Sunday, January 31, 2010

A Mail from Mr. Vijay Govindarajan, management guru

Dear Suprio,

As honored as I was to have been a part of the Reverse Innovation concept (with Jeff Immelt and Chris Trimble, October 2009 HBR article), I am more excited to say that our concept was just cited as one of the "Big Ideas" of the past decade by HBR! Please check it out!
(http://blogs.hbr.org/hbr/hbreditors/2010/01/the_decade_in_management_ideas.html)

Historically, multinationals have used the glocalization strategy where they developed high-end products at home and adapted them for other markets around the world.  To preempt emerging market giants, companies must master reverse innovation where they develop products in countries like China and India and then distribute them globally.  We elaborate on the concept of reverse innovation in our HBR article. Attach please find a copy of the HBR article.

I look forward to any feedback you may have.
All the Best for 2010,
VG


SEE THIS LINK FOR FREE ACCESS TO OUR REVERSE INNOVATION ARTICLE
http://www.vijaygovindarajan.com/2009/09/reverse_innovation_how_ge_is_d.htm

A Mail from Narayan Murthy on Late Sitting

It's half past 8 in the office but the lights are still on...
PCs still running, coffee machines still buzzing...
And who's at work? Most of them ??? Take a closer look...

All or most specimens are ??
Something male species of the human race...

Look closer... again all or most of them are bachelors...

And why are they sitting late? Working hard? No way!!!
Any guesses???
Let's ask one of them...
Here's what he says... 'What's there 2 do after going home...Here we get to surf, AC, phone, food, coffee that is why I am working late...Importantly no bossssssss!!!!!!!!!!!'

This is the scene in most research centers and software companies and other off-shore offices.

Bachelors 'Passing-Time' during late hours in the office just bcoz they say they've nothing else to do...
Now what r the consequences...

'Working' (for the record only) late hours soon becomes part of the institute or company culture.

With bosses more than eager to provide support to those 'working' late in the form of taxi vouchers, food vouchers and of course good
feedback, (oh, he's a hard worker... goes home only to change..!!).
They aren't helping things too...

To hell with bosses who don't understand the difference between 'sitting' late and 'working' late!!!

Very soon, the boss start expecting all employees to put in extra working hours.

So, My dear Bachelors let me tell you, life changes when u get married and start having a family... office is no longer a priority, family is... and
That's when the problem starts... b'coz u start having commitments at home too.

For your boss, the earlier 'hardworking' guy suddenly seems to become a 'early leaver' even if u leave an hour after regular time... after doing the
same amount of work.

People leaving on time after doing their tasks for the day are labelled as work-shirkers...

Girls who thankfully always (its changing nowadays... though) leave on time are labelled as 'not up to it'. All the while, the bachelors pat their
own backs and carry on 'working' not realizing that they r spoiling the work culture at their own place and never realize that they would have to
regret at one point of time.

So what's the moral of the story??

* Very clear, LEAVE ON TIME!!!
* Never put in extra time ' unless really needed '
* Don't stay back unnecessarily and spoil your company work culture which will in turn cause inconvenience to you
and your colleagues.

There are hundred other things to do in the evening..

Learn music...

Learn a foreign language...

Try a sport... TT, cricket.........

Importantly,get a girl friend or boy friend, take him/her around town...

* And for heaven's sake, net cafe rates have dropped to an all-time low (plus, no fire-walls) and try cooking for a change.

Take a tip from the Smirnoff ad: *'Life's calling, where are you??'*

Please pass on this message to all those colleagues and please do it before leaving time, don't stay back till midnight to forward this!!!

IT'S A TYPICAL INDIAN MENTALITY THAT WORKING FOR LONG HOURS MEANS VERY HARD WORKING & 100% COMMITMENT ETC.

PEOPLE WHO REGULARLY SIT LATE IN THE OFFICE DON'T KNOW TO MANAGE THEIR TIME. SIMPLE !


Regards,
NARAYAN MURTHY.

The Answers

1. The correct answer is:
Open the refrigerator, put in the giraffe, and close the door.
This question tested whether you tend to do simple things in an overly complicated way.

2. Did you say, Open the refrigerator,
Put in the elephant,
And close the
Refrigerator?
Wrong Answer.

Correct Answer: Open the refrigerator, take out the giraffe,
Put in the elephant and close the door.
This tested your ability to think through the repercussions of your previous actions.

3. Correct Answer: The Elephant.
The elephant is in the refrigerator.
You just put him in there.

This tested your memory.

4. Correct Answer: You jump into the river and swim across.
Have you not been listening?
All the crocodiles are attending the animal conference.


 
 

A Test For Intelligent People

This is a test for Intelligent People. I have determined that you qualify.
The following short quiz consists of 4 questions and will tell you if you are qualified to be a professional. The answers will be sent in a different post. The questions are NOT that difficult.

1. How do you put a giraffe into a refrigerator?

2. How do you put an elephant into a refrigerator?
3. The Lion King is hosting an animal conference. All the animals attend....except one.
Which animal does not attend?

4. There is a river you must cross but it is used by crocodiles, and you do not have a boat. How do you manage?

Indian way of doing Business

This has been sent by my school friend, Sandip Gupta.

Three contractors are bidding to fix a broken fence at the White House in D.C. One from Bangladesh, another from India and the third, from China.
They go with a White House office to examine the fence.

The Bangladesh contractor takes out a tape measure and does some measuring, then works some figures with a pencil. "Well", he says, "I figure the job will run about $900. ($400 for materials, $400 for my team and $100 profit for me)".

