Thursday, June 30, 2011

Finance Rumblings: Here We Go Again?

Just when we thought all had turned around and we sensed the corner had been turned, we hear banter about financial institutions pondering lay-offs and staff reductions. Haven't we heard these rumblings before?

As big banks and other financial institutions stumble toward the end of the second quarter, 2011, published reports say lay-offs are looming. Senior managers have begun to panic over whether they will be able to generate returns that will match those of 2010, especially with deal flow, trading activity, and the economy sputtering.  Historically, the first response of financial institutions (from trading desks and deal teams to operations groups and compliance functions) is to reduce personnel numbers to brace for rougher waters.  And always, the method that comes to mind to reduce is "LIFO" outplacement--the last in are the first out. Critics say the first reaction is to protect compensation among the elders when the industry must weather a brief storm.

This time around, some financial institutions say they will manage a hint of a slow-down in intelligent, efficient ways.  Banks, funds, dealers and other financial institutions in the past often reduced staff too quickly. Once markets signaled a decline, institutions marshaled out the door the young, ambitious talent it had just hired with effusive enthusiasm.  When markets turned bright months later, firms with swiveled heads rushed to replace the talent it just let flee.

Financial institutions promise they will manage staff numbers better the next time. So at midyear, 2011, when banks and firms sense turbulence heading into the second half (not a crash, not a collapse, not a double-dip recession, but a pause or a correction of some kind), they must restrain themselves to avoid rampant lay-offs in areas where they will be desperate for analysts, team leaders, MBAs and finance experts once markets and activity surge again.

Still, the professionals in these roles must be prepared--from managing director, senior vice president to analyst intern. In fact, this could be an opportune time for self-assessment, the time to ask introspective questions about what's next or the time to make sure you are in sturdy spot if there is commotion around and about:

1.  Are you in a group, unit or business area that could be vulnerable?

2.  How would you expect business-unit leaders to respond, behave or react if there is a prolonged slow-down in the business? How have they reacted or behaved in the past?

3.  Do you understand the positioning, the strategy or the vulnerabilities of your group or area?  Are you aware of the profits and losses (or expense burdens) of your group?

4.  Have you performed as best as possible, given the circumstances? Have you done something recently (managed a project, done a deal, generated new business, or developed staff) that can separate you from the rest?

5.  Are there other opportunities worth exploring? Could this be the right time to move to a new area, new role or a position with greater responsibility and visibility?

Often finance professionals, from those at entry-level to those in privileged perches at the top, will say they are too mired in current problems, deadlines, and group turmoil to address career-related questions.  "We are just trying to survive," everybody says. 

Pausing and assessing what's going, nevertheless, might be worth the time and attention--even if you are exhausted from trying to develop new business in shaky markets, taking on extra projects to prove you can still contribute, or existing in an environment of uncertainty and worry.

Whether they are Consortium MBAs or others with extensive experience, there are many stories of how people thrived when the ground was shaking beneath them, when they took advantage of tenuous circumstances or when they used them to springboard to a better position. This is the time when equity analysts might decide to transition into private banking, when a derivatives expert might consider being a foreign-currency risk-manager, when a top client-relationship executive moves into corporate staff management. Or when a senior manager agrees to take on more responsibility--more groups or more clients reporting into her. Or when the 10-year corporate citizen decides to pursue an opening at a smaller boutique.

It could be the right time, too, to reach out to networks, peers, and colleagues to share ideas, perspectives and concerns.  Not gossip, not hot leads to a new job, but information or insight about what's going on and where the industry is headed. Ideas about next steps and appropriate ways to manage uncertainty. What better time, say, than for Consortium MBAs in finance to reach out to share thoughts about where markets are headed from here, what the hiring trends are in certain areas of the U.S., what opportunities exist in foreign locations, and what the best ways are to confront uncertainty.

Tracy Williams

Monday, June 27, 2011

Overconfidence

One of the most documented of all psychological errors is the tendency to be over optimistic. In general, most people do not see the need to improve the way they make decisions, as they believe that they are already making excellent decisions. The unwarranted belief that we are usually correct is a major real-life barrier to critical thinking.

