A Study in Research and Investment Firms

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Research and research methods are controversial topics because of their very nature. It is difficult to tell to what extent an investment company has made a superior or an inferior showing thanks to its research activities.

In practice, research may mean anything from reliance on the information provided by investment services and statistical manuals to thorough studies of the economics of an industry or of the operations of a particular company. Over the years, I believe that progress has been made toward recognizing the value of genuine research and in improving research methods.

In this respect, the Federation of Financial Analysts, which grew out of the activities of local groups like the New York Society of Security Analysts, Incorporated, has played a noteworthy role. In some cases, it is still probably true that analysts submit valuable reports based on careful study, yet the decisions of the executive committee or board of directors of the investment company may be influenced largely by other considerations.

A representative research department generally consists of a group of senior security analysts, assisted by juniors, statistical aides, and a librarian. An economist may be a member of the staff or available for consultation. In certain specialized scientific or natural resource fields, technical specialists are also consulted at times. The adequate research department should center about a library that contains annual reports of leading companies, listing applications, prospectuses, and government publications, as well as the financial manuals. Staff members read and mark for filing the leading financial dailies and trade papers. Subscriptions to advisory services may be entered. The heads of research departments sometimes allege that if they must read all the leading services, they will have little time left for anything else. Occasionally, the department head receives the reports of advisory services and digests them, along with comment for the members of the investment committee or board of directors.

Depending on the size of the research staff, the analysts cover a number of industries. One may specialize in capital goods; another in consumer goods; others, in electric and gas utilities, transportation, and financial institutions. Other methods of classifying the members of the department also are employed. If a large investment is maintained in oil stocks, a member of the staff probably will specialize in the oil industry. It may be considered advisable to have more than one person follow a particular industry. Specialization may, of course, be carried to absurd lengths: in the twenties, some investment companies proudly displayed portraits of staff members who were specialists in German securities, or South American issues, or southern railroads. It is the duty of an analyst to be familiar with the leading companies in his field and to keep abreast of financial reports and trade developments affecting the industry.

Investment companies supplement the usual sources of information by having the members of the research staff visit companies periodically to make field reports and call on government agencies (in the case of regulated industries).

From the foregoing, it can be seen that maintaining a research department can be expensive. Nevertheless, the department should not be regarded as "embroidery" or an expense item to be held down to a minimum, but as one of the most prolific sources of valuable suggestions and ideas. True, the work of analysts must be coordinated and placed in perspective in the light of general investment policy, but the analyst often is objective in his approach and able to resist the waves of enthusiasm and pessimism that influence even the management of investment companies.

Research departments therefore provide a much-needed service to investment companies -- an outside eye that can bring sober analysis to an often overindulgent business. This much-needed service is vital to the health of the economy, and, in essence, each company's bottom line.

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