The Chinese contractor also does some measuring and figuring, then says, "I can do this job for $700. ($300 for materials, $300 for my team and $100 profit for me)".

The Indian contractor doesn't measure or figure, but leans over to the White House official and whispers, "$2,700."

The official, incredulous, says, "You didn't even measure like the other guys! How did you come up with such a high figure?"

The Indian contractor whispers back, "$1000 for me, $1000 for you, and we
hire the guy from China to fix the fence."

"Done!" replies the government official.

Parsi Names

This has been sent to me by my friend, R. Balasundaram, originally written by Pushi Chowdhry and published in The Tribune, on 6th January.



While most surnames in India reflect caste and lineage, the Parsis had a delightfully modern streak — having landed without caste, history and context, they created identities through professions and urban streets.

Our family moved to Bombay (now Mumbai) from Rawalpindi in 1947. We came as refugees but the family soon settled and by 1953 my father had restarted playing golf at the Willingdon Club.  I was eight years old and would walk 18 holes with him every Saturday and Sunday.  The three Parsi gentlemen who made up his regular four-ball were “uncles” Poonawala, Coorlawala and Colabawala. Very soon they had rechristened my father Pindiwala.

Uncle Colabawala did not live in Colaba but in a penthouse on Malabar Hill. May be his ancestors had lived in Colaba. I used to spend hours searching the telephone directory to find Parsi surnames and building up stories around their families.

There was prohibition in Bombay those days. So to get liquor you had to find Mr Dalal, who would introduce you to Mr Daruwala, who in turn would get bottles delivered to your home by Mr Batliwala who would be accompanied by Mr Sodawaterbottleopenerwalla (the longest Parsi surname I have come across).

Other surnames whose ancestors were in the beverages trade were Mr Fountainwala, Mr Ginwala, Mr Rumwala, Mr Sodawala and Mr Jhunjhunwala.

We used to have two delightful Siamese kittens in our flat and these were gifted to my mother by her friend Mrs Billimoria.  My mother spent hours knitting cardigans for them, with wool she bought from the Unwala family.

My uncle ran the Air Force Canteen in Cotton Green and his partner, yes you guessed it, was Mr Canteenwala.  They had this fantastic cook, Mr Bhajiwala.  Their mild and meek manager, Mr Jeejeebhoy, nodded his head and agreed with everything everybody said.

My grandfather was the Sheriff of Bombay. I think the first and only Sikh to hold this position. Being Sheriff it was only natural that he had Mr Bandookwala and Mr Golimarwala as his constant companions.

Grandfather had many Parsi friends who were in politics. There was this squeaky clean khadi-clad Mr Ghandy, and the not so clean Mr Kalaghandy — who was invariably being hounded by Mr Kotwal.  But he never left home without his “friends” Mr Barrister, Mr Vakil, Mr Lawyer and their munshi Mr Mehnty.

My grandfather built Hotel Waldorf on Arthur Bunder Road in Colaba.  So for this he naturally used the services of Mr Contactor and Mr Mistry.  He never went to the “native” moneylenders when short of money, but borrowed it from his Parsi friend Mr Readymoney.

Our neighbour and family physician was Dr Adi Doctor — he was only half a doctor. He lived with his in laws Mr and Mrs Pochkhanawala. My sister swears they ate only poached eggs for breakfast.

I remember going to Dr Doctor’s sister’s wedding. She married Mr Screwala. What he did for a living, I do not know to this day. If you are in Mumbai maybe you can track him down in the yellow or pink pages.

Jokes apart, there is a lesson for all of us here: imagine if we could christen our politicians through democratic vote: Jinnahwalla, Nikarwalla, Icequeen, Motawalla!  It would really be able to keep everyone in check, where individuals and media didn’t only control your public profile but also your public identity.

The Parsis have taught us that if you take serious interest in satire, you can change the world!  My name today is Comedymanifestowalla!
Cheers.........

A 30-second speech by Bryan Dyson, CEO of Coca Cola

"Imagine life as a game in which you are juggling some five balls in the air. You name them - Work, Family, Health, Friends and Spirit and you're keeping all of these in the Air. You will soon understand that work is a rubber ball. If you drop it, it will bounce back. 
 
But the other four Balls - Family, Health, Friends and Spirit - are made of glass. If you drop one of these; they will be irrevocably scuffed, marked, nicked, damaged or even shattered. They will never be the same. You must understand that and strive for it." 
 
WORK EFFICIENTLY DURING OFFICE HOURS AND LEAVE ON TIME.
 
GIVE THE REQUIRED TIME TO YOUR FAMILY, FRIENDS & HAVE PROPER REST

Life's Learnings from 3 Idiots


This has been sent by my student, James George as well as by my friend, Vipul Haria. It had been originally prepared by GMR Industries Ltd. highlighting a message - learning from each individual shots in the movie.

1. Never try to be successful, pursue excellence Success is the bye product and the result
 Excellence always creates success and it is a process of continual improvement
 Never run after success
 Let it happen automatically in life



2. Freedom to Life - Life is beautiful Don’t die before the actual death
 Live every moment to the fullest as if today is the last day
 Life is gifted to humankind to live
 Live and live happily towards happiness

3. Passion leads to Excellence When your hobby becomes your profession , the passion becomes your profession
 You will be able to lead up to excellence in life
 Satisfaction, joy, pleasure and love will be the outcome of the passion
 Following your passion for years, you will surely become somebody one day

4. Learning is very simple - Never stopBe humble
Teachers do fail, learners never fail
 Learning is never complicated or difficult
 Learning is always possible whatever rules you apply




5. Pressure at head The current education system is developing pressure on the student's head
 University intelligence is useful and making some impact on life; but it cannot be
at the cost of life

6. Life is management of emotions and not optimization of intelligence Memory and regular study have definite value and it always helps you in leading a
life.
 You are able to survive even if you can make some mark in the path of the life.
 With artificial intelligence, you can survive and win but you cannot prove yourself to be a genius.
 Therefore, in this process genius dies in you



7. Necessity is the mother ofinvention Necessity creates pressure and forces you to invent something or to make it happen or to use your potentiality.
 Aamir Khan in this film is able to prove by using vacuum pump at the last moment.


