The Easy Class/Hard Class Dilemma: Do I want a 4.0 or Do I want to learn?

Tags

, , , ,

There is a very interesting conflict between the academic advisers and the career advisers at our school. Academic advisers recommend that we take difficult challenges that push us to the limit, whilst the career advisers recommend taking “easy As” that could boost our GPA and allow more time for internship/job applications. Whilst both have a good rationale behind their recommendations, the conflicting incentives make the students lose focus. They are forced to pick between becoming smart and becoming employable.

And taking liberal arts classes, and then getting straight As don’t exactly make you as employable as you think. Wall Street recruiters snatching up confused students with attractive salaries distort how employable students really are.

This liberal arts failure leaves students with no practical skills at all, leaving them to defer to sources such as Goldman Sachs to turn them from graduates into professionals.

At the end of the day, what is important is arming students with practical abilities so that they can delve into their professional lives without too much on the job training. Whilst liberal education makes you a great “problem solver”, it doesn’t give you any industry knowledge or technical skills at all. Sure, you could argue that since the kids are smart, they could easily learn everything themselves, but temptations that exist on any campus easily prevent them from achieving any effective independent study of technical skills.

I think the solution at the end of the day is rather simple: create environments that incentivize development of technical skills. An economic modeling club, for instance, where groups of students run projects together to develop their computational analysis skills whilst reviewing the material they learned in class would be ideal for cementing technical skills.

And, I guess the way to develop these environments is through students themselves: student organizations and clubs are the perfect way to motivate each other to develop technical skills. Besides, learning something with some friends is much more fun than learning it by yourself.

I personally believe that universities should be encouraging students to start organizations where students work in groups to develop a specific technical skills, especially in liberal arts colleges. That way, college students won’t be panicking near graduation and look to Goldman Sachs to fulfill their technical training.

No technical skills? Don't worry.

Advertisements

“Warhol Works are Worthless”: Constrained by Laziness or a Conscious Choice?

Tags

, , ,

I recently overheard someone say “well, Warhol works sure are worthless.” You definitely can replicate an Andy Warhol given the right tools. In fact, he taught his assistants how to replicate his silkscreen prints and then sold them at ridiculous prices. It is very easy to accuse Andy Warhol of being “lazy.”

Rather than start with an extreme example, let us start with a more moderate one of potential accusations of artists being “lazy”.

Gustave Courbet, The Meeting; Bonjour M. Courbet, 1854

Despite wikipedia claiming him as “one of the leaders of the realist movement“, the stiff figures in Courbet’s The Meeting would like to suggest otherwise. The comical beard along with the awkwardly inserted dog destroys the impressions of “realism” in this painting.

Gustave Courbet, The Hammock, 1844

Gustave Courbet, Woman with White Stockings, 1861

After examining the next two paintings, his status as a leader of the realist movement becomes more apparent. He has demonstrated that he had the capability to draw figures in delicate stances both before and after the painting of The Meeting. Rather than assume he had an off-day, it is much more logical to deem his stiff figures as “intentional.”

The suggestions of this painting is that Courbet indeed has the capabilities to paint in a genuine, 19th century realist style. Rather, it is much more likely that he was either trying to suggest something with the stiff figures or experimenting with a different style. Not just being lazy.

Now back to Warhol. It is very easy to draw the conclusion that he is some lazy guy who is simply good at scamming rich people. I mean, he even admits that that is what he does:

“Being good in business is the most fascinating kind of art. Making money is art and working is art and good business is the best art.”

To top it off, he calls his studio “the factory.” His neglect to hide his intentions of cashing in on easy-to-make-art may make Warhol appear as the biggest scam artist in history, but does this mean he is lazy, and wants a quick way to cash in on his name?

Andy Warhol, Turquoise Marilyn, 1964

What you don’t see often of Warhol is his amazing work as a director (see this particularly interesting short), event organizer (huge multimedia events such as the Exploding Plastic Inevitable), painter, print maker, sculptor and of course the initial work he put into developing the silkscreen method he uses to “mass produce” in his “factory.”

What I love personally about Warhol is how he presents himself: a tool out there just to sell replicated silkscreen prints at ridiculous prices. From his repertoire of skill, it is rather clear he isn’t forced to do what I have heard many friends call “work I can teach my son to do”, but rather made the conscious choice to express himself through that method. Hence, when you buy his work, you are buying into his philosophy and attitude. And despite the ridiculous prices some of his works get at auctions, some of his prints can be found for as low as (ok, I’m using this term loosely) $20,000. And besides, there are much worse ways to spend you can spend $20,000 if you have it anyways.

