I came across the following last night: Buy-Side vs. Sell-Side Analysts: What’s the Difference? (investopedia.com)

I thought I knew the difference but thought I'd check it out to make sure. In essence sell-side analysts tend to work for brokers and their research tends to have more depth to it - they dig deeper - and they can conclude that a company is a strong buy, a strong sell, or anything in between, however there is clearly sometimes pressure from their employer to lean one way or the other - usually towards the "BUY" side, because it's work from these companies that ultimately pays these analysts' salaries.

And buy-side analysts tend to work for funds, where they are trying to put together buy recommendations for their own fund, which of course also involves identifying what NOT to buy, so there is a lot of crossover between the two roles, and buy-side analysts rely in no small part on the research produced by the sell-side analysts at broking firms. The link above gets into a fair bit more detail about the differences between the roles, however, if you're reading a research report or update from a broking firm, that's from a sell-side analyst, but the word "sell" in their job title in no way influences their decision making or makes them more likely to put a "sell" recommendation on a company. If anything, the fact that sell-side analysts are employed by brokers, who do not like to upset potential clients (companies), means there is going to often be some pressure from their own employers to paint companies in a more favourable light. Interesting.

For some great insights into the various pressures that a very successful and legendary sell-side analyst was under throughout his career working for a range of broking houses, check this out (Johnny Mac):

Legendary Analyst John Macdonald on Spotting Company Lies & Calling It How It Is - YouTube

"We had the great privilege of sitting down with John Macdonald, a legendary mining analyst."

"In our conversation we delved into the conflicts of staying true to your views and not being swayed by outside pressures, the common tricks that companies get up to, how he spotted richly valued as well as promising businesses, what the real costs that investors should follow are and a whole heap more."

To skip the ads and go straight to the Johnny Mac interview - click here: https://www.youtube.com/watch?v=HG6W6DlsvyI&t=598s

DISCLAIMER: All Money of Mine episodes are for informational purposes only and may contain forward-looking statements that may not eventuate. The co-hosts are not financial advisers and any views expressed are their opinion only. Please do your own research before making any investment decision or alternatively seek advice from a registered financial professional.

Found this excerpt from Peter Bevelin's book Seeking Wisdom interesting.

If you're playing the game repeatedly do you choose game 1 or 2?

Which game do you choose if you can only play once?

*Hint it's in the section titled Variability.

When Brett Blundy seeks partners in business he is looking for people who align with his “Principles of Ownership”. There are only eight of them. They are simple, sharp and sensible. I think we would do well to think the same way about ASX listed businesses we choose to partner with.

They are listed on the BBRC Worldwide website. I really want to meet Brett Blundy some day…just to learn more about smart business.

“Big businesses grow from small investments (like Lovisa), so our door is always open to a conversation. Our DNA is building big businesses. Along the way, we have learnt a few valuable lessons that we call our Principles of Ownership:

• Return on Equity (ROE); the metric that matters most.
• Debt; it is dangerous.
• Say it Simply; Net Profit After Tax is the measure we prefer
• Blow Budgets Up; BBRC does not need them or look at them.
• Boards; Keep them lean and mean
• Cash is King; Lazy Balance Sheets are not to be.
• Share Options; Understand their true cost.
• Mindset Matters; Executives should have an owner’s mentality.

BBRC Principles of Ownership have held true throughout our investing history since 1980. These principles allow for positive energy, with time spent focusing on making the businesses better. Reach out to us if you would like a personalised copy of them.”

Marissa Rossi of Milford Asset Management was on the Your Wealth podcast with Gemma Dale to discuss how to value a company. She does a great job explaining a complex topic succinctly and simply and I wish I came across this episode when it first came out. I've included a link and my notes below.

You might like a company but are you paying too much?

How does fundamental analysis work

Value a company the same way anyone would any investment opportunity

Need to understand

The business

Cash flows in & out today

And how those will change over time

Important to

Ask the right questions & do the work to find the answers

Remember this hypothetical as you go through the episode/notes

Opening a coffee shop with a friend

You’ll contribute 50% to purchase & get 50% of profits

Friend will run

Is this a good investment/what should you pay?

Look at the financial accounts of the café

Will tell us how profitable the business is today

Just as you’d look at a public company’s financials

More importantly is how we believe profitability will change over time

Reported results are backward looking

How the company did over the past 12 months

Equity markets are forward looking, not backward looking

So analysts are thinking what profits will be earned next year & the year after

Investors will pay more for a stock

With strong growth potential

And less for a stock

Operating in a mature industry

Where the business is stable or declining

Ex: Print publisher in early 2000’s

Investors will also pay more for a stock

That has stable earnings

Ex: grocer, healthcare company

Instead of

Volatile earnings

Ex: mining company, airline

You can see this in the financials of your café or a publicly listed company

Have the profits been consistent & stable?

Coffee shop analogy – 2 important questions to ask

How much money you’re making now from selling coffee?

And

How will that change over time?

What people are willing to pay

Not necessarily how they value a company

Is very much about how much they feel the business will change in the future

Often without a deep analysis

And often based on a thematic or online hype

Is there a rule of thumb for valuation?

No simple answer

P/E

If our coffee shop is making $100,000 per year

2 Shareholders

Earnings per share is $50,000

What we’d be willing to pay for the coffee shop is a multiple of that

Can compare the price of our coffee shop to others in the area

Is ours higher/lower quality?

Is there more potential?

On a main road?

What will it earn in the future?

Is the local population growing or declining?

Is there a lot of competition?

If so we don’t have pricing power

Our employees will get offers to work for other coffee shops

So we have to pay more

We may need to source a fancier product (bean)

Or spend more on décor

Easy to assess a coffee shop

But if you don’t have expertise in an industry how do you assess how a business fits in the industry?

It’s tricky

Start with historical financials

Has it been profitable?

Has it grown?

Have profits been volatile?

What’s happening with expenses?

Have they been volatile?

What do returns looks like?

How much capital does this business need to grow?

And how profitable will this growth be?

Has the share count grown?

And compare to others in the industry

Question

Is $100 a good return on your investment?

Answer

It depends

How much you invest &

For how long

Can’t just look at profits

If share count is doubling every year there needs to be a lot of profit growth to offset that dilution

A company can raise debt or equity

If equity they’re issuing more shares

Positive

They can buy things to grow or pay down debt

Negative

You own less of the company

Coffee shop example

Business earns $100,000

Shares grow from 2 – 3

You go from earning $50,000 to $33,333

But you have extra cash to upgrade or grow your business (e.g. buy another shop)

As a fundamental investor it’s going to be hard to value a share without knowing what the company does

Understand the industry

Company’s competitive position within industry

Understanding

Volume & price which drive revenue (unit economics)

Operating expenses

Governance

CEO’s strategy

Management

Just because management calls an expense a “one-off”

You still need to think about it

ESG are the risk factors to the value of intangibles & important to consider because

They are becoming an increasingly large portion of balance sheets

Quality of earnings

Commonsense test – when things don’t add up or something is difficult to understand

Or a business is too difficult to understand

It might be best to pass

The faster a company grows the more the market is willing to pay for it

Understanding whether a company is over or undervalued is a lot about

Testing your understanding of growth vs what the market thinks

Either the market is wrong

Or

You’re wrong

How to Value a Company - Your Wealth

https://open.spotify.com/episode/1WcDVJtQZem2CQe6YIOPej?si=mGazlS-YTDilLRHp08NEVw

My Twitter post

https://twitter.com/mater_dura/status/1663438634052358146