8. Simplicity in life Life is need based never want based. Desires have no end.
 Simplicity is a way of life and Indian culture highly stresses on simple living and high
thinking and this is the way of life: ‘Legs down to earth and eyes looking beyond
the sky’


9. Industrial Leadership The Dean of the institute is showing a very typical leadership. He has his own principles, values and ideology, and he leads the whole institute accordingly.
 This is an example of current institutional leadership. In the present scenario, most of the institutes are fixed in a block or squarish thinking


10. Love is time and space free Trust your partner
 Love is not time bound and space bound.
 It is very well demonstrated in this movie. The same love was demonstrated by Krishna and Meera.
 Love is border free, time free, unconditional and space free.

11. Importance of words in communication If communication dies, everything dies.
 Each word has impact and value in communication.
 One word if used wrongly or emphasized wrongly or paused at a wrong place in communication, what effect it creates and how is it affected, is demonstrated very well in this movie.

12. Mediocrity is penalized A middle class family or average talent or average institute is going to suffer and has to pay maximum price in their lives if they do not upgrade their living standards.
 To be born poor or as an average person is not a crime but to die as an average person with middle class talent is miserable and if you are unable to optimize your potentiality and die with unused potentiality then that is your shameful truth.
 One should not die as a mediocre. He/she has to bring out the genius inside him/her and has to use his/her potentiality to the optimum level


Seek excellence and success will follow

The Socrates Triple Filter Test

Here is some food for thought...

Socrates

The Socrates Triple Filter Test


In ancient Greece , Socrates was reputed to hold knowledge in high esteem. One day an acquaintance met the great philosopher and said, "Do you know what I just heard about your friend?"


Hold on a minute," Socrates replied. "Before telling me anything, I'd like you to pass a little test. It's called the Triple Filter Test."

"Triple filter?"

That's right," Socrates continued. "Before you talk to me about my friend, it might be a good idea to take a moment and filter what you're going to say. That's why I call it the triple filter test. The first filter is TRUTH. “Have you made absolutely sure that what you are about to tell me is true?”

"No," the man said, "actually I just heard about it and..."

All right," said Socrates. "So you don't really know if it's true or not. Now let's try the second filter, the filter of GOODNESS. “Is what you are about to tell me about my friend something good?”

"No, on the contrary..."

"So", Socrates continued, "you want to tell me something bad about my friend, but you're not certain it's true. You may still pass the test though, because there's one filter left: the filter of USEFULNESS. “Is what you want to tell me about my friend going to be useful to me?”

“No… not really…”

“Well,”
concluded Socrates, "If what you want to tell me is neither true nor good nor useful, why tell it to me at all?"

This is why Socrates was a great philosopher and held in such high esteem. So, lets use this triple filter each time we hear loose talk about any of our near & dear ones (friends/relatives/colleagues). It will save us time and trouble.

Financial Modeling - A Part of Equity research

This has been sent to me by one of my students, Shivan Bakshi. I would like to share it with you.