Andy Warhol, Campbell's Soup Cans, 1962

Warhol certainly has discarded thousands of prints in the process of arriving at his famous works. And I feel there is a lot of value in that process of thought an experimentation. In my opinion, the experimenting on the side of Warhol and all the work to build his brand definitely doesn’t qualify him as “lazy.” Whether he is “overpriced” is another story, but I find that what defines a good artist is not found simply in the end product, but the process in which they arrived at the end product.

Andy Warhol, Cars, 1986

Gods of the Market: the Importance of having “Faith”

Tags

, , ,

For me, religion is something to fall back upon when everything goes wrong. To this point, I feel as though there has been no god to speak of up to this point in finance, making “believing” that the market will recover ridiculously difficult when you are watching your wealth bleed away. Having no recovery to believe in, panic selling is triggered, and the markets begin to fall.

What if, though, that someone, or something in the market can immediately swing market sentiment in the other direction, and encourage a rally within the most dire of situations. Two people I can think of approach this status of a market god: Ben Bernanke and Warren Buffet.

I’m not necessarily referring to Ben Bernanke, but more to the Chairman of the Federal Reserve. Always at the front lines dictating the movement of the country financially (though some people disagree), the chairman of the federal reserve has a sway on the market that is unmatched by anyone else. The sheer power of monetary tools (the mere notion of a potential round of quantitative easing is enough to start drawing speculation in the market) gives the chairman of the federal reserve quite some power in the market.

Warren Buffet’s investments mean much more than the money itself. Buffet drops big deals on big companies for more than just “investment”, in my opinion. I feel as though his act of injecting $5 billion of capital into Bank of America did much more than set him up for a handsome profit. Contrary to what their executives were saying, their bank needed capital, as public confidence was eroding fast. The act of “the” Warren Buffet investing into BofA created a stimulation of public confidence that the bank sorely needed. I feel as though another banking panic may have occurred if Buffet did not make such an investment. Not only the respect people have for him and his story of building up Berkshire Hathaway, but also the ability for Buffet to bring faith into a company that had almost none makes him, to me, a god of the market.

What’s more important in the roles of these two people is their ability to create “faith”. The markets are swung by “faith” in the economy, and whoever can create “faith” when there is none can truly save a nation. This is in my opinion why FDR was one of the greatest presidents of all time. In a period where people were losing faith in the market, he was able to create a brighter outlook at least increase the “faith” people had in the economy (though the fiscal effects of his policies are completely up for debate).

Did I miss anyone who deserves to be a “god” of the markets? Please comment below.

What you love, and what you love in a job

Tags

, , ,

Someone has probably shared this tip with you at some point during your life. Don’t do a job you hate, and follow your passion. This is both right and wrong, as it addresses a critical point that you should never do something you hate, but misleads you into thinking there is necessarily a correlation between your hobby and your job.

I was talking to my friend SL, who loves philosophy. But he would never consider becoming a philosopher. Not because a philosopher doesn’t make money (he personally wants to be an economic grad student in the short-term, which doesn’t make that much money either), but because it isn’t something he would do as a job.

Something I find most cpeople don’t realize is the distinction between “what they love”, and “what they want to do as a job.” This isn’t a proposal that you should blindly develop a career in finance, and ignore what you truly love, but to simply recognize this distinction.

This distinction is very simple: you like to do what you “have the most fun doing”, while you want to find a job where “you want to perfect an art.” Using myself as an example, I have the “most fun” playing video games, but I want to “perfect the art” financial analysis. I spend a lot of my free time playing video games because they make me happy, but I find because it is what I do to relax, I never bother perfecting the art of gaming, and not bother that much about errors when I play. However, when I do financial analysis, I don’t always have fun. However, I gain satisfaction as I rise in what I’m able to do in terms of analyzing more and more complicated problems. Hence, even though I’m not always having fun, the strive for excellence makes it a good career choice for me.

Sure, some people “have the most fun doing” the same thing they “want to perfect as an art”, but do recognize most of us aren’t this way. Recognizing this fact will ensure that 10 years down the road, you are actually doing a job you can progress in, and not just something you love to kill time with. By realizing exactly what these two components of your life are, you can hopefully reach a better work-life balance.

 

Perfection, but Lacking Passion: They Can Tell When You Don’t Love your Work

Tags

,

I had the luck to be treated to a certain Michelin 3 star restaurant in Napa valley today. It was amazing to say the least. Everything was absolutely perfect. The food, the service, the atmosphere… It is exactly what its reviews promised it to be.

