加载中…An Investment Banker's confession
(2008-12-08 03:52:07)
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分类： 谈史论经 |
An Investment Banker's confession: How I prepared and waited for the recession from 2003
This blog came from my email threads with a friend who's a long-time investment banker, both in US and in Asia. He's sharing many great thoughts re financial and career management.
With his permission, I am reposting it here. To protect his privacy, I have removed all the identity information. And let's call him "Mr. M".
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from: M
to: Forever Himalayan
date: Dec 3, 2008 at 6:01 am
Long time no chat. How are things going where you are?
M
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from: Forever Himalayan
to: M
date: Dec 3, 2008 at 9:23 am
Thanks for your note. I am hanging in here :-). How are things going in Asia?
Is your firm still hiring MBA intern? I'd like to introduce a friend (1st year MBA) to you if yes.
Forever Himalayan
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from: M
to: Forever Himalayan
date: Dec 3, 2008 at 9:30 am
Hiring? There's always the summer program, but it'll likely to be reduced. But please feel free to make the introduction.
M
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from: Forever Himalayan
to: M
date: Dec 3, 2008 at 7:23 pm
Thanks, M. I know it's tough these days in financial services industry, and hope you are doing well.
Forever Himalayan
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from: M
to: Forever Himalayan
date: Dec 3, 2008 at 7:30 pm
Yeah, it's def. tough but I'm doing surprisingly well. Think I'm probably one of the most optimistic guys out there because I've been planning and waiting for the downturn to come since I re-entered IB. No plans to visit the Bay area in the immediate future, but I think it's more than likely that I'll drop by sometime next year. How about yourself? Any plans to come on out here? In other news, I'm buying a place in Shenzhen soon . . . and might buy a place in Beijing sometime in the near future . . .
M
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from: Forever Himalayan
to: M
date: Dec 3, 2008 at 7:33 pm
Geez - it seems you're the single beneficiary from the 700 billion bail-out!
Tell me - why did you plan and prepare for the downtown from 2005? What did you do (assuming your personal finance part, not your business) to prepare for that?
And - lend me your crystal ball - when is this gonna be finished?
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from: M
to: Forever Himalayan
date: Dec 3, 2008 at 7:51 pm
This is going to require a much longer email =P
Will write you more in a bit.
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from: Forever Himalayan
to: M
date: Dec 3, 2008 at 8:12 pm
Send it from your personal account please...
I don't want you to tell me anything confidential, and from your corp account :-).
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from: M
to: Forever Himalayan
date: Dec 3, 2008 at 8:14 pm
No worries - nothing confidential. Just my own personal take on things.
==============================
from: Forever Himalayan
to: M
date: Dec 3, 2008 at 8:15 pm
am all ears.
==============================
from: M
to: Forever Himalayan
date: Dec 4, 2008 at 2:20 am
>> Geez - it seems you're the single beneficiary from the 700 billion bail-out!
Hahaha - def. not. And the funny thing is, I work with a firm - which has done well and won't be taking any government money at all. But I'll be honest - I'm one of the happiest guys in the world right now because I've been working hard at preparing for the downturn for a long time and I'm finally seeing some of the sacrifices pay off.
>> Tell me - why did you plan and prepare for the downtown from 2005? What did you do (assuming your personal finance part, not your business) to prepare for that?
I planned for a downturn because, well - there will be another one. There almost always is another one. Just like there is almost always another boom. It might not be in the direct sectors or economies that we're in - but everything cycles and it's just a normal part of life. The only funny/stupid thing about it is that every time something like this happens - everyone thinks that it's the end of the world and it's the worse thing that's ever happened.
To prepare for this, I basically had three/four thoughts/questions in mind (in no particular order)
- What's the nature of my job/career? Or more importantly is my job/career highly cyclical in nature?
And since I work in finance and for a financial services company, I'm probably in one of the most cyclical jobs possible. Which means when times are good, the rewards will be enormous (which people hear about all the time), and when times are bad, they'll cut heads and costs like there's no tomorrow because it'll feel like there's no tomorrow (kind of like right now). It also means you need to constantly work very hard to ensure that your head is not one of the first heads on the chopping block. So when other people ease up/switch jobs/relax, etc., you really can't afford to.