 Financial modeling is the task of building an abstract representation (a model) of a financial decision making situation. This is a mathematical model, such as a computer simulation, designed to represent (a simplified version of) the performance of a financial asset or a portfolio, of a business, a project, or any other form of financial investment. Many financial models are inherently stochastic.
Financial modeling is a general term that means different things to different users. In the US and particularly in business schools it means the development of a mathematical model, often using complex algorithms, and the associated computer implementation to simulate scenarios of financial events, such as asset prices, market movements, portfolio returns and the like. Or it might mean the development of optimization models for managing and controlling the risk of a financial investment. In Europe and in the accounting profession financial modelling is defined as cash flow forecasting, involving the preparation of large, detailed spreadsheets for management decision making purposes.
While there has been some debate in the industry as to the nature of financial modeling : whether it is a tradecraft, such as welding, or a science, such as metallurgy, the task of financial modeling has been gaining acceptance and rigor over the years. Several scholarly books have been written on the topic, in addition to numerous scientific articles, and the definitive series Handbooks in Finance by Elsevier contains several volumes dealing with financial modeling issues.
There are non-spreadsheet software platforms available on which to build financial models. However, the vast proportion of the market is spreadsheet-based, and within this market Microsoft Excel now has by far the dominant position, having overtaken Lotus 1-2-3 in the 1990s. From this it is easy to see how the uninformed can equate Financial modeling competency with 'learning Excel'. However, the fallacy in this contention is the one area on which professionals and experts in the financial modeling industry agree.
The process by which a firm constructs a financial representation of some, or all, aspects of the firm or given security. The model is usually characterized by performing calculations, and makes recommendations based on that information. The model may also summarize particular events for the end user and provide direction regarding possible actions or alternatives. Financial models can be constructed in many ways, either by the use of computer software, or with a pen and paper. What's most important, however, is not the kind of user interface used, but the underlying logic that encompasses the model. A model, for example, can summarize investment management returns, such as the Sortino ratio, or it may help estimate market direction, such as the Fed model.
Fed Model: A model thought to be used by the Federal Reserve that hypothesizes a relationship between long-term treasury notes and the market return of equities. The Fed doesn't endorse this tool. In fact, it was named the"Fed model" by Prudential Securities strategist Ed Yardeni.
This model believes that returns on 10-year treasury notes should be similar to the S&P 500
earnings yield. Differences in these returns identify an over-priced or under-priced securities market.
Black Scholes Model: A model of price variation over time of financial instruments such as stocks that can, among other things, be used to determine the price of a European call option. The model assumes that the price of heavily traded assets follow a geometric Brownian motion with constant drift and volatility. When applied to a stock option, the model incorporates the constant price variation of the stock, the time value of money, the option's strike price and the time to the option's expiry.
Also known as the Black-Scholes-Merton Model. The Black Scholes Model is one of the most important concepts in modern financial theory. It was developed in 1973 by Fisher Black, Robert Merton and Myron Scholes and is still widely used today, and regarded as one of the best ways of determining fair prices of options.
There are a number of variants of the original Black-Scholes model.
Black Box Model: A computer program into which users enter information and the system utilizes pre-programmed logic to return output to the user. The "black box" portion of the system contains formulas and calculations that the user does not see nor need to know to use the system. Black box systems are often used to determine optimal trading practices. These systems generate many different types of data including buy and sell signals.
Black's Model: A variation of the Black-Scholes model that allows for the valuation of options on futures contracts. In 1976, Fisher Black, one of the developers of the Black-Scholes model (introduced in 1973), demonstrated how the Black-Scholes model could be modified in order to value European call or put options on futures contracts.
Heath-Jarrow-Morton Model - HJM Model: A model that applies forward rates to an existing term structure of interest rates to determine appropriate prices for securities that are sensitive to changes in interest rates. The HJM model is very theoretical and is used at the most advanced levels of financial analysis. It is used mainly by arbitrageurs seeking arbitrage opportunities.
Lintner's Model: A model stating that dividend policy has two parameters: (1) the target payout ratio and (2) the speed at which current dividends adjust to the target. In 1956 John Lintner developed this theory based on two important things that he observed about dividend policy:

1)
Companies
tend to set long-run target dividends-to-earnings ratios according to the amount of positive net-present-value (NPV) projects they have available.

2)
Earnings
increases are not always sustainable. As a result, dividend policy is not changed until managers can see that new earnings levels are sustainable.

Equity research

This has been sent to me by one of my students, Shivan Bakshi. I would like to share it with you.

 Equity research is divided into Buy side and sell side. Buy side analyst research on investment opportunity for their company and the sell side analyst research on the investment opportunity for the clients of their company which is very risky. Research and the Stock Market
Actually, the title of this article is a bit misleading because the role of research has not changed since the first trade occurred under the Buttonwood Tree on Manhattan Island. What has changed is the environments (
bull and bear markets) that influence research.

The role of research is to provide information to the market. An
efficient market relies on information: a lack of information creates inefficiencies that result in stocks being misrepresented (over or under valued). Analysts use their expertise and spend a lot of time analyzing a stock, its industry and peer group to provide earnings and valuation estimates. Research is valuable because it fills information gaps so that each individual investor does not need to analyze every stock. This division of labor makes the market more efficient.

Research in Bull and Bear Markets
If the role of research has always been so "noble", why is it currently in such a state of ill-repute? There are two reasons: firstly the current bear market gives us a new perspective to evaluate the excesses of the last bull market; secondly investors need to blame somebody.

In every bull market there are excesses that become apparent only in the bear market that follows. Whether it is tulips or transistors, each age has its mania that distorts the normal functioning of the market. In the rush to make money, rationality is the first casualty. Investors rush to jump on the bandwagon and the market over-allocates capital to the "hot" sector(s). The most recent examples being web-based grocery companies, online pet
stores and fiber-optic capacity. This herd mentality is the reason why bull markets have funded so many "me-too" ideas throughout history.

Research is a function of the market and is influenced by these swings. In a bull market
investment bankers, the media and investors pressure analysts to focus on the hot sectors. Some analysts morph into promoters as they ride the market. Those analysts that remain rational practitioners are ignored, and their research reports go unread. During the late 1990s the business media catered to the audience's demands and gave the spotlight to the famous talking heads that are now under investigation.

Seeking to blame someone for investment losses is a normal event in bear markets. It happened in the 1930s and the 1970s and is occurring today. Some of the criticisms are deserved, but the need to provide information has not changed.

Research in Today's Market
To discuss the role of research in today's market, we need to differentiate between Wall Street research and other research. Wall Street research is provided by the major brokerage firms (both on and off Wall Street). Other research is produced by independent research firms and small
boutique brokerage firms.

This differentiation is important. First, Wall Street research has become focused on
big cap, very liquid stocks and ignores the majority (over 60% based on our research) of publicly-traded stocks. This myopic focus on a small number of stocks is the result of deregulation and industry consolidation. In order to remain profitable, Wall Street firms have focused on big-cap stocks to generate highly lucrative investment banking deals and trading profits.

Those companies that are likely to provide the research firms with a sizable investment banking deals are the stocks that are determined worth being followed by the market. The stock's long-term investment potential is secondary. The second reason to distinguish Wall Street from other research is that most of the blame for the excesses of the last bull market is rightfully placed on Wall Street.

Other research is filling the information gap created by Wall Street. Independent research firms and boutique brokerage firms are providing research on the stocks that have been orphaned by Wall Street. Investors, now educated in the benefits of electronic trading, may not be willing to support boutique brokerage firms for their research by opening an account and paying higher commissions.

