It’s Not Rocket Science: Why You Should Stop Learning Partial Differential Equations If You Want to Break Into Investment Banking
Numi Advisory has advised over 400 clients by providing career coaching, mock interviews, and resume reviews for people seeking jobs in equity research and investment management (full bio at the bottom of this article).
So I was looking at the most popular search terms on M&I the other day, and reached two conclusions:
- You really like that silly little cover letter template I created.
- It seems a few people might want to hear about this thing called “equity research” – I guess that might be a good idea one of these days?
We’ve already been through everything else on the list to the right, so now we’re going to apply the magical process of elimination and focus on equity research: what it is, how you break in, and how to dominate your interviews and land offers.
You’ll get to learn all of that straight from the source: a reader who has worked in equity research at both boutiques and bulge bracket banks and seen the market in the best of times and the worst of times.
Let’s get started.
The Elevator Pitch
Q: Why don’t we kick things off by learning more about your background? Walk us through your resume.
A: Sure. I went to a “target” school and did a few finance-related activities and internships there, including one summer internship at a long-only investment management firm. I had considered investment banking but ultimately was more drawn to stocks and the public markets rather than M&A deals.
Ultimately, I received offers in both investment banking and equity research, and accepted the research offer. I ended up working at a couple bulge bracket investment banks over the next three years.
Q: I’m kind of disappointed; I was expecting juicier and more personally identifiable details from you.
A: Hey, I can’t reveal too much – I still work in the industry and equity research is a small world.
Q: I guess I’ll accept that for now, but we’ll see what happens once you really start talking.
So what exactly is “equity research”? What do you do, and is it more or less glamorous than Jim Cramer’s job?
A: I’d like to think we know a lot more than Cramer, but sadly enough he gets way more attention.
Broadly speaking, we advise investors (primarily asset managers and hedge funds) on what stocks they should invest in. We track public companies in a specific sector, issue reports giving buy, sell, or hold recommendations (dated, but good report example here), and comment on earnings announcements and news.
These “reports” are the most well-known part of the job, but we actually don’t spend the most time writing them – they’re only issued a few times per quarter, so most of our time is taken up by researching companies and other qualitative tasks.
Similar to banking, you develop a well-rounded skill set in accounting and finance and learn industries in-depth.
The main difference is that in investment banking you focus more on transactions, whereas in equity research you care more about tracking stocks and making investment recommendations.
The purpose of equity research is to generate trading fees and commissions for the bank – by writing about specific companies and keeping in touch with investors, we aim to build up interest in certain stocks and get big institutional investors like Fidelity to make their trades through us.
Q: That sounds cool, but I’m guessing that you don’t get to do all of that at the entry-level – what do the important people in equity research do, and how is that different from the peons?
A: Actually, you do a lot of that at the entry-level in equity research – the hierarchy is much flatter than what you see in investment banking.
The two main levels are Associate and Research Analyst – and they’re the opposite of IB, so the Research Analyst is the senior person above the Associate.
At the Associate level, you do pretty much what I described above; Research Analysts do less modeling and report writing and instead spend most of their time speaking with institutional investors and others on the buy-side, providing investors with access to management teams, and coming up with insights into stocks.
So the Research Analyst might meet with a management team, be impressed and come away with a positive impression, and then speak with investors he or she knows who might be interested.
Then, the Analyst would tell the Associate to turn the ideas into a report, run a model and value the company, and start doing additional research.
Q: Right, and so you wanted to get into equity research because you follow companies and invest for fun anyway and this was a logical extension.
A: It was partially that, and also partially that you sometimes get to be more creative in equity research than you would be in banking. There, you don’t really generate ideas of your own or go out and start meeting clients until you’re much more senior – but even as an Associate in equity research you start doing that over time.
And your Analyst generally encourages you to come up with ideas of your own and to think about companies differently from the mainstream, whereas in banking you’re pretty much just taking orders from the senior bankers.
Q: Right, so you’re still not writing the next New York Times fiction bestseller but at least you get some form of autonomy / creativity.
A: Yeah, but I should also point out that it sounded much cooler when I was recruiting.
And keep in mind that just like the pitch books you see in banking, the report writing, presentations, and model updates in equity research can also get repetitive. It gets more fun as you advance and focus more on building relationships, but don’t expect to get guest appearances on TV in your first 3 months.
Breaking Into Equity Research
Q: So what types of people get into the industry? Do banks just recruit straight out of undergraduate and MBA programs, or do they also consider people who are working full-time and people with advanced degrees?
A: Bulge bracket banks definitely focus on undergrad and business school recruiting, and they look for the usual characteristics you would expect – high grades, analytical ability, demonstrated passion for the markets, and so on.
The main difference is that you need to show a strong interest in stocks to get into ER – for banking or PE you could just be interested in doing deals or business in general, but for ER you need to be passionate about the public markets (see: asset management and hedge funds as well).
So the basic criteria is not much different from what you need to get into anything else in finance, and just as in those other fields, the only way you advance is by being social and making friends everywhere.