People exaggerate their own abilities and this is particularly common in managing their assets. Overconfidence often results in investors being fooled by small gains in a few trades, feeling much more in control of a situation than they are. Money managers, advisors and investors are consistently overconfident in their ability to outperform the market, but fail to do so.

For example, mutual fund managers, analysts, and business executives at a conference were asked to write down (1) how much money they would have at retirement and (2) what is their net worth now. The average figures were $5 million and $2.6 million respectively. The professor who asked the question said, “regardless of the audience, the ratio is always 2:1”. People are definitely very confident that they will at least make more money in future than now.

Overconfidence can lead to the followings:

1. Not having an investment plan
Perhaps the most common reason why investment plans fail is that the investor doesn’t actually have a plan. The very first step of a rational investor is to draft a plan stating investment goals and conditions. This is to make you detached from the whole investment business and follow strictly by the book not your heart.

2. Overtrading
In Odean and Barbet’s study of 78,000 investors’ accounts in a large brokerage firm from 1991-1996, the most active traders scored an average return of 10% compared to the less active investors’ 17.5% profits. And online traders suffer even lower returns as they tend to overtrade and thus lose money to brokerage charges.

3. Lack of diversification
Due to overconfidence, investors tend to invest heavily on a particular investment with the optimism that it will generate good returns. This lead to insufficient diversification of portfolios.

In general, overconfidence is caused by mental bias that leads investors to over-estimate their knowledge, under estimate the risk and exaggerate the control they have over a situation.

Happy investing,
Pauline Yong

Monday, June 13, 2011

Financial Services: How Are Black-Owned Doing?

What are the top black-owned banks, brokers, and asset managers in the U.S.? Has there been progress in financial services for African-Americans who want to start, run, own and manage their own firms?  Is the outlook better today than it was in the 1980s--or even a few years ago?

For the young black banker, broker, or trader, are there fair, reasonable opportunities to dream and aspire to starting a new firm?

Black Enterprise magazine just published its annual BE100s lists. The list shows what's possible and what's been done. The magazine every year publishes several lists of the top black-owned businesses in the U.S. for several industry groups.  In financial services, its lists includes the top banks, top asset managers, top investment banks and top private-equity firms.  Those lists suggest how much black firms have penetrated within the industry.

Review and analyze the lists in financial services, and applaud the courage, progress and showing among top black firms. But notice, too, there is still a way to go before many of the top firms find their way onto lists of top 100 or 200 U.S. banks, investment banks or asset managers.

In most cases, the firms are led by experienced leaders, many of whom started their careers at established institutions (like Merrill Lynch, Morgan Stanley, or Goldman Sachs), but decided at some point to take risks and do it on their own. In many cases, they sacrificed big bonuses and industry notoriety for the opportunity to manage and control their own (smaller) operation.

The lists in 2011 include many familiar names and firms.  In recent years, the rankings have hardly changed, yet prove how many were sturdy enough to survive the financial crisis or bounce back from episodes of dwindling business opportunity or market volatility.  If the financial crisis was a momentary blow for Morgan Stanley or Bank of America, surely it must have forced black-owned firms to pare businesses and develop new strategies. Black Enterprises's list shows how some bounced back and even got better.

Among commercial banks. Harlem's Carver Federal Savings, led by long-time CEO Deborah Wright, is the no. 1 bank (with $744 million in assets).  Just like their larger peers, black banks had to wrestle with dwindling capital and credit losses from mortgage portfolios.  Many are now trying to boost their capital bases to keep regulators comfortable.  Citizens Bancshares in Atlanta, led by former JPMorgan Chase banker Jim Young, leads black banks with the most capital with $46 million.

