Nic Colas on the Futility of Research

Zero Hedge posted some recent commentary from Nicholas Colas (ConvergEx) that discusses the way forward for equity analysts once this macro storm abates.  I particularly liked the intro, in which Nic lays bare the problem for all to see, the utter pointlessness of so much research today:

Suppose for a moment that you are a money manager with just one client, whose investment more than covers your day-to-day expenses at your customary 2% management fee.  The catch to this happy arrangement is that this investor wants a 10% absolute return and will pull his capital if you do not achieve it.  On the plus side, he will keep the money with you for as long as you achieve this bogey.  Drawdowns don’t matter; just make 10%.  Oh, and the performance fee is 50% of anything over that target.

One more catch – you can only use one external resource in your investment process.  Our mystery client wants you focused.  Your choices are:

  • Unlimited access to one major broker’s sell side research and investment conferences.
  • Top-customer status at one expert network of your choice.
  • All the quantitative research resources you would like.  The catch here is that you can only hire a few programmers to exploit this content.
  • Unlimited access to a top-tier macro research firm, with resources deep in every major central bank around the world.

In the current investment environment, the last choice is the lay-up answer.  With asset price correlations near 90% for a wide range of investment choices, the on-off switch to market direction sits in Washington, Frankfurt, Beijing, and other centers of political and central bank power.  The other choices would give you little insight here.  Even those brokerages with excellent macro research and alumni in high places don’t seem to be able to call the twists and turns of macro policy.

That about sums up the last three years or so.

Colas is optimistic that analysts will start taking better advantage of datasets and the transparency afforded us in the internet age in order to bring a more novel research product to market.  Or failing that, they could just continue to rely on “management access” until the last guy out turns off the light.  Whatever, LOL.

Head over for the whole thing and read it when you have some time.


Equity Analysts: “In A Bull Market, You Don’t Need Them. In A Bear Market, They’ll Kill You” (Zero Hedge)




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