November 18, 2015

Buy side versus sell side

For a number of years David Rosenberg was one of the top dogs at one of the largest, most well-known firms on Wall Street. As he told Barry Ritholtz on a recent episode of Masters in Business, it wasn’t until he left that job that he realized how much he still had to learn:
When you’re the Chief Economist at Merrill Lynch you think you’re the starting pitcher for the New York Yankees. You have it all figured out. I realized when I got to Gluskin Sheff how much I didn’t know.
About six years ago Rosenberg made the transition from the sell side, at Merrill Lynch, to the buy side, at Gluskin Sheff. For the uninitiated, on Wall Street the sell side consists of those who produce research, forecasts and advice, but don’t manage client assets. It’s called the ‘sell side’ because they sell their research and ideas. On the other hand, the buy side consists of people who manage money — portfolio managers, hedge funds, RIAs, etc. The buy side uses those research reports and forecasts to make their investment decisions.
Both the buy side and the sell side can add or detract value from their client’s bottom line depending on who you’re working with, but as Rosenberg found out, there is a huge difference between making forecasts and managing money. He described his role with Merrill as one in which he would fly around the world and meet with the firm’s large institutional clients and make predictions about the economy and the markets. What he realized after he left is that he never attached probabilities or alternative scenarios to his forecasts. It was basically all-or-nothing.
Once he started working with portfolio managers he realized how important it was to think in terms of probabilities, not certainties:
The whole life of a portfolio manager, their brain, is one giant distribution curve of outcomes. I’ve learned more in the past six years at Gluskin Sheff on the buy side, as a strategist and economist, than the previous twenty-two combined [in various sell side roles]. Because I figured out how to produce a forecast that’s meaningful for somebody who manages money for a living.

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