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Why equity research is one of the most useful courses in Business School

Why equity research is one of the most useful courses in Business School

I believe at some point in our lives, everyone will have to invest, simply because having one income stream from our day job is not enough.

Hence, the earlier you learn how to invest be it in individual stocks or ETFs, the more beneficial it is for you.

Having majored in finance and marketing in the National University of Singapore Business School, here is why I think equity research is one of the most useful courses.

 

A. It hones your report writing skills

Writing will be the bread and butter of any corporate job and the better you are at email writing or report writing, the faster you will climb up the corporate ladder. Equity research courses will allow you to hone your report writing skills since you have to cover the below non-exhaustive sections of your company report.

  • Executive summary
  • Background of company
  • Background of industry
  • Business model
  • Value chain analysis
  • Key catalysts for monitoring the companies
  • Porters five forces
  • Financial models including project and loss projection, balance sheet, and cashflow statement
  • Investment risks
  • Conclusion and recommendations (buy, sell, hold)

In addition, it will train up your attention to detail since you have to format your report in a way whereby it is neat and legible.

equity research

Source: JP Morgan, Corporate Finance Institute

 

B. It teaches you how to analyse companies

It is not difficult to analyse companies and most of the time, extensive desktop research will do the job. Note, professional sell-side and buy-side analysts will attend company presentations and meetings, but for someone who is investing his own capital, reading annual reports and watching companies’ webcast will be sufficient.

You will learn how to understand the business model of the company you are analysing eg Starbucks is in the retail coffee and snacks store industry, and also the competitors in that space.

You will also develop your critical thinking skills during this process since you need to make sense of the current market environment and also sieve out any scepticism from management guidance.

 

C. It makes you more comfortable with numbers

As a big part of equity research includes learning the basics of accounting and financial modelling, it will make you more comfortable with numbers. Equity research will train you to make sense of data, spot any irregularities, or even determine if a particular company is undervalued / overvalued. All these is important for you to discover rare gems (companies) to invest.

financial model

Source: Corporate Finance Institute

You will also learn that there are so many ways to analyze figures and some of it include:

  • P/E ratio
  • P/B ratio
  • Dividend yield
  • ROE
  • Gearing

You will also learn how to make reasonable forecasts and assumptions of the company for the next 5-10 years and this is oftentimes subjective. Of course, the more you can back it up with data and reasoning, the more robust your financial model will be.

 

D. It improves your Powerpoint and presentation skills

Most equity research courses require their students to present a recommendation of their company to their professions via a short pitch. This is to stimulate a real-life scenario where buy-side and sell-side analysts have to present their recommendation to their portfolio managers, team, or Chief Investment Officer.

It requires you to be crisp and straight to the point as most people will lose focus after a while. Also, it will train your pitching skills since you are now selling an idea to your audience. Definitely useful in your day-to-day job.

equity research 2

Source: Corporate Finance Institute

 

E. The experience is transferable to your own personal portfolio

Equity research is as much art as science. When to buy or when to sell? These are questions only you will know best. You cannot full time the market. Likewise, you cannot full exit at the highest price.

Hence, equity research will teach you about portfolio management, risk management, allocation of capital etc. All very fundamental skills that you will pick up especially if you are managing your own account. It will allow you to think like the institutional investors and train up your thought process.

However, based on my personal experience, decision making for your own individual portfolio is often times simplified and faster as compared to the institutional investors like sovereign funds, pension funds, insurance companies etc.

 

F. Even with doing all these, you can still be wrong!

Investing is a journey and it is difficult to tell if the market is right or if you are right. You can have the most comprehensive 400-lines of financial model, but the market can still put you in place.

Take a look at Tesla’s share price below. The company’s share price has increase almost +327% since its year-to-date lows of USD 361 on 18 March 2020.

tesla

Source: Google charts

However, JP Morgan has consistently kept an underweight rating on Tesla (target price of USD 275) saying that it is the most overvalued stock in their coverage group. But how does their analyst or management team come up with that target price? Why is their forecast so drastically off from what the market is pricing?

This leaves a lot of unknown.

tesla 2

Source: JP Morgan, Seeking Alpha

And this is also why I love investing.

How many of you took equity research classes back in university? Or better still, how many of you learned it on your own? Comment in the box below.

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Cheers,

Vincent

 

 



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