Squeezing Through to the Prize Job

The path to becoming an equity analyst soon hits a bottleneck, because many skilled candidates are competing for very few openings

Interviews. That is the common theme for almost every first-year MBA student at any school as we roll into the New Year.

I'm curious as to whether the scene was similar at other B-schools: a dozen or so anxious students in a room, casually pretending to read the Wall Street Journal or the latest issue of Barron's. It's like a dentist's office waiting room—one by one we are called by our interviewer, and one by one we come back and say "That wasn't so bad" (the equivalent of a no-cavities response) or more frequently something like, "Wow, that was painful" (the root canal response).

A casual observation of mine was that close to a third of my class landed summer jobs by mid-February, with most, if not all, committing to the heavy recruiting machines of the investment banking houses and consulting firms. After all, as I mentioned previously, these are naturally the firms that recruit early and recruit often.

My interests focus on the investment management side of finance; the "buy-side" as many people refer to it. It seemed to take multiple rejections before I succeeded in landing a second-round interview.

Preparation is key, and even then your method of valuation for the infamous "stock pitch" may ultimately be picked apart and criticized. Generally, the path to becoming an equity analyst on the buy-side is a bottleneck.

So You Want Buffett's Job

Capital is scalable, so if BlackRock or Fidelity receives a billion dollars of net flows, the same analysts are still covering the same stocks. At the same time, it's a career where good performance and experience are complemented with an annuity in the form of fees for its asset pool for traditional long-only managers, unlike investment banking where new deals must be constantly created to generate fresh fees.

In my opinion, this contributes to very few openings due to the scalability of the business, and an employee group with little attrition. Just look at Jeremy Grantham or Warren Buffett (although Buffett isn't necessarily considered an investment manager in the literal sense).

So now that we've established that very few openings exist, the process becomes even more difficult as a talented and prepared candidate pool attempts to squeeze through this bottleneck. At Sloan, most of my classmates were prepared well beyond the course material covered during our intro accounting and finance classes. Generally, we were very open with one another about discussing the questions that were asked during our interviews.

Preparation and More Preparation

During my interview with Wellington, I had two stocks modeled out on Excel printouts. My interviewer briefly questioned me on the first one, then the second…and then proceeded to ask me about a third and fourth stock, and I was able to cite two names along with a solid base of detail of why I liked the third and fourth, and equally important, the risks and uncertainties involved in each investment thesis.

Rigorous analysis is the best way to approach these interviews, followed closely by a thorough capability to analyze an industry from a top-down strategic perspective as well as from a bottom-up, line-by-line accounting approach. We live in an accrual accounting world, where managers have a fair amount of discretion with estimates such as useful asset lives (depreciation), bad-debt expense, inventory obsolescence, and the like. It's important for an equity analyst to understand these terms and their impact on a particular period's income statements and balance sheets vs. that of a competitor.

Picture two airlines, Airline A with the useful life of its planes estimated at 20 years, and Airline B at 30. On a straight-line basis, the depreciation of B's planes will be allocated over a 50% longer time period than A, but B will initially enjoy a depreciation expense that is two-thirds that of its competitor on an annual basis, all else being equal.

At a minimum, you have to be aware of "shenanigans" such as this and their implications. A quote by Warren Buffett parallels the demand for rigorous analysis: "Diversification is only required when investors do not understand what they're doing."

For me, I'll be heading back to the motherland (New Jersey), spending my weekdays with a midsized high-yield asset manager who operates long-only products, a long-short hedge fund, and a private equity vehicle. The perk here is that the firm's experienced analysts cover positions in their industry that span multiple products.

In short, they value the entire capital structure—bonds and equity. As an intern, my role will certainly remain much more limited. And on the weekends, I'll be down at the shore. Maybe I'll work weekends on the beach patrol—although working for a 10th season may be taking my hobby a bit too far.

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