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A Call for Quality Content in 2012: Investment Research Must Evolve

I’ve been off the grid for the last two weeks, out in Fuerteventura, one of the Canary Islands off the coast of Africa. During my time, I had the chance to catch up on some reading, specifically Michael Lewis’s Boomerang. What can I say, Lewis has been an incredible writer, telling the story in a way that is both entertaining and educational, with a morality check to boot. Interesting read for anyone who’s missed it.

One of the themes that came out both in “Boomerang” and “The Big Short” involved the negligence of the ratings agencies and the analysts and managers of CDO portfolios who willfully bet on the music not stopping. Lewis argued that many of these folks were just mismatched and didn’t remotely understand the securities they were reviewing or investing in – the others were just out to manipulate the markets (and probably should be put in prison). Lewis also notes that the market was fairly aware that the market was frothy and that analysts were probably putting out reports that were overly optimistic.

Why Research is Needed

The fact is, the research and analysis market is still very robust for one very specific reason – due diligence is hard to do in a vacuum and expertise is always valued in making investments (as my dad used to say “its important to ‘buy a little brain’ from time to time).

As a VC at Greylock, we relied heavily on the greater Greylock network to better understand the startup’s team, the market, competitors, potential acquirers, and the quality of the product. Since our investments were in the private markets, and often in new industries, our ‘experts’ were bloggers, executives from potential acquirers and related firms, and technical experts. We rarely used investment bankers, as valuation was loosely structured on industry comps (from VentureSource or some equivalent service). We always included legal advisors in constructing the right term sheets for the investments once we agreed to move forward.

The same approach is applied in the PE world and the public markets, but with different data sources. In the PE world and Public Markets, buy-side firms have hard-data to construct valuations in a smarter way, resulting in a heavier emphasis on internal and external analysis on that front (think investment bankers on the PE side and sales traders on the public side providing pricing guidance). Additionally, there is a larger market of information and comps to draw insights from, namely the company’s executives (think investor relations / corporate access), market research analysts from the likes of Gartner and Forrester, experts from the likes of GLG and professional analysts from large investment firms (sell-side) and independent shops.

But Research has Changed

Sadly, for our friends in Investment Research, the last 15 years have seen major changes. During the dot com bubble, a variety of analysts became superstars on CNBC, including folks like Henry Blodget, Mary Meeker, and Jack Grubman – these guys and many of their colleagues were incentivized to be bullish on securities that were issued by firms doing lucrative investment banking business with their firms – e.g. in exchange for a positive rating, the firm got larger allocations of IB fees. After the bubble burst, Spitzer went after the Sell-Side Research firms, and made several key changes to the industry, namely:

  1. Institutionalized a chinese wall between Investment Banking and Research to ensure that analysts were more objective
  2. Create pools of resources for these firms to allocate and promote independent research content, coming from firms who did not have investment banking or a broker-dealer in-house, again ensuring a wider array of opinions and objective analysis
Investment Research, generally a ‘soft dollar’ or ‘loss leader’ business, conducted to induce investment banking and trading revenues, now would be forced to either go ‘hard dollar’ (charge a fee for research directly) or rely on the latter only.
A few years later in 2006, ‘best execution’ requirements further solidified the shift to ‘hard dollars’ in mid-market and smaller shops, as it forced the buy-side to conduct the most efficient trade at the given moment, not the right trade within a ‘soft dollar’ arrangement (e.g. trading off a few bp in exchange for the research that induced the trade). This further decoupled research as a stand-alone offering, ideally situated as a hard-dollar business line.
These changes  came precisely during the decade of exponential information sharing and growth – retail investors on retail sites were getting access to real-time research and ideas shared from numerous sources. Consensus data, analyst projections,  and research reports were openly available or passed around with relative ease across historical and newfound communications channels (think of the big Lazard report for Carl Icahn that became a web sensation in February 2006, and still shared all over the web).
During the same time, traditional publishers had their content tested by the general and financial public to determine its value – certain brands thrived (think WSJ, FT, NYTimes, The Economist, and several smaller, leaner web-based offerings) while others struggled heavily or fell apart (think nearly everyone else). Clearly, people were willing to pay for the best available content, but the bar had risen to determine who would succeed in this new information-rich world.