Since the 1970s, blacks have regularly started their own investment banks and broker/dealers. Many started their careers as investment bankers or institutional traders at major investment banks. Once they gained a track record of success, relationships with dozens of clients, and the silent backing of major institutions, they opened their own firms.  Some took advantage of the goals of corporations and municipalities that with open minds opened up opportunities for minorities in finance by including them in syndicate underwritings and new bond and equity offerings.  Blaylock Partners and Utendahl Capital are two of many examples. Jackson Securities, founded in 1987 by former Atlanta mayor Maynard Jackson, attached itself to Jackson's relationships and reputation in the South to become a significant municipal firm in the South.  The firm struggled after Jackson's death in 2003 and is now owned by insurance company Atlanta Life.

Black Enterprise's 2011 list no longer includes Blaylock, Utendahl, Jackson and others, but there are familiar mainstays.  Chicago's Loop Capital and New York's Siebert Brandford Shank rank as the top black investment banks.  Loop Capital is well known for its relationships with leaders of the City of Chicago. That has led to consistent lead roles in Chicago municipal-bond deals.

Siebert Brandford was actually formed from a venture combining Muriel Siebert, the New York-based broker/dealer run by Muriel Siebert, well known in New York circles as a woman pioneer in the securities industry, and Brandford Shank, the black-owned West Coast investment bank.

Williams Capital Group and M.R. Beal are two other familiar black-owned firms in the top 5. They have survived and thrived in the past few years, despite industry turmoil and uncertainty.  Christopher Williams, an MBA graduate of Consortium school Dartmouth, founded his firm in 1994 after stints at Lehman Brothers and Jefferies.  Bernard Beal, a Stanford MBA graduate, founded his firm in 1988 after leaving what was then E.F.Hutton. Over the past two years, Beal has been able sweep up talent from large firms that downsized and import talent (of all colors and background) to help boost his firm.

The top black asset managers, just like the investment banks, include long-time firms, with leaders who first made their marks at major firms.  American Beacon Advisors is the top asset manager (with $44 billion under management).  Tracy Maitland's Advent Capital management ($6 billion) in New York climbed into the top 5 this year.  Maitland, a Columbia graduate, started his career in convertible bonds at Merrill Lynch in the 1980s and at one point worked with Utendahl.

The top 15 includes John Rogers' Ariel Investment (Chicago) and Eugene Profit's Profit Investment ($2 billion) (Maryland).  Rogers, based in Chicago, started his firm in 1983, shortly after he graduated from Princeton, where he also played basketball.  Profit, a Yale football player successful enough to have played in the NFL for the Patriots and Redskins, founded his firm in 1996.

Black Enterprise now also includes the top black-owned private-equity and venture-capital firms. Black firms in this segment are much smaller and have not yet established a long-term record as black investment banks have.  But there is progress.  Some are affiliates or extensions of the established investment banks (Williams Capital, for example, has a private-equity unit.)  Ronald Blaylock, who once led investment bank Blaylock Partners, now leads GenNx360 Capital ($600 million under management), a New York private-equity firm focusing on investments in medium-size companies.  Hartford's Fairview Capital is Black Enterprise's top private-equity firm ($3 billion). 

For black-owned firms, challenges still exist.  In many ways, they are the same challenges that larger, known firms confront:

(a) the need for more capital,
(b) the long wait for a sustained economic recovery,
(c) the hiring and holding onto top talent,
(d) the uncertainty over regulatory reform,
(e) the urgency to find, nurture and keep clients (as borrowers, investors, depositors, or issuers), and

(f) the requirement that operating costs are under control and compliance is in order

Black firms face special challenges, too.  They know they need to establish and maintain credibility, the continual, grinding effort to prove they can provide superior service, advice, trade execution, pricing, or research, compared to larger, peer firms, who are heartless, fierce competitors. In financial services, business is not necessarily handed to them.

They have the monumental task of proving to corporate clients and investors that it makes sense to move business from Jefferies, UBS, Morgan Stanley, Deutsche Bank, or Wells Fargo to their firms.  They must show officials from California or Illinois that they can help the state borrow at a lower rate than that offered by Goldman Sachs.  They must convince the budding trader or broker that career prospects (in the long term) are better at their firms than at JPMorgan Chase.  And they can't ease up.