This means that independent research firms are becoming the main source of information on the majority of stocks, but investors are reluctant to pay for research because they don't really know what they are paying for until well after the purchase. Unfortunately not all research is worth buying. I have purchased reports from reputable sources only to find them inaccurate and misleading.

Who Pays for Research? Big Investors Do!
The ironic thing is that while research has proven to be valuable, individual investors do not seem to want to pay for it. This may be because, under the traditional system, brokerage houses provided research in order to gain and keep clients. Investors just had to ask their brokers for a report and retained it at no charge. What seems to have gone unrealized is that the commissions pay for that research.

A good indicator of the value of research is the amount institutional investors are willing to pay for it. Institutional investors hire their own analysts to gain a competitive edge over other investors. They also pay (often handsomely) independent research firms for additional research. Institutions also pay for the
sell-side research they receive (either with dollars or by giving the supplying brokerage firm trades to execute). All this amounts to big money, but the institutions realize that research is integral to making successful investment decisions.

If investors are unwilling to buy research how will the market correct the imbalance caused by the lack of coverage? The solution may be found by looking at the issue a slightly different way.

The Growing Role of Fee-Based Research
Fee-based research increases market efficiency and bridges the gap between investors who want research (without paying) and companies who realize that Wall Street is not likely to provide research on their stock. Fee-based research provides information to the widest possible audience at no charge to the reader because the subject company has funded the research.

It is important to differentiate between objective fee-based research and research that is promotional. Objective fee-based research is analogous to the role of your physician. You pay a physician not to tell you that you feel good but to give you his or her professional and truthful opinion of your condition. Legitimate fee-based research is a professional and objective analysis and opinion of a company's investment potential. Promotional research is short on analysis and full of hype. An example is the fax and
email reports about the penny stocks that will supposedly triple in a short time.

Legitimate fee-based research firms have the following characteristics:

1. They provide analytical not promotional services.
2. They are paid a set annual fee in cash; they do not accept any form of equity, which may cause conflicts of interest.
3. They provide full and clear disclosure of the relationship between the company and the research firm so investors can evaluate objectivity.

Companies who engage a legitimate fee-based research firm to analyze their stock are trying to get information to investors and improve market efficiency. Such a company is making the following important statements:

1. That it believes its shares are undervalued because investor are not aware of the company.
2. That it is aware that Wall Street is no longer an option.
3. That it believes that its investment potential can withstand objective analysis.

Perhaps more importantly, the reputations/credibility of the company and the research firm depends on the efforts they make to inform investors. A company does not want to be tarnished by being associated with disreputable research. Similarly, a research firm will only want to analyze companies that have strong fundamentals and long-term investment potential.

Fee-based research has had to fight the stereotype of promotional research, but the market is starting to realize that fee-based research is a viable source of information. The
National Investor Relations Institute (NIRI) was probably the first group to recognize the need for fee-based research. In January 2002 NIRI issued a letter emphasizing the need for small-cap companies to find alternatives to Wall Street research in order to get their information to investors. More recently, the NIRI is conducting a survey on research alternatives and will possibly have a session on this topic at their national conference this year.

Equity Research fullfilments

This has been sent to me by one of my students, Shivan Bakshi. I would like to share it with you.