One thing was missing, though, that made it not as satisfying as some other restaurants: passion. The owner, being the celebrity chef that he is, is excellent in making sure his kitchen cranks out quality food, but his busy days working on all his different restaurants naturally makes the food lose its warmth.

Now, this isn’t a “3 star” problem, as I have eaten at 3 star restaurants that inject their passion into their food (hmm…maybe its time for a stint in the food critic industry). It merely is a problem that slowly arises when your attention is diverged to something else. And trust me, the customers can tell.

I see banking (private, commercial and investment) having these inevitable problems too…only on a much more magnified scale. It is certainly not hard to identify when a wealth manager is recommending you products that look like they were grabbed out of thin air. It also isn’t very difficult to tell if an equity report had free cash flow numbers that seemed to be taken from a fortune cookie.

I guess what I feel is most important over your bank (or restaurant’s) reputation is showing your love for your work. And I guess from the trend we’re seeing in finance, people who love what they do is getting rarer and rarer.

Not that this restaurant wasn’t one of the most amazing ones I have eaten at. I was just searching for a bit more love from the chef for his art. But like a three star restaurant, bulge bracket banks should stop taking their customers for granted, and show more love for what they produce. A report from, say, Goldman Sachs is great and all, but if the banker can put the extra touch in to convince the reader they really were passionate and proud of their work, it does so much more in terms of convincingness.

In any restaurant, be it banking or restaurants, I feel as though there is nothing more important than making your customer feel loved. Show some love for your clients today!

Requiem for a Dream: Finance Version

“A good drug dealer is like a good investment bank, they don’t try their own products.”

Imagine an amazing product that takes advantage of other people’s addiction. Wouldn’t dealing such a product be profitable? As all those with a minimal understanding of the drug industry would know (or watched Requiem for a Dream), dealers should never try their own products.

Well, Goldman Sachs certainly is enjoying the benefits of selling credit default swaps. Let’s think about this for a moment, and remember the last few banks who sold credit default swaps in the late 2000s financial crisis. Depending on the payout, we could be looking at some very screwed dealers. And not just Goldman Sachs, all the banks that sold Credit Default Swaps on Greece, thinking that they could get easy cash on paranoid investors may just slowly watch their non-existent capital get whittled away.

I find it intriguing that people are still selling CDS on bonds that have a, according to the market prices, 99% chance of default. In my opinion, selling credit default swaps for the past few months is analogous to a drug dealer addicted to their own product. And, I personally don’t see a good end to these people who bet that Greece wouldn’t default.

False Salvation of the False Salvation: “I can’t be bothered to think”

Tags

, ,

So many of my friends compare finance to “The Matrix”. It’s warm and comforting inside, but your life energy is being sucked out of you for the mental stimulation you receive. What if, though, finance is the salvation and we’re just grasping at reasons to not accept it? What if we aren’t in the Matrix?

A financial world creates such a conflict simply because people are looking at it as salvation, when it in fact is nothing more than another job. Working in finance will not find you a wife you love, fix your parent’s marriage, forge lasting friendships, or even necessarily make you better off. It all depends on whether you love the job.

But here’s the problem: how would you know if you love the job or not? There is no way college students can determine whether they will enjoy working in finance. Even a litmus test through an internship doesn’t answer all the questions about a career in finance. You may be able to “take” the workload considering how much you know the salary is, but will you give the same response five years of fatigue into the job?

The problem of this problem is that it is simply too complicated. And when encountered with complexity, the natural human reaction is to take the path of least resistance; a path where recruiters have already laid out a clear path for you. Financial service applications are so similar to college applications that the jobs just seems so within reach of students. On the contrary, deciding what you really like takes up too much time. You have to explore different things at the opportunity cost of falling behind your peers in networking and specialization. You also have to spend time actually contemplating rather than working to improve your resume. And the fact that career centers of top 10 universities are dominated by financial firms mean that if you ever want to explore an alternative field, you are completely on your own.

A lot of my friends are really smart. But no matter how hard the math class they are taking, the honors that they receive, the competitions that they win, the internships that they land…they all struggle to fully explain what they want to do with their life, and why they want to do that. I think a big problem of this is difficulty of individual contemplation. Individual contemplation about the vast world of careers is difficult when you don’t have a framework to work within. The diversity of jobs simply means you can spend an infinite amount of time exploring all different types of jobs and still end up nowhere. For most students at least, the unbounded time frame to find which they truly love is too big a cost. I ask a lot of friends who want to do finance the question, “If you want to do finance for the money, why don’t you look into petroleum engineering? They make even more straight out of college.”