Value In Information

In the publishing world, firms like the NYTimes and organizations like Dow Jones were able to win the digital dollars by creating a lucrative new model in cyberspace – giving away a portion of content for free and supplementing such services with advertising. Their best writers leverage social media to build notoriety to encourage more eyeballs to look at the content to drive those two business models (subscribers and ad traffic).
In the research world, firms on the sell-side push their research reports to both clients and potential clients (basically the bulk of the buy-side) for free, with the hope that clients will reach out to their analysts for both corporate access (opportunities to meet management) and analysts access (opportunities to pick the brains of the analyst over the phone or in person).
Today, most top-tier sell-side shops, who can ensure ‘best execution’ via their trading desks, can still afford to manage their research business via soft-dollars, but the rest of the sell-side and the independents make all of their money through hard-dollar arrangements. To be successful in a hard-dollar environment, analyst insights need to be considered highly valuable and essential to investment decisions – it can no longer be reliant on ‘relationships’ or some intangible connection for other business.

Selling Valuable Content

Again looking to the publishing business for answers, we can see a variety of approaches, namely the freemium model vs. the walled garden approach. In the freemium model, a taste of the content is shared with the potential customer to entice them to buy – sites actively push their best writers and content to be accessible to this audience, as it will encourage subscription and ad dollars rolling in. Alternatively, in the walled-garden model, the firm relies on its existing reputation to sell their content, generally sight unseen – this requires the very strongest of brand names in the market.
In the research world, a large amount of content is produced and shared through a variety of private channels (e-mail, databases, brokerage firms, and through financial news agencies), with the intent of building brand with existing and potential clients. The goal is to build enough credibility around specific securities, industries and macroeconomic areas to be worthy of client research budgets, which can easily be in the seven or eight figures for the larger firms.

Social as a Distribution Channel

Again, the publishing industry has largely embraced Twitter to push content to the masses and establish/extend the brand of the firms and their individual writers. It has been able to expand empires (think Thomas Friedman) and build new ones (think Mashable, HuffPo and BusinessInsider), particularly in the smaller and less-established firms.
On the research side, embracing StockTwits as a distribution channel is a modern alternative to the traditional research freemium model of database and dissemination through the news agencies – allowing the firm and their analysts to own the content being shared, how it gets shared, and follow the engagement from the community. With the research community sharing their basic thesis and analysis with the greater investment community on StockTwits, they will ensure attribution with the firm and analyst, and enabling fully-trackable engagement from both market influencers and potential clients. The result is a highly effective, yet simple way to be a part of the more transparent information market (actively, as apposed to being dragged into it, kicking and screaming), building clout and brand with the right audience who can be long-term clients.

Seems like a smart approach to me.

Look for it in 2012…

Istanbul: 1st Night After

Wednesday, after nearly 80% recovery I decided to venture out with Howard. Around 2pm, we began a walk to the Galata Tower, which has excellent views of the whole city. Istanbul truly is a city of contrasts, with a heavy presence of both the old-style Muslim cities that I had seen in Egypt and Morocco, and European elegance/convenience/modernism. Thus, there’s a good public transportation system (trams and subways), good restaurants and bars, along with the “call to prayer” chants via loudspeaker, coming from the various mosques. It’s pretty interesting. Here’s some photos from the tower:





After the tower, Howard and I travelled to a more modern part of the city, on our way to the nice kosher restaurant in town, Carne. On our way, we passed the Cultural Center, where I noticed that a Michael Bolton concert was on the board. I guess they like Michael Bolton on this side of the world!