Somehow they find a way to survive, get the big deals done, make a difference in communities, act as adviser to large corporations and municipalities and hire the right people in crucial roles (trading, risk management, lending, compliance, research, and brokerage). 

Among all black financial-service companies, Chicago's Seaway Bank is the leading employer (200 on staff).  Loop Capital, Carver Federal, Washington's Industrial Bank, and New Orleans' Liberty Bank each has over 120 employees.

Historically, black firms tend to try to go at it alone, unless dire survival is at stake.  Hence, seldom do they seek to grow or increase market share by combining or acquiring a peer firm.  The black banker who worked 10-15 years at Merrill Lynch, founded his own firm and struggled to keep it viable and profitable--while maintaining complete control of the firm and its strategic vision--usually doesn't want to give that up in a merger, even if the combined firm is twice the size.   


While it is discouraging to some that after decades, black firms are still a blip in the financial-services landscape, it's encouraging that many of the firms have been around for a long time.

Tracy Williams

Sunday, June 5, 2011

Midyear, 2011: Perspectives, Outlook

Still looking for a sustained uptown?
We are all suffering fatigue waiting for a surging recovery in job markets and the general economy.  Every month or so, the news sours after a few months of hopeful, surging signs.

That--in a nutshell--describes midyear 2011.  A series of upturns and optimism followed by the stench of a momentum-killing downturn. 

MBAs in finance, especially those who embarked on careers the last decade, know these trends, teasing market movements and promising signs well. Many have adjusted to these ups and downs and press on.

As of midyear, 2011, the mood is not dismal. Uncertainty, however, always seems to be hovering overhead.  Many MBAs are finding jobs and meaningful positions in finance.  Job openings and opportunities are more prevalent now than they were in the depressed years of 2008-09.  Yet they may not be first-choice jobs or dream roles. While a select few are winning prize positions at investment banks or private-equity firms, most others are finding suitable spots at smaller institutions, boutiques and industrial companies and are content.

Consortium MBAs have seen growing opportunities in private wealth management.  The big firms, Morgan Stanley, Goldman Sachs, and JPMorgan, continue to hire large numbers of MBAs--right out of school or with a few years of experience in other finance roles. They have convinced MBAs from top schools to explore careers beyond, say, mergers and acquisitions or bond trading.   Big banks have turned asset and wealth management in response to the crisis, regulation and the likelihood that traditional trading and banking businesses will have difficulty achieving expected levels of profitability.

In midyear, 2011, market signs are unclear. One market, nonetheless, seems to have shown renewed life signs--the IPO market.  The evidence is not necessarily from a flood new offerings, but from recent banner-headline equity deals (Groupon's announcement, Linkedin's IPO, anticipation at Twitter and Facebook).  Technology and social networks have rekindled interests in equity offerings, although investors are still reminded of the busted dot-com bubble of the early 2000s.

Months and months after a new guidelines were enacted, financial regulation is still nebulous, arcane, and uncertain.  The rules are changing, but banks, brokers and funds are still stumbling to understand what the rules will be, how they will be enforced, how detrimental they will be to their businesses, and how certain instruments will be traded, processed and cleared (derivatives, most notably).  Financial institutions are going through proper motions, but many are at a stand-still on what the regulatory picture will look like 3-5 years from now.

Meanwhile, in midyear, 2011, insider-trading indictments and court cases are in the news, reminding old-timers of the dramatic insider-trading scandals of the late 1980s and early 1990s and reminding many that history oddly repeats itself more often than we think.

Lehman and Bear Stearns collapsed three years ago. Meanwhile, the barrage of books retelling what happened (at Lehman, at Bear, at Madoff, in mortgage and derivative markets) continues.  In the first half of 2011, new books telling dramatic tales of about Madoff, Goldman Sachs, mortgage-markets, and AIG have been published.  No finance MBA can keep up with cascading reading list, although many are already familiar with the subject matter and issues. Former Merrill and U.S. Treasury official Herb Allison just wrote a short treatise, not recounting the gory past, but proposing tough solutions.