I get a variety of answers from, “finance is more ‘interesting'” to “I don’t have the skill-set to petroleum engineering.” But one of my friends was extremely honest: “I didn’t bother.” Ironically, the idea of a liberal arts education is to help you appreciate the intricacies of many different subjects, but many students don’t even bother looking into other industries as deeply as they look into finance. The fact that they have a bounded area to work within simplifies the process for them, and allows them more time to do what they do best: get As and build their resume.

I find it sad the people no longer have the time to contemplate about what they want to do with their life. The decision of where you are heading after college determines the outlook for the rest of your life, yet exams, extracurricular activities and internships suck away all the precious time needed for contemplation. The weight of a multivariable calculus midterm is but a drop in the ocean in terms of how much it affects your life, but picking your career path is something that could completely change your life. However, students still prioritize “getting As” over career contemplation. Our society has screwed the priority of our youth.

Now, many of my senior friends plunging into finance have told me “I’ll quit when I have enough money” or “I’ll quit if I don’t like it.” But the world of finance doesn’t work like that. People are really bad at giving up material goods that they are expecting, so dropping from a $250k a year salary at a bank to a $50k a year salary being say, a wine sommelier will be difficult even though you clearly enjoy one over the other.

And this problem is leaking out of the elite universities and into the world. Schools are giving their youth less and less time to think about their careers, meaning at the end of the day, they have an incentive to take a job from someone welcoming them with open arms and a high salary: Wall Street.

I remember on a Chicago fall last year, in Millennium Park, a young man was playing his violin. He was playing a slow, sad song that really matched the depressing weather of Chicago. He did such a good job I stopped to listen. The cars driving by drowned out the full beauty of his violin, but he still played really hard. He had excellent control of his bow, and a very expressive vibrato. I didn’t have change on me, but I was still tempted into dropping him a $5. I asked him, “Are you studying music?”

He shook his head. “I’m studying economics”, he said.

“What do you want to do when you graduate?” I asked instinctively.

“I’m not from a target school, but hopefully I can get a job at an investment bank or something,” he chuckled.

I smiled and walked away. He continued playing his violin. That sad, depressing song on his violin. I wondered what he loved more, playing the violin, or making models in finance?

How to be Pro in Finance: Always Making the Right predictions

Tags

, ,

The best way to become pro at finance is to make random calls. Yep. Here’s how it works: say the market is going up or down, and then simply wait for it to happen. The market can’t go up or down forever, so eventually you’ll be right.

This is the hazard of calling recessions. For every right recession call, there will be a wrong one. If you make a wrong recession call, everyone shrugs it off. If you make the right one, you instantly rise to the status of god.

Hence, how do we separate the people who make blind calls and get lucky and those who truly understand the complexities of the financial system?

The reality is, it’s really difficult to do so. We can turn to figureheads like Soros whose name is always there during a crisis, but even Soros misses out on most of his bets (he just makes extremely high return bets). And the odd incentive system is that making the right calls at the right time boosts your public image much more than wrong calls deduct from it. This creates a skewed incentive to keep on making big calls.

Who is god, and who is just lucky in the financial world? That’s why they say fund managers who consistently make 30% are much more valuable than fund managers who inconsistently perform.

To perform for the long-run, maybe a more sustainable strategy should be looked at. But to succeed at finance in the short-run, do a big all-in play and be ready to say “I told you so.”

“Oh my god, it’s all the fault of the Black-Scholes model”: common misconceptions about the model

Tags

, , , ,

Well, it isn’t surprising that everyone blames the model that all the bankers are using. But is it really the fault of the formula, or the people using the formula? That is a distinction I believe we have to make.

“I sometimes wonder why people still use the Black-Scholes formula, since it is based on such simple assumptions – unrealistically simple assumptions.” — Fischer Black

Here are the assumptions of the model from The Pricing of Options and Corporate Liabilities:

a) The short-term interest rate is known and is constant through time.

b) The stock price follows a random walk in continuous time with a variance rate proportional to the square of the stock price. Thus the dis- tribution of possible stock prices at the end of any finite interval is log- normal. The variance rate of the return on the stock is constant.

c) The stock pays no dividends or other distributions.

d) The option is “European,” that is, it can only be exercised at maturity.

e) There are no transaction costs in buying or selling the stock or the option.

f) It is possible to borrow any fraction of the price of a security to buy it or to hold it, at the short-term interest rate.

g) There are no penalties to short selling. A seller who does not own a security will simply accept the price of the security from a buyer, and will agree to settle with the buyer on some future date by paying him an amount equal to the price of the security on that date.

