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Thursday, June 02, 2011

High Finance and a Low Down Dirty Shame

Its summer on Kent Island at long last. We have had a couple of 90 degree plus days and I can feel summer creeping into my veins. It is a more subdued roar these days as my life situation has changed in the past year. It is not so much the firing of growling engines and popping of many beers as it is the firing of the grill and the sipping of cocktails by the pool this year. Truth be told I am getting to old for those 48 hour blasts of depravity that marked summers past so this is all a good thing. Coupled with the fact that the slowdown is accompanies by the perfect combination of lover friend and wife and it’s all good. Summers here and the good times will roll. I ll probably slip in a few wild nights along the way but this time I ll have a partner in crime.

Moving on I find that I took some shit about my last posting here. At least one old friend appears to have stopped talking to me. Let’s review. Earlier this year I said:

My second piece of advice that I can share at this point in my life is do not go into the financial business, especially investing. It’s too fucking hard for most and the plain simple truth is that those of us who do this for a living do not really add much to the world. We may help a few clients do better with their money over the years but for the most part the more honest among us will admit we do not add shit to the world we live in.

I really did not mean that as a criticism of the brokers I have worked alongside for decades. It was really meant more at those who journey to Wall Street to be rocket scientists finding new ways to slice and dice securities. Use your degree for something more useful that creating reverse convertibles or auction rate preferred stocks. The world does not need a new way to slice and dice a damn mortgage. I really had in mind the math major who wants to open the worlds next stat arb fund or be the king of the world at Goldman Sachs. It’s a lot fucking harder than you think it is and it really doesn’t add much to the world.

My friend and a few others took it as a slap at brokers. He also pointed out the business had been good to me and it was not right for me to cast aspersions on the profession. I wasn’t but as long as the subject has come up lets talk about it. I entered the brokerage business back in the 1980s. We sold stocks and bonds, maybe a few mutual funds to investors. A few of the braver souls traded options and futures. I loved it. If you worked real hard and learned how to make some money for your clients you got more clients and built a business. You could specialize in municipal bonds and cold call your way into a six figure income. Many of the firms were still partnerships and there was a lot more caution when it came to risk taking and product invention. It was the best job in the whole damn world as far as I was concerned.

When I left I was a dinosaur. The firms were all public companies and the emphasis was on asset gathering and fee generation. Brokers were taught not to be stock pickers but to gather money for “professionals” to manage. Product wholesalers would wander though the office and with a straight face look you in the eye and tell you a variable annuity with a 7% commission was a good deal for a customer’s IRA. After all it had benefits. They forgot to mention that the client paid for the benefits and had to fucking die to collect them. They would tell you it was far too risky to sell puts for your clients but then push a reverse convertible note. Hey guys, read the term sheet..its the same thing! Brokers were urged to “allocate clients assets” according to some model without ever mentioning that everything in the portfolio was highly correlated, The only time the idea of non-correlated assets comes up these days is when someone wants to sell a futures fund with ongoing fees streams and commissions that have rarely delivered solid returns. It is not the business I entered all those years ago and I am less than convinced the changes have been for the better.

There are a lot of great folks in the financial services business. The fact is there just too many of them. There are almost 8000 mutual funds in the US. There are 9400 hedge funds. There are over half a million registered representatives. Close to 6 million people are employed in financial services including brokerages asset managers and other investment related professions. Goldman Sachs alone has more than 38,000 employees.

Of course some people will go into the business. If you have a passion for it you should. I don’t mean just a passion for making a shit ton of money but a deep and lasting passion for the markets and all that entails. Are you willing to do the homework to really learn the markets? It’s a steep learning curve. Don’t tell me you passed the exam and took your CE classes so you’re qualified. That’s a lot like your doctor telling you he passed the entrance exam to Med School and remembered to wipe his ass this morning so he’s ready to do your surgery. You have some self study ahead of you and it aint gonna be easy.

First this is a sales business at the end of the day. You have to convince people to do business with you. With that in mind you need to read Nick Murray, Leroy gross and Tom Dorsey on how to manage and grow your practice. You need to learn how to make a presentation and tell your story. If you can’t do that it is going to be a very tough road. Once you know how to tell the story let’s make sure you have a good one to tell.

