This article is part of Seleya's blog series "Investment Research: Time For Innovation".
Traditional stock research is a highly laborious, idiosyncratic process. On average, it takes an investment analyst up to 4-8 weeks to initiate research coverage on one stock. This requires the analyst to synthesize massive amounts of information and distill insights that could generate returns above the market (i.e. “alpha” in the asset management industry) - often under significant time constraints. The explosive growth of data has certainly added to the analysts’ bane of existence. There is enormous potential for scaling up investors so they can become “a mile deep, and a mile wide.”
An investment analyst’s initiation of research coverage on a company results in a recommendation to buy, hold, or sell a stock. Many inputs and a lot of analyses come together in this highly laborious, idiosyncratic process. The analyst must become very knowledgeable about a company in a short period of time in order to make an investment recommendation.
Below, we break down common elements of the fundamental investment research process to help you understand why fundamental research has traditionally taken a long time and tends toward knowledge that is deep yet narrow.
But before we dive in, we want to highlight the difference between sellside and buyside research. For the purposes of this blog series, we focus on buyside research.
Sellside research is produced by investment banks or independent research firms and sold directly or indirectly to institutional clients or private wealth clients.
Buyside research is produced by the internal research teams of asset management firms. These reports make recommendations to portfolio managers on which stocks to buy or sell. Such research is proprietary and is not distributed.
When initiating coverage on a stock, an analyst typically does the following:
Collect and analyze relevant information about the company and its industry;
Form an investment thesis, including financial projections and valuation;
Make an investment recommendation, including a detailed research report.
Let's briefly review what's involved in each of these stages:
As you can see, the generalized process described above often takes hundreds of hours per company for an initiation report. This is truly “a mile deep, but an inch wide”!
Ongoing coverage is less time intensive, but an investment analyst can typically only cover up to 15-20 companies. Analysts are under constant pressure to synthesize massive amounts of data under time constraints. Meanwhile, technology has not only democratized access to data, but also inundated analysts with additional information. This makes discovering insights to achieve above market returns increasingly difficult.
What if there is a way to use technology to scale up an analyst’s ability to research companies faster and more accurately? This would enable analysts to become “a mile deep and a mile wide.”
Yet the quality of information for both human investors and computers is critical. We will delve into this topic in our next blog post.
Seleya Technologies is an industry expert in AI and quantitative analytical tools for financial institutions. We leverage AI to augment human perspectives, enabling financial institutions to make decisions faster, more accurately, and with less bias.
Our two solutions include ExpertAI for institutional investors and ExpertAI ESG™ that scales up a financial institution’s in-house, proprietary ESG assessments.
Our team has been authoring the intersection of AI and investing since 2013. The company is founded by experienced investors and computer scientists with over 20 years of experience developing solutions for financial institutions.
Comments