 Securities research is a discipline within the financial services industry. Securities research professionals are known most generally as "analysts," "research analysts," or "securities analysts;" all the foregoing terms are synonymous. Securities analysts are commonly divided between the two basic kinds of securities: equity analysts (researching stocks and their issuers) and fixed income analysts (researching bond issuers). However, there are some analysts who cover all of the securities of a particular issuer, stocks and bonds alike.
Securities analysts are usually further subdivided by industry specialization (or sectors) -- among the industries with the most analyst coverage are biotechnology, financial services, energy, and computer hardware, software and services. Fixed income analysts are also often subdivided by asset class—among the fixed income asset classes with the most analyst coverage are convertible bonds, high yield bonds (see high-yield debt), and distressed bonds (see distressed securities). (Although technically not securities, syndicated bank loans typically fall within the domain of fixed income analysts, and are covered, as if they were bonds, by reference to the industry of their borrowers or asset class in which their credit quality would place them.)
In the broadest terms, securities analysts seek to develop, and thereafter communicate to investors, insights regarding the value, risk, and volatility of a covered security, and thus assist investors to decide whether to buy, hold, sell, sell short, or simply avoid the security in question or derivative securities (see: derivative). To gather the information required to do so, securities analysts review periodic financial disclosures (such as made by United States-listed issuers to the S.E.C.) of the issuer and other relevant companies, read industry news and use trading history and industry information databases, interview managers and customers of the issuer, and (sometimes) perform their own primary research.
Securities research falls into two broad categories: that provided by investment banks and that provided by independent equity research boutiques. The former group offer research as part of a broad set of financial services including broking and corporate finance. Independent equity research has largely sprung into existence as a result of scandals such as Enron, Lernout & Hauspie and Worldcom where investment banks wrote positive research despite deteriorating fundamentals or fraudulent management.
Research analysts produce reports and typically issue a recommendation: buy ("overweight"), hold, or sell ("underweight"). These reports can be accessed from a number of sources, and brokerages will often offer the reports free to their customers.[1]
Career path: Entrance into the profession, which is generally very well paid and prestigious, is highly competitive. Those who enter the profession at the junior level, typically have an undergraduate degree from a leading college or university and one to a few years of experience in some other discipline of finance or (lacking such experience) an MBA or other relevant advanced degree. Those who enter the field in a junior capacity, can progress to a senior capacity in a fairly brief period of time (two to four years) if they prove themselves talented; often such advancement is greatly aided by earning a Chartered Financial Analyst charter (which requires passage of three, successively more difficult examinations over a period of not less than nineteen months). Many securities analysts have directly entered the profession at a more senior level; such persons typically have an MBA or other relevant advanced degree and a number of years of progressively responsible experience either in another finance profession, or in the industry which they will be covering as an analyst.
Employment: Securities analysts are generally employed in one of three capacities: sell-side analysts (who work for a broker-dealer and indirectly for broker-dealer's trading customers), buy-side analysts (who work for institutional investors, such as hedge funds, mutual funds, pension funds, proprietary trading operations of banks and brokers, endowments, and insurance companies), and independent analysts, who work for firms which sell research to sell-side and/or buy-side firms, but who do not themselves engage in securities transactions.
Buy-side analysts generally do their work in private; publishing research reports and issuing public opinions on a security is generally confined to sell-side and independent analysts. However, the amount of formally-published sell-side research is generally thought to be declining, as it becomes more difficult for brokers to gain a clear revenue stream from the investment. (The direct connection between securities research and the underwriting of new issues, which enabled research analysts to claim a share of investment banking fees, was severed as a result of government investigations into excesses of some sell-side analysts in the late 1990s; see, for example, Henry Blodget).
Qualifications: In the US, as of 2002, investment professionals seeking to become sell-side equity research analysts must pass the Research Analyst examination jointly administered by NASD and NYSE. The exam is divided into two parts: the 86 and 87. The Series 86 Research Analyst exam is the Quantitative portion consisting of material from introductory economics, and financial accounting. Initially, successful completion of the CFA level I & II exams provides a waiver for the Series 86 exam, but not the Series 87 examination. Now, the waiver opportunity has lapsed and the Series 86 exam which is challenging for an experienced analyst must be taken. The Series 87 Research Analyst exam is the Regulatory portion consisting material from the Securities Exchange Act of 1933, Securities Exchange Act of 1934, NASD and NYSE Rules. The Series 7 examination/license is a pre-requisite for the Research Analyst exams.
Industry Rules: Buy-side and independent research are generally unregulated. Sell-side research is subject to regulation by the securities authorities of the locales where it is performed. The large majority of all sell-side research is performed either in the United Kingdom or the United States. UK sell-side research is regulated by the Financial Services Authority. US sell-side research has a more complex regime of regulation. The U.S. Securities and Exchange Commission has prescribed certain relevant rules (among them Regulation AC and Regulation FD) but has generally delegated research regulation to the self-regulatory organizations. The principal SROs (the National Association of Securities Dealers and the New York Stock Exchange) have issued detailed regulations of equity research, and much more cursory regulation of fixed income research. (With respect to the latter, the NYSE and the NASD have re-delegated the substance of regulation to the broker-dealer trade group Securities Industry and Financial Markets Association as the merger successor of the Bond Market Association, to whom the role was originally assigned.) The impact upon securities research regulation of the pending merger of the NASD with the regulatory arm of the NYSE is as of yet uncertain.
In the immediate aftermath of the excesses of the 1990s referred to above, Eliot Spitzer, Governor of the State of New York, asserted a significant role in policing securities research performed by New York-based analysts; it is unclear whether oversight by the New York State Attorney General will become a long-term meaningful component of securities research. The going-forward conduct provisions of a master settlement agreement between (on the one hand) most of the aforesaid U.S. regulators and (on the other hand) many of the largest U.S. broker-dealers, is an important source of ongoing regulation, with the force of law for the broker-dealers who are party to it, and a strong, if not formally legally binding effect, on broker-dealers not party to it.

Investment banking

This has been sent to me by one of my students, Shivan Bakshi. I would like to share it with you.