A good portion of your life and your business will be in and around the stock market. You need a deep in depth knowledge of markets whether you are selling individual stock, managed accounts or mutual funds. You have to read them all I am afraid. It does not matter if you favor growth value or a technical approach to the markets. The other schools of thought are active participants in the market and will have an impact on prices. You need to read Ben Graham, Joel Greenblatt and Marty Whitman’s value investing books. You also have to read and learn the great growth stock pickers like Navellier, Phil Fischer, Mitch Zacks and William O’Neil. You also need to read Steve Nisson, Larry Williams and John Murphy on the basics of technical trading of stocks. Trend traders have a huge effect on stock prices at times so Michael Covel s books on the subjects are on your reading list as well. Counter trend traders play a part in this mix so add Victor Niederhoffer to the list as well.

That’s a good start. Now let’s add Damodoran on valuation and investment fables. Probably better read all the editions of Jack Schwagers market wizards as well to gather different viewpoints. You really need to understand as many different market viewpoints as possible Guy Wyser Prattes Risk Arbitrage is also necessary homework.

You need to understand the workings of fixed income and interest rates as well. Start with James Grant for the history of interest rate markets. When you are done that move on to Frank Fabozzis fixed income handbook. You also need to read Calamos on convertibles in my opinion to really get a grip on taxable fixed income. Back to Fabozzi again now for the handbook of municipal bonds as they will most likely be an important part of your business if you deal with individual clients. Jim Lebenthal on munis also makes a lot of sense if they will be a big part of your repertoire.

Now we have to put all this together. You should read Peter Bernstein on capital markets and Risk. David Darst on asset allocation is absolutely mandatory . You need to learn how to diversify and allocate portfolios and not just use an out of the box software package provided by your firm. To take it ot the next level read Phil McDonnell on optimizing portfolios.

You also better read Van Tharp and Steenbarger on the psychology of being a trader and investor. This is as much to help you as your clients. Some nights you will be euphoric and other as a friend of mine once put it you will want to” stop in the middle of the fucking bridge and just jump.”

If you plan to trade options and have not studied McMillan, Euan Sinclair, Taleb or the like on options pricing I think you are criminally negligent. Every time you enter an options trade keep in mind that in all likelihood the firm buying or selling that option from you has had to install special air conditioning units to cool the supercomputers they are using to make prices.

That is a bare minimum fucking start in my opinion. Not only should you read them I think you should have a passion for this stuff deep enough that you want to read them. A lot of this can now be gained though the excellent little books of investing put out by Wiley and Sons but some of it you just have to work your way through. If you decide to adopt a specific style of investing you have to go still deeper into the subject. Most of all you have to keep reading and educating yourself all the time. On top of that you have to measure your success by your client’s success and not your paycheck If you do that the paycheck will always be there.

If we cut the number of brokers in half and only kept those who have the attitude and desire to be the best and what they do and learn all they need to know to master the markets somewhat, brokersand clients alike would happier and richer.

Just one mans opinion of course.

I wonder who will stop talking to me this time?


cemott3rd said...

I have to whole heartedly agree with you, on both of your main points. One should always try and go into a profession because they have a true passion for it, and not mostly because they'll make a sh!tload of money doing it. God knows I did, it just doesn't pay a living wage in this country unless you are able to own your own place...which is a large risk here as well. And unfortunately I also believe you are right about your trade generally not adding a whole lot to the overall embetterment of society, just shuffling paper at a sometimes very profitable rate....sort of reminds me of lawyers. =-0 I say it is unfortunate because over the last 30+ years our nation has gone from 25% of our GDP being created by manufacturing and 11% of our GDP from finance, to 12% from manufacturing and 22% from finance...That might be a good thing if we were Switzerland, but not for the USA!...and now that the Great Reaganomic Fire Sale is over, we have little to show for it but rust...that never sleeps. =/

m said...


I was looking for a list of books that a student of the markets should study to get some understanding on what really happens in the markets. Your post helped me get that list.