Carne is the cleanest and nicest kosher restaurant I have been to in a while. The restaurant serves real Sephardi food (Howard had Lachmagin). It was really quite good. Following dinner, I went back to the hotel to rest, with the plan of seeing a few key sites on Thursday…

Carne Entrance

Cairo: Day 1

Welcome to Cairo! Upon arrival at Cairo Airport, I immediately realized the contrast with Israel. Firstly, the airport uses the old bus system to move you from plane to terminal. Second, the arrivals hall is very small and the lines are incredibly slow (they use two officers to review visas and enter information into their systems for tracking). After getting my bags, I was asked by nearly two dozen drivers if I’d need a ride to Cairo. The time was roughly 3:15am. I grabbed one, and for 85 EGP (roughly $15) we took the 30-45 minute ride to my hotel, the Hilton Ramses, on the Nile River. Along the way, the driver stopped for gas and filled up. His entire gas tank required ~50 EGP or $9 (check out the picture below). Yes, gas is cheap here:

At the Ramses, I was given a room on the Executive Floor, with a beautiful view of the Nile River. It’s a pretty big room, with a couch and chair. In the closet, there were two safes (one large safe with multiple sections, like those private safes that people put in their homes, and a standard hotel safe). Check it out:



Here’s a pic of the amazing view:

After unpacking, I went to bed, at nearly 5am. This morning, I woke up at 11:30 or so, and decided to go the Egyptian Museum, only a few blocks away. Cairo is very warm, but not humid, which makes it easier to tolerate than the Tel Aviv weather. I tried walking to the Egyptian Museum, and immediately realized that Cairo would be a bit more tricky to navigate than elsewhere. Here, there is minimal traffic laws, and people literally run across the street, trying to avoid the cars and oncoming traffic. It’s basically the most extreme kind of jaywalking. The guidebooks suggest that you use a local person as a “human shield”, and that you keep very close to them as you scurry across the street. I certainly learned the ways of native Egyptians pretty quickly in that manner. Here’s a few photos of the jaywalkers:


Here’s a photo of the highway from the bus station. Note the car next to the bus has nearly a dozen young men sitting on it in the midst of traffic. This is pretty common here in Cairo. Additionally, I have seen buses not fully stop at their designated stops, instead, making people jump on and off while it rolls. Not sure why that is… :

The Cairo museum was amazing, with tons and tons of exhibits from several pharoatic dynasties. There are fully restored chariots, mummies, jewelry, and other objects that are exquisite and incredibly interesting. The only problem with the museum is that you cannot take photos and that there is no air conditioning. After walking around the museum for over 2 hours, I began to feel light headed and decided to drink some more water and go back to the hotel. On the way back, I walked through a few local streets and attempted to take a photo. A local woman came by and respectfully asked me not to do that (the locals are not here for photographs). She’s right. I ended up going back to the hotel, gambling for a little bit in the casino by the pool and resting. Here’s some photos from outside the Museum, and downtown Cairo:






This evening, I ventured out to the Nile River, walking up and down the side of the river, until I finally decided to “felucca cruise”. There are tons of these small boats leaving the side of the Nile every few minutes. Everyone on my boat was local, with few English speakers, but I still enjoyed talking with one guy. During the “cruise” arabic music played in the background and the women danced around, mostly belly dancing style. It was kind of interesting seeing young Cairoians hanging out and just enjoying life on a Monday evening. The cruise was roughly 45 minutes and cost me 30 EGP (~$5) and included a drink of Pepsi. Here’s a few photos from shore (Le Pacha 1901 is apparently an Italian restaurant ship):


After the cruise, the young Arab guy who I had been talking to on the cruise invited me to drink at a local bar where they were watching the end of a football match (to be exact, the Egyptian Cup). I decided to go along, drank a few beers, ate a felafel (called Tamia here, and served as 2 pitas, each with a single patty rather than individual balls), smoked a sheesha (apple flavored) and ordered a large bottle of water at the end. The total cost for the time at the bar was 33 EGP (<$6) including tip. Oh and Ahli won the cup, beating Zamalek on an amazing goal from Osama Husni during extra time...

Time for bed… Tomorrow, I will travel to the pyramids in the morning and the Khan El Khalil markets in the afternoon.