One difference is that the hiring process in equity research is less structured – not just with the interviews themselves (which we’ll get to in a bit) but also in terms of who can break in.
An equity research group that focuses on semiconductors, for example, might hire someone who worked at Texas Instruments for 5 years, understands how the technology actually works, and knows the companies’ business models firsthand.
That can happen in banking or PE as well, but it’s rare and you usually need an MBA or some type of previous finance experience to do it.
But since we specialize in understanding companies rather than doing deals, we value people with deep industry experience; occasionally you also see Ph.D. holders get in if they have enough business sense to perform well.
Q: So is it harder to get into investment banking or equity research?
A: People debate that question a lot, but it’s tough to answer because ER is a much smaller industry – so fewer people get in, but fewer people also apply. Overall, it’s very competitive to get into either field.
There’s more of a difference with the exit opportunities, which are definitely broader in investment banking since you get exposed to deals.
Q: I’ll have to cut you off awkwardly right there because we’re saving the exit opps discussion for part 2 of this interview.
You said earlier that the recruiting process is less structured, but what do you mean exactly? Is it still based on on-campus first round interviews and then Superdays?
A: The largest banks do on-campus recruiting and the process is similar to banking interviews – on-campus at first, then Superday interviews at their offices if you do well.
By “less structured,” I meant that some banks don’t do on-campus recruiting at all – and we’re not talking about the tiny boutiques that would never do it anyway, but rather firms you’ve definitely heard of that just don’t recruit on campuses.
So you have to be proactive with reaching out and contacting firms, even if you’re at a top school and plenty of banks recruit on-campus for IB roles.
As I said before, they’re looking for similar qualities – the top 4 most important ones are:
- High grades / good academic performance
- Some knowledge of finance and accounting
- Solid internships or work experience
- Personal investing and passion for the markets
Ironically, you’re not putting your money where your mouth is in equity research since you’re just making investment recommendations – but showing evidence of investing yourself is still a requirement if you want to get in.
At the MBA-level the process is similar, but we look for people who have interesting industry experience related to the sectors we cover. So going back to the semiconductor example, we would much prefer to hire an MBA who worked at a company like Texas Instruments – even if it was a non-business role – than someone who worked in entertainment and knows nothing about technology.
Q: I’m going to stop you right there, because I don’t quite believe that – or at least I’m skeptical.
I’ve gotten feedback from a lot of readers who say that it’s tough to get in with a more technical background, so what advice would you give them if they wanted to follow the non-business experience to MBA to equity research path?
A: Yeah, as I said, you need some type of business intuition. If they look at your resume and think, “He’s a tech nerd and can only talk to computers” then it’s not gonna fly.
To show that you have some business sense, you should either:
- Find or spin something business-related about your current job – for example, if you’re in an engineering role you can talk about a cost-benefit analysis you did, a feasibility study, or something that shows you know how your work impacts revenue and expenses.
- Do something outside of work that’s business-related – personal investing is an obvious choice, but it could be anything from activities to professional groups.
You could also try to move into an area like business development at your company, but you don’t necessarily need to do that if you’re already going for an MBA.
Pitch Me a Stock…
Q: So let’s say you’ve landed a bunch of interviews – what topics do you need to know? Is there anything you can ignore?
A: The questions are pretty similar to what you would get in a banking interview on the accounting and valuation side.
You might think that since we don’t focus on transactions as much in equity research, you can skip over merger models and LBO models but I wouldn’t recommend doing that – you still need to be familiar with them and understand at least the basics.
The biggest difference is that we focus more on the market, what you invest in, and so on – I guarantee that you will be asked to pitch a stock, sometimes multiple times, in equity research interviews.
It’s a common question in IB interviews as well, but the difference is that you could name private companies there.
Q: Why don’t you show us how it’s done? Pitch me a stock.
A: I didn’t realize this would be a real job interview.
Q: OK, fair enough. Why don’t you just explain how to do it and the most common mistakes people make?
A: Sure. I would aim for 1.5 minutes for your pitch and would start by saying why you like it or don’t like it – both “buy” and “sell” ideas are fine.
I would structure it like this:
- Make an actionable recommendation – buy or sell – and get to the point in the beginning with a quick summary sentence (“I think Company X is a great investment because it’s undervalued next to the competition and has been diversifying its operations and getting into higher-margin businesses.”)
- List 3 key reasons why you like or don’t like the company, followed by how these reasons are different from the consensus. It is essential to understand what the “mainstream” thinks in equity research and then think differently from others – if you can’t do that, why would big-name investors ever pay attention to you?
- Summarize what you think the stock should be valued at (“Right now it’s at $20, but I could see it rising to $30 within the next year”) and explain how you reached this conclusion. You might talk about comparables, DCF analysis, or other methodologies, many of which you would probably also use in banking.
The biggest mistakes people make are:
- Not actually giving a recommendation one way or the other.
- Rambling on for too long and dwelling on unnecessary details.
You need to be concise because investment managers don’t have time for anything else – in real life you might only chat for a few quick minutes during the day.
I hate to bring up the Wall Street references yet again, but it really is just like that scene when Bud Fox first meets Gordon Gekko: tell them something they don’t know – quickly and legally – or get out.