An individual or institution which acts as an underwriter or agent for corporations and municipalities issuing securities. Most also maintain broker/dealer operations, maintain markets for previously issued securities, and offer advisory services to investors. investment banks also have a large role in facilitating mergers and acquisitions, private equity placements and corporate restructuring. Unlike traditional banks, investment banks do not accept deposits from and provide loans to individuals. also called investment banker.
Division of banking encompassing business entities dealing with creation of capital for other companies. In addition to acting as agents or underwriters for companies in the process of issuing securities, investment banks also advise companies on matters related to the issue and placement of stock.
A majority of investment banks offer strategic advisory services for mergers, acquisitions, divestiture or other financial services for clients, such as the trading of derivatives, fixed income, foreign exchange, commodity, and equity securities.
In terms of regulatory qualification, to perform these services in the United States, an adviser must be a licensed broker-dealer, and is subject to Securities & Exchange Commission (SEC) (FINRA) regulation[1]. Until 1999, the United States maintained a separation between investment banking and commercial banks. Other industrialized countries (including G7 countries) have not maintained this separation historically. Trading securities for cash or securities (i.e., facilitating transactions, market-making), or the promotion of securities (i.e., underwriting, research, etc.) was referred to as the "sell side".
Dealing with the pension funds, mutual funds, hedge funds, and the investing public who consumed the products and services of the sell-side in order to maximize their return on investment constitutes the "buy side". Many firms have buy and sell side components.
Main activities and units: An investment bank is split into the so-called front office, middle office, and back office. While large full-service investment banks offer all of the lines of businesses, both sell side and buy side, smaller sell side investment firms such as boutique investment banks and small broker-dealers will focus on investment banking and sales/trading/research, respectively.
Investment banks offer security to both corporations issuing securities and investors buying securities. For corporations investment bankers offer information on when and how to place their securities in the market. The corporations do not have to spend on resources with which it is not equipped. To the investor, the responsible investment banker offers protection against unsafe securities. The offering of a few bad issues can cause serious loss to its reputation, and hence loss of business. Therefore, investment bankers play a very important role in issuing new security offerings.
·       Core investment banking activities: Investment banking is the traditional aspect of the investment banks which also involves helping customers raise funds in the capital markets and advise on mergers and acquisitions. Investment banking may involve subscribing investors to a security issuance, coordinating with bidders, or negotiating with a merger target. Another term for the investment banking division is corporate finance, and its advisory group is often termed mergers and acquisitions (M&A). The investment banking division (IBD) is generally divided into industry coverage and product coverage groups. Industry coverage groups focus on a specific industry such as healthcare, industrials, or technology, and maintain relationships with corporations within the industry to bring in business for a bank. Product coverage groups focus on financial products, such as mergers and acquisitions, leveraged finance, equity, and high-grade debt and generally work and collaborate with industry groups in the more intricate and specialized needs of a client.
·       Sales and trading: On behalf of the bank and its clients, the primary function of a large investment bank is buying and selling products. In market making, traders will buy and sell financial products with the goal of making an incremental amount of money on each trade. Sales is the term for the investment banks sales force, whose primary job is to call on institutional and high-net-worth investors to suggest trading ideas (on caveat emptor basis) and take orders. Sales desks then communicate their clients' orders to the appropriate trading desks, who can price and execute trades, or structure new products that fit a specific need. Structuring has been a relatively recent activity as derivatives have come into play, with highly technical and numerate employees working on creating complex structured products which typically offer much greater margins and returns than underlying cash securities. Strategists advise external as well as internal clients on the strategies that can be adopted in various markets. Ranging from derivatives to specific industries, strategists place companies and industries in a quantitative framework with full consideration of the macroeconomic scene. This strategy often affects the way the firm will operate in the market, the direction it would like to take in terms of its proprietary and flow positions, the suggestions salespersons give to clients, as well as the way structurers create new products. Banks also undertake risk through proprietary trading, done by a special set of traders who do not interface with clients and through "principal risk", risk undertaken by a trader after he buys or sells a product to a client and does not hedge his total exposure. Banks seek to maximize profitability for a given amount of risk on their balance sheet. The necessity for numerical ability in sales and trading has created jobs for physics and math Ph.D.s who act as quantitative analysts.
·       Research is the division which reviews companies and writes reports about their prospects, often with "buy" or "sell" ratings. While the research division generates no revenue, its resources are used to assist traders in trading, the sales force in suggesting ideas to customers, and investment bankers by covering their clients. There is a potential conflict of interest between the investment bank and its analysis in that published analysis can affect the profits of the bank. Therefore in recent years the relationship between investment banking and research has become highly regulated requiring a Chinese wall between public and private functions.
·       Other businesses that an investment bank may be involved in: lending, and securities brokerage services to institutions. Prime brokerage with hedge funds has been an especially profitable business, as well as risky, as seen in the "run on the bank" with Bear Stearns in 2008.
·       Investment management is the professional management of various securities (shares, bonds, etc.) and other assets (e.g. real estate), to meet specified investment goals for the benefit of the investors. Investors may be institutions (insurance companies, pension funds, corporations etc.) or private investors (both directly via investment contracts and more commonly via collective investment schemes eg. mutual funds). The investment management division of an investment bank is generally divided into separate groups, often known as Private Wealth Management and Private Client Services.
·       Merchant banking is a private equity activity of investment banks.[2] Current examples include Goldman Sachs Capital Partners and JPMorgan's One Equity Partners. (Originally, "merchant bank" was the British English term for an investment bank.) . The chief distinction between an investment bank and a merchant bank is that a merchant bank invests its own capital in a client company whereas an investment bank purely distributes (and trades) the securities of that company in its capital raising role. Both merchant banks and investment banks provide fee based corporate advisory services including in relation to mergers and acquisitions.
·       Commercial banking see article commercial bank. Examples being Goldman Sachs and Morgan Stanley growing into the commercial banking businesses even before the financial crises of 2008
·       Risk management involves analyzing the market and credit risk that traders are taking onto the balance sheet in conducting their daily trades, and setting limits on the amount of capital that they are able to trade in order to prevent 'bad' trades having a detrimental effect to a desk overall. Another key Middle Office role is to ensure that the above mentioned economic risks are captured accurately (as per agreement of commercial terms with the counterparty), correctly (as per standardized booking models in the most appropriate systems) and on time (typically within 30 minutes of trade execution). In recent years the risk of errors has become known as "operational risk" and the assurance Middle Offices provide now includes measures to address this risk. When this assurance is not in place, market and credit risk analysis can be unreliable and open to deliberate manipulation.
