The quintessential and increasingly difficult part of financial work is known as “idea generation”.
This encapsulates the concept of finding investment opportunities that other people have either misunderstood or not discovered at all. In public equity markets, it almost always refers to knowing something unique or special about a stock or a sector that is not widely believed and then making an investment decision based upon that unique insight.
Idea generation sounds easy—but in reality, it’s one of the hardest parts of finance. The reason for that is that it requires knowing more about a company than the simple nuts and bolts that you can understand from the tools that finance gives you. For instance, back in 2012 Facebook (FB) went public and its stock price tanked because of poor monetization of the desktop webpage Facebook.com. No one at the time could have used financial tools to predict that Facebook would not only monetize its mobile app (believe it or not, there weren’t mobile Facebook ads back then), but become the most important app for mobile marketing.
This kind of insight cannot be found by simple financial tools like DCF modeling and calculating the NPV of future cash flows. It involves a level of due diligence that is difficult and time consuming, and it also involves a level of subjective judgment that many argue is too artistic and not quantitative enough to have any market value at all.
Nonetheless, investment banks that sell research require their analysts to marry the quantitative skills of doing things like producing DCF models and the qualitative skills of doing things like digging deep into a company’s future monetization plans and the changing tastes of consumers and the evolving nature of the market. This is what the equity research analysts at Goldman Sachs (GS) regularly do, and as a result of this research they have recently released a slew of strong calls on 2018’s equity markets.
The calls are somewhat broad-based, but still interesting; the bank’s analysts see autos in a cooling cycle for 2018, while construction is being impacted by higher inflation for input costs and rising interest rates—but this will mean good things for building product names instead of the builders themselves. Another paradoxical call comes in the relatively dull sector of packaging, paper & forest products; the bank sees WRK as a particularly interesting name for 2018 because it stands to benefit from e-commerce growth.
These kinds of insights are what equity research analysts are most prized for, and ironically they are getting harder and harder to find. The key to a successful financial career is going the extra mile—doing a bit of in-depth analysis of sectors and companies to find qualitative insights that are the rationale behind your future predictions. Analysts who do that well are almost always rewarded well.