Beyond Biglaw: Market Analysis

If there were a law firm stock market, would you be buying or selling your firm’s shares?

One of the best things about working with investors over the past year has been learning about the stock market. Advising buy-side investors, whether they be large hedge funds, family offices, or individual investors, on patent litigation issues that can influence their investments is the bedrock of our consulting practice at Markman Advisors. These investors are without exception very sophisticated, and it would be impossible for us to do our jobs for them effectively without educating ourselves as to how the equity markets, and trading, really work. They do not need our advice how to trade, nor do we offer it, but understanding what you can about your client’s business is always good practice.

Let’s start with first principles. Conceivably, there are only three directions a stock price can go. Flat, up, or down. Flat never lasts for long, and considering inflation, usually leads to losses. So effectively all the financial and other analysis we see on a daily basis, whether it be in print, the web, or television, is directed towards helping investors decide whether any particular stock will go up or down in the near-term and over time. A lot of pundits get paid a lot of money to provide their opinions. And savvy investors will do almost anything to get a legal information edge over other participants in the market. Thankfully, some of them have the good sense to pay for our professional services, at least when it comes to analyzing potentially market-moving patent litigation events.

In some ways, playing the market is like litigation. When it comes to results, things are simple — you either win the case or lose. Up or down. Some cases will be big winners, while others will be minor successes. Others will lose, and swallow up all or part of the litigator or client’s investment.

While litigation results might be binary, as sophisticated lawyers know, there is tremendous underlying complexity embedded into the process of getting to those results. As with stocks, there are numerous legal and business factors that influence the course of a litigation. Keeps thing interesting. Ultimately, you need to pick more winners than losers. As true for a litigator as it is for a hedge fund manager.

There is something attractive about the simplicity of performing market analysis of a particular stock. A stock goes up, or it goes down. At the same time, there are innumerable factors that could contribute to any given movement of a stock price, so there is plenty of juicy complexity as well to the analysis investors engage in. It is no surprise that Wall Street attracts so many intelligent people, from all different backgrounds. Intellectual stimulation has a lot of appeal for intelligent people. The chance for wealth is an even more powerful motivator.

Now that we are at the end of the year, there is value to putting a market analysis to work when thinking about your career and your firm. When it comes to stocks, there are two types of positions — short (meaning you think the stock price will drop) or long (you think the stock price will appreciate). If you had to decide objectively, would you go short or long stock in your firm? Partners are actually asked to “go long” when they decide whether to join the partnership of a firm. If you are a partner, I would hope you agree that your firm is worth “staying long.” Otherwise, it is probably worth looking at your options.

What should you think about when you apply a market analysis to your firm? The same things that investors think about when they evaluate whether to initiate or maintain an investment in a company. It starts with management. Do you trust it? Is there a vision for the firm? More importantly, is it a realistic one? No one wants to be at a firm where the strategy is indeterminate. And it is important not only to consider the management of the firm itself. As important for most partners is leadership of their practice group. Are the leaders of the group inclusive? Or simply trying to preserve their prime positioning, even at the expense of their own partners? These are important considerations.

Sponsored

Once you have developed your opinion about management, it is time to focus on fundamentals. Meaning financials. Has revenue grown over the past year or two? How are expenses being managed? It is easy to cut expenses. It is harder to do so in a way that does not prejudice future growth. Just as important is to do a hard analysis of the firm’s revenue sources — meaning clients. Is the client base growing? Has the firm been able to make inroads into new practice areas or new clients in existing practice areas? This can be a challenge at firms, even for partners. Unlike publicly-traded companies and the mandatory disclosure rules that govern them, firms are private enterprises. And even partners are at the mercy of management’s willingness to share the firm’s true financial position. But you need to do your best with the information available to you nonetheless.

Finally, market analysis should never be done in isolation. There is always a benchmark or index to compare your firm’s performance to. Opportunity cost matters when it comes to investments, just as it applies with respect to your career. Ultimately, everyone wants to be involved with a firm or group that is on the upswing. Because like investors, your willingness to devote your time and energy to an endeavor is dictated at least in part by your hope for a return on your investment. If there were a law firm stock market, would you be buying or selling your firm’s shares?

Please feel free to send comments or questions to me at gkroub@kskiplaw.com or via Twitter: @gkroub. Any topic suggestions or thoughts are most welcome.


Gaston Kroub lives in Brooklyn and is a founding partner of Kroub, Silbersher & Kolmykov PLLC, an intellectual property litigation boutique. The firm’s practice focuses on intellectual property litigation and related counseling, with a strong focus on patent matters. You can reach him at gkroub@kskiplaw.com or follow him on Twitter: @gkroub.

Sponsored