Inside business schools and at many hedge funds, efficient-market theories have been analyzed and in some cases attacked.  Many are analyzing "asymmetries" of markets. Some are calling for an overhaul or review of older concepts; the crisis proved more than ever that markets are flawed.

Top business schools are now welcoming another class.  The MBA and the business-school curriculum and experience are still criticized by pockets of pundits and the public, who blame MBA-trained leaders, managers, traders and deal-doers for market and ethical lapses of recent years.  All business schools sprint to adapt, reform and make the degree as relevant as ever.  The degree is still in demand--among students, who have applied in near-record numbers in recent years, and among financial institutions, who recruit and hire by the hundreds when markets and business grow.

Diversity topics and issues are still on the agenda.  Few signs exist that big banks, financial institutions, and public companies have reduced emphasis, although even fewer signs exist that there is a notable pipeline of under-represented minorities or women who will step up to become CEO of a major financial institution soon. As ever, there is still work to be done, especially after the torment of 2008-09 discouraged much talent to explore opportunities elsewhere.

The recovery at midyear, 2011, has been a series of starts-stops, occasional stumbles, and promising upturns.  As many economists would say, just like most recoveries.

Tracy Williams

What happens when an economist fails to predict?

There was a famous economist, who was also a Yale professor who was once a very successful man, driven by chauffeured limousine, owned $10million worth of stocks but because he made a blunder in his macroeconomics view he lost all his fortune and died in poverty! He was known as the Milton Friedman of his time, the premier monetarist – Irving Fischer, the man who contributed to the Quantity theory of Money.

Where did he go wrong? During the 1920’s the U.S. was enjoying the fruits of the industrial revolution with new technology and new consumer products, one of them was the mass production of the Ford T model. Fischer believed in this new era and he was too optimistic about the macroeconomic data at that time. He was famous for having made a statement one week before the crash, on October 16th, 1929: "Stocks appear to have reached what appears to be a permanent plateau." He argued that stocks could not go down, and economists have had to live with that.

As a great economist he failed to see the Great Depression was coming and as a result, Irving Fischer lost his entire fortune. He was totally wiped out of his $10 million, and in the late 1940's his financial situation was so dire that Yale University had to buy his home and rent it back to him for free. When he died, he died in poverty and disgrace.

Do economists have more prediction power than the rest when it comes to guessing the direction of the market? In my personal view, I think stock investing is an art. There’s no fixed rule for it and definitely we can’t just rely on facts and figures to make decisions. Having an economics degree or a finance degree doesn’t mean you can do well in the stock market. What most investors need is a combination of experience, luck, knowledge and most importantly, good analytical skills.

I’ve been pondering how well I can predict the stock market too. In 1996, I saw the super bull run in Malaysia and thought we were really the “tigers” of Asia. However my dad told me something that I will never forget! He said it could be a bubble. I was very puzzled and he explained to me further how the asset bubble was formed and how the houses were in over supply at that time because everyone thought they could make money from assets and not from production!

Rober Kiyosaki said he has a rich dad and a poor dad, but I always tell people I’ve a “Wise Dad”! I learned about the virtue of value investing from my dad because I saw how his portfolio ballooned to hundred folds when he invested during the 1997-98 Asian financial crisis. My dad doesn’t have economics or finance background, but he graduated from University of Malaya with Engineering degree. To me he’s a very successful investor. Through my dad, I think I’ve found the key factor to success in stock investing, which is:

KNOWLEDGE + ANALYTICAL SKILL + VISIONARY

Having knowledge alone is not enough, because knowledge is just a source of information. We need further analysis to get to the possible effects of the source. And we must have a visionary perspective of the whole situation to see the bigger picture.

Irving Fischer was a knowledgeable man and I’m sure his analytical skill was superb but what he lacked was “visionary”. He was unable to see the bigger picture into the future and was blinded by the rosy scenario in Wall Street.
As for me, I’m still learning. If I continue to polish my skills through learning from successful people I believe I’ll have more successful and rewarding investment in years to come.

Happy investing,
Pauline Yong