·       Corporate treasury is responsible for an investment bank's funding, capital structure management, and liquidity risk monitoring.
·       Financial control tracks and analyzes the capital flows of the firm, the Finance division is the principal adviser to senior management on essential areas such as controlling the firm's global risk exposure and the profitability and structure of the firm's various businesses. In the United States and United Kingdom, a Financial Controller is a senior position, often reporting to the Chief Financial Officer.
·       Corporate strategy, along with risk, treasury, and controllers, often falls under the finance division as well.
·       Compliance areas are responsible for an investment bank's daily operations' compliance with government regulations and internal regulations. Often also considered a back-office division
·       Operations involves data-checking trades that have been conducted, ensuring that they are not erroneous, and transacting the required transfers. While some believe that operations provides the greatest job security and the bleakest career prospects of any division within an investment bank[3], many banks have outsourced operations. It is, however, a critical part of the bank. Due to increased competition in finance related careers, college degrees are now mandatory at most Tier 1 investment banks.[citation needed] A finance degree has proved significant in understanding the depth of the deals and transactions that occur across all the divisions of the bank.
·       Technology refers to the information technology department. Every major investment bank has considerable amounts of in-house software, created by the technology team, who are also responsible for technical support. Technology has changed considerably in the last few years as more sales and trading desks are using electronic trading. Some trades are initiated by complex algorithms for hedging purposes.
Chinese wall: An investment bank can also be split into private and public functions with a Chinese wall which separates the two to prevent information from crossing. The private areas of the bank deal with private insider information that may not be publicly disclosed, while the public areas such as stock analysis deal with public information.
Size of industry: Global investment banking revenue increased for the fifth year running in 2007, to $84.3 billion.[4] This was up 22% on the previous year and more than double the level in 2003. Despite a record year for fee income, many investment banks have experienced large losses related to their exposure to U.S. sub-prime securities investments.
The United States was the primary source of investment banking income in 2007, with 53% of the total, a proportion which has fallen somewhat during the past decade. Europe (with Middle East and Africa) generated 32% of the total, slightly up on its 30% share a decade ago. Asian countries generated the remaining 15%. Over the past decade, fee income from the US increased by 80%. This compares with a 217% increase in Europe and 250% increase in Asia during this period. The industry is heavily concentrated in a small number of major financial centres, including New York City, London and Tokyo.
Investment banking is one of the most global industries and is hence continuously challenged to respond to new developments and innovation in the global financial markets. Throughout the history of investment banking, it is only known that many have theorized that all investment banking products and services would be commoditized. New products with higher margins are constantly invented and manufactured by bankers in hopes of winning over clients and developing trading know-how in new markets. However, since these can usually not be patented or copyrighted, they are very often copied quickly by competing banks, pushing down trading margins.
For example, trading bonds and equities for customers is now a commodity business], but structuring and trading derivatives retains higher margins in good times - and the risk of large losses in difficult market conditions, such as the credit crunch that began in 2007. Each over-the-counter contract has to be uniquely structured and could involve complex pay-off and risk profiles. Listed option contracts are traded through major exchanges, such as the CBOE, and are almost as commoditized as general equity securities.
In addition, while many products have been commoditized, an increasing amount of profit within investment banks has come from proprietary trading, where size creates a positive network benefit (since the more trades an investment bank does, the more it knows about the market flow, allowing it to theoretically make better trades and pass on better guidance to clients).
The fastest growing segment of the investment banking industry are private investments into public companies (PIPEs, otherwise known as Regulation D or Regulation S). Such transactions are privately negotiated between companies and accredited investors. These PIPE transactions are non-rule 144A transactions. Large bulge bracket brokerage firms and smaller boutique firms compete in this sector. Special purpose acquisition companies (SPACs) or blank check corporations have been created from this industry.
Vertical integration: In the U.S., the Glass–Steagall Act, initially created in the wake of the Stock Market Crash of 1929, prohibited banks from both accepting deposits and underwriting securities, and led to segregation of investment banks from commercial banks. Glass–Steagall was effectively repealed for many large financial institutions by the Gramm–Leach–Bliley Act in 1999.
Another development in recent years has been the vertical integration of debt securitization. Previously, investment banks had assisted lenders in raising more lending funds and having the ability to offer longer term fixed interest rates by converting the lenders' outstanding loans into bonds. For example, a mortgage lender would make a house loan, and then use the investment bank to sell bonds to fund the debt, the money from the sale of the bonds can be used to make new loans, while the lender accepts loan payments and passes the payments on to the bondholders. This process is called securitization. However, lenders have begun to securitize loans themselves, especially in the areas of mortgage loans. Because of this, and because of the fear that this will continue, many investment banks have focused on becoming lenders themselves,[5] making loans with the goal of securitizing them. In fact, in the areas of commercial mortgages, many investment banks lend at loss leader interest rates in order to make money securitizing the loans, causing them to be a very popular financing option for commercial property investors and developers. Securitized house loans may have exacerbated the subprime mortgage crisis beginning in 2007, by making risky loans less apparent to investors.
Possible conflicts of interest: Potential conflicts of interest may arise between different parts of a bank, creating the potential for financial movements that could be market manipulation. Authorities that regulate investment banking (the FSA in the United Kingdom and the SEC in the United States) require that banks impose a Chinese wall which prohibits communication between investment banking on one side and equity research and trading on the other.
Some of the conflicts of interest that can be found in investment banking are listed here:
·       Historically, equity research firms were founded and owned by investment banks. One common practice is for equity analysts to initiate coverage on a company in order to develop relationships that lead to highly profitable investment banking business. In the 1990s, many equity researchers allegedly traded positive stock ratings directly for investment banking business. On the flip side of the coin: companies would threaten to divert investment banking business to competitors unless their stock was rated favorably. Politicians acted to pass laws to criminalize such acts. Increased pressure from regulators and a series of lawsuits, settlements, and prosecutions curbed this business to a large extent following the 2001 stock market tumble.
·       Many investment banks also own retail brokerages. Also during the 1990s, some retail brokerages sold consumers securities which did not meet their stated risk profile. This behavior may have led to investment banking business or even sales of surplus shares during a public offering to keep public perception of the stock favorable.
·       Since investment banks engage heavily in trading for their own account, there is always the temptation or possibility that they might engage in some form of front running. Front running is the illegal practice of a stock broker executing orders on a security for their own account before filling orders previously submitted by their customers, thereby benefiting from any changes in prices induced by those orders.