Essentially, this model assumes perfect information, stable markets, and no brokers as middle-men to markets. This beautiful equation is nothing but unrealistic. Black and Scholes founded the formula not to make money, but to “find the truth.” Like many other economists, their work is the result of nothing other than their inherent desire to study economics. In fact, when they first initially tested the model, it was nothing more than field testing. They bought some options, and lost money.

Why? The Black-Scholes model is nothing more than a theoretical ingenuity. The performance of Long Term Capital Management, the hedge fund in which Myron Scholes and Robert Merton were on the board of directors, indicates that knowledge of pretty formulas does not necessarily lead to success.

This brings up a big problem: is it the fault of Black-Scholes that the options market has caused much grief for the common man? I think the problem is similar to Einstein’s theories were instrumental in facilitating the development of atomic weapons that kill hundreds of thousands of people, but that by no means suggests he is responsible for the use of the bomb. Similarly, the Black-Scholes model does not in itself prevent irresponsible use. Rather, the user is required to remain diligent and responsible whilst using it. It led to a boom in the establishment of the modern options market, but it by no means promotes irresponsible and unethical trading behavior.

What’s more, in fact, modern traders don’t even use the original Black-Scholes model anymore. They either use advanced derivations or separate models to valuate options. For instance, Goldman Sachs only uses a derivation for the Black-Scholes model for short-term options on long-term bonds.

That being said, the Black-Scholes model is a rather misunderstood model that has been all too often linked with “evil.” Rather, it was just the result of two men and a dream for economic truth. As for its “evil”, I think it may all just be media hype.

“Why is my office filled with upper-middle/upper class kids?”: Exploring HR Alternatives in the Financial Services Sector

Tags

, , , , ,

There are plenty of reasons that socioeconomic diversity can contribute to a more creative and vibrant workplace. In fact, almost every single bank claims that such diversity helps the growth of their firm. In fact, it has become a buzzword for so many employers.

But how much diversity is really present within the industry? Simple test: for all of you who work/have an internship in finance, find out how many people in your office come from a family who makes below $48K. All my friends who tried this found at most one person with this economic background. Well, I guess in a society where being a rich dumb kid gives you a higher chance of graduating from college than a poor smart kid, it’s not surprising the upper-middle class and upper class kids are the ones heading towards finance. With networking being such a crucial part of finance, it is inevitable that kids from better-off families who interact with other better-off families inevitably have a higher possibility of landing a connection that will help them in their financial career.

Buffet got exposure to the world of finance because his father was a stock broker. Some kid in a lower income area probably gets exposure to the drug trade in the neighborhood he is in. Who is more likely to work in finance, and who is more likely to deal drugs? That’s the inevitable tragedy of income inequality hindering social mobility (I’ll refrain from debating this issue now, but I might just right up an analysis of this issue if enough people want me to…)

Children born into better-off families receive better education, have better connections, and have little to no pressure to helping put food on the table. No wonder they don’t have time to look up how to make discounted cash flow models on the internet. Here’s my problem with this phenomena from a human resources standpoint: we have a large pool of applicants with a lot of potential, but not the right education. Why is no one reaching out to them?

Granted, some areas of finance such as trading is more accessible to those without prestigious connections, but other areas such as investment banking and wealth management have a surprisingly low level of socioeconomic diversity. I feel as though this pool of talent has to be tapped into, and someone really should see the potential of many kids who don’t have the luxury to explore the financial services industry. In addition, the morals and ways of thinking of the entire industry may change if we substitute some arrogant upper-middle/upper class kids for their humbler counterparts who simply didn’t have a shot at a job because of personal constraints.

I’ve talked to enough recruiters that I understand three important criteria for hiring that doesn’t rely on having an expensive degree and well-off family:

1) Be smart

2) Learn fast

3) Be a team player

These are criteria that almost every single recruiter desires, but in fact may be extremely pronounced in certain kids who didn’t have the luxury to explore this industry. The problem with the industry is that the elite university douchebags to honest, humble workers is much too high. (not to generalize and say everyone who graduates with an econ degree from an elite university is a douchebag, but there certainly is enough out there to change the collective conscience in the financial sector)

Government regulation is debatable in terms of “making finance better”, but tapping into an undervalued labor pool full of potential is certainly something more human resource departments should be looking to do.