an Equity Research Report

Doing the researchDoing the researchKnow what your clients are looking for in

terms of investment ideas.

Their strategyTheir recent successes and failuresTheir mood

Page 21: Writing an Equity Research Report

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

Page 22: Writing an Equity Research Report

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?

Page 23: Writing an Equity Research Report

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

Page 24: Writing an Equity Research Report

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?

Page 25: Writing an Equity Research Report

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.

Page 26: Writing an Equity Research 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

Page 27: Writing an Equity Research Report

Organising ideas coherentlyOrganising ideas coherentlyMessageMessage

New question: Why?

Key point Key point Key point Key point

Page 28: Writing an Equity Research Report

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

Page 29: Writing an Equity Research Report

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.

Page 30: Writing an Equity Research Report

Explanation: six typesExplanation: six typesExamplesExamples

CategorisationCategorisation

Process Process

DefinitionDefinition

Cause and effectCause and effect

Comparison and contrastComparison and contrast

Page 31: Writing an Equity Research Report

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.

Page 32: Writing an Equity Research Report

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)

Page 33: Writing an Equity Research Report

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

Page 34: Writing an Equity Research Report

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’

Page 35: Writing an Equity Research Report

Effective paragraphs: Effective paragraphs: four characteristicsfour characteristics

UnityUnityTopic sentenceTopic sentenceCoherent supportCoherent supportAdequate Adequate developmentdevelopment

Page 36: Writing an Equity Research Report

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?

Page 37: Writing an Equity Research Report

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

Page 38: Writing an Equity Research Report

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/

Page 39: Writing an Equity Research Report

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?

Page 40: Writing an Equity Research Report

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

Page 41: Writing an Equity Research Report

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

Page 42: Writing an Equity Research Report

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

Page 43: Writing an Equity Research Report

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

Page 44: Writing an Equity Research Report

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.

Page 45: Writing an Equity Research Report

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.

Page 46: Writing an Equity Research Report

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

Page 47: Writing an Equity Research Report

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.

Page 48: Writing an Equity Research Report

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

Page 49: Writing an Equity Research Report

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.

Page 50: Writing an Equity Research Report

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.

Page 51: Writing an Equity Research Report

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

Page 52: Writing an Equity Research Report

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:

Page 53: Writing an Equity Research Report

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