If they want more details from you, they’ll ask for them – that’s what follow-up questions are for.
Q: So do you usually get into extended conversations about stocks in interviews? How much preparation do you need?
A: Yes, they’ll usually ask follow-up questions – especially if it’s an industry they know something about. They’re more likely to ask detailed questions than in banking interviews. People in equity research tend to be inherently curious, and you must have that curiosity to excel in this industry.
So you should try to learn what the company is doing relative to its competition, be prepared to defend and explain your valuation, understand what current investors are thinking, and so on. They want people who are intellectually curious enough to go out and find new ideas and then pitch them convincingly.
The best way to find information like this, ironically, is to get actual equity research reports on the company you want to pitch. If you sign up for a brokerage account with TD Ameritrade you can get free reports from Credit Suisse; some other brokerage services offer a similar deal and you could always ask friends or professors to pull reports for you.
Q: Since you can get into these detailed discussions on stocks, should you also be worried about case studies? Would they ask you to sit down and build a revenue or expense model or a 3-statement model?
A: Real case studies are not that common, at least in the US – I might assume that it’s different in regions like the UK where assessment centers are the norm.
But you could easily get a financial modeling test – you might get asked to build a 3-statement model based on a company’s filings and growth and margin expectations.
So you should be prepared for that, even if it’s an entry-level interview.
They might also say something like, “We’re looking at Company X and thinking about what investment recommendation to make – what information would you like to know?”
With that type of question you should always hedge yourself by saying, “I realize you cover these companies all day and I’m not an expert at all, but based on what I know, here’s what I would ask for…” Again, it’s important to be savvy and to show good business judgment.
Q: So you should try to find out what sectors the person you’re interviewing with covers before you go in to speak with them.
A: Definitely. If they cover consumer packaged goods companies, read up on all the research you can and get a feel for what different companies are doing and recent news.
Usually they’ll tell you beforehand what groups your interviewers are in, so you would be foolish not to research their respective industries – and if they don’t tell you, just ask and see.
Certifications, Lateral Interviews, and More
Q: So it sounds like interviews are fairly similar to banking interviews, with a few differences such as the modeling tests and more detailed discussions of stocks.
Now onto my favorite topic in the world: the CFA. Is it helpful for equity research?
A: It’s more helpful than in investment banking and private equity, but it still shouldn’t be your #1 priority.
They care more about your academic background, work experience, and stock pitches than which level of the CFA you passed; I’ve met some people who think that passing any level of the CFA will make up for a 2.0 GPA and no internships, and that’s not the case at all.
Go for the CFA if you already have high grades, solid finance-related internships, and a few dozen people you’ve networked with and have been speaking to in the industry. If it comes down to you and someone very similar, the exam might make a difference.
It’s also more helpful if you’re coming from a non-finance background – if you already have 2 investment management internships, high grades, and a personal portfolio that returned 30% in the past year then the CFA is a marginal boost at best.
Q: Right, but a lot of the Analysts on equity research reports have the CFA title after their names – so isn’t it a requirement?
A: For entry-level roles, no. You might study for the exam once you’re already working and they ask you to pass it, but there’s no hard requirement to complete it just to break in as an Associate.
Q: It is a huge time commitment, so that makes sense. You’ve also moved around to a couple different banks – do you think there are any differences in lateral interviews for equity research?
A: The main difference is that they’ll ask you more intelligent questions – if they see that you’ve written reports and built models before, they won’t ask you how to link the 3 statements together.
Instead, they’ll ask what ideas you came up with on your own, how you think about investments, and how you analyze stocks differently from other people.
You don’t want to be contrarian just for the sake of being contrarian – you want to find opportunities where it makes sense to diverge from the mainstream and then capitalize on them.
And that’s what they’re looking for in interviews: they want someone who can generate new ideas and become a trusted source for investors on the buy-side.
Q: Any differences between interviews for bulge bracket and boutique equity research?
A: Not really – having worked at both types of shops, I can tell you that the personality types and interview formats are generally similar. In an interview, you may want to mention how you appreciate the more cohesive and entrepreneurial environment that often characterizes smaller firms.
However, at the end of the day, interviewers at any shop want to see that you have a genuine passion for investing as well as the interpersonal skills to speak persuasively about your ideas.
Q: Awesome – thanks for your time.
A: Sure thing, enjoyed the chat.
And if you want to get personalized advice from our interviewee on how to break into equity research, you’re in luck:
Numi Advisory has advised over 400 clients by providing career coaching, mock interviews, and resume reviews for people seeking jobs in equity research and investment management. With extensive investment experience in equity research and private equity and now working as an analyst at a long/short equity hedge fund, Numi has unparalleled insights into the recruiting process and advancing on the job.
Numi customizes solutions to each client’s unique background and career aspirations, and teaches clients the most efficient and impactful methods to achieve successful results on their career search. He has helped place over 50 candidates in leading buy-side and sell-side jobs. For more information on career services and client testimonials, please contact firstname.lastname@example.org, or visit Numi’s LinkedIn page.
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