- What are the mistakes that I need to avoid? More importantly - what would be some truly catastrophic mistakes?
For this question I looked at what happened to many people in the last downturn. So the main things that I realized I needed to avoid are:
1) spending too much money
2) assuming that my job is secure / the job market will be good
3) taking on too much debt.
For the first 2, it was relatively easy - just make sure I save as much money as possible. And even if other people are spending alot of money, I shouldn't just because they are. And I should put myself in a possible where I can save money. So don't have a car, didn't take certain vacations, didn't enjoy life as much as other people, and had to make some sacrifices here and there.
For the third one (taking on debt), it's much more tricky - and this is actually the one that blows alot of people up in a downturn - and the thing that blows people up tends to be their house or apartment.
There's a old story on wall street (and in fact, it was part of the movie Wall Street) about how a young investment banker, at the height of the boom, goes and buys a very expensive condominium. And it's not even the one he lives in, it's the one he buys for investment. He does the calculations, does a great deal of analysis, and concludes that it's a fantastic buy, and that the rental income will more than cover the monthly mortgage payment. He then rents it out to someone, and things are good.
Two years later, the market turns bad, he finds that the apartment prices have dropped. The first thing that happens, is that his tenant moves out - so he needs to pay the mortgage out of his own pocket. The second thing that happens, is that either he can't find a new tenant or he can't rent it out at the same price as before, and needs to pay part of the mortgage out of pocket. The third thing that happens, is that he loses his job - and now he has no income and a substantial part of his savings is trapped in the condominium. The fourth thing that happens is that because he needs money, he's forced to sell his condo - in the depressed market. The last thing that happens is that he finds that if he sells, he's actually going to end up with a loss, and negative equity, and lose alot of money. But he has to sell, because he needs cash.
It's something that people forget (esp. us Americans) - but a mortgage can potentially kill you financially because it amplifies your losses and compounds your problems. The joke with the above story is, had the banker waited just two years - he could've bought the same apartment, at a lower price, with a lower mortgage, and still have money left over.
The tricky part about this one is that it can happen to anyone and at all levels of society - and this story occurs again and again at the bottom of the cycle. You hear stories about multimillionaire hedge fund managers / CEOs / basketball players now trying to sell their houses and not being able to at a good price. The head of Goldman Sachs is trying to sell his Nantucket vacation home for something like USD40.0 million(!!) Good luck to him and I hope he doesn't have a mortgage on it. Plus as you prob. heard, he's not getting a bonus this year - so imagine what potentially his personal costs might be if he has a mortgage/maintenance costs on it. It's the worse market possible and it makes so much more sense to just hold on to the property and not try to do anything. Or alternatively, it's potentially one of the best markets to buy and get in, which leads to the next item . . .
- What are the good things about a downturn?
This one was a little poignant back in 2001-2003. There were so many things on sale in so many ways. 0% financing on cars, big steep discounts, cheap vacations, stocks, etc. It's the best possible time to spend. The only thing that wasn't down back then was the housing price. When a downturn hits - everything pretty much goes on sale and it'll feel like the world is on sale and life is pretty good - as long as you have cash for it. This is esp. true this time - be it vacations, autos, and now real estate as well (and be it in the US, China, etc.) - everything is cheaper. So basically, the conclusion would be to . . .
. . . hoard as much cash, and have as much cash as possible right before the downturn. Be it from a personal security perspective, an investment perspective, or just a lifestyle perspective.
Right now is the best time in the world to have as much cash as possible in the bank (and not much investment). Because the world is on sale and even the investments are cheap. So be like Warren Buffett and get in around now - esp. since many others can't because they don't have the money.
>> And - lend me your crystal ball - when is this gonna be finished?
Generically, these things typically take 2-3 years (like in 2001-2003, 1991-1993, 1981-1983, etc.). Depending on how you count it, I think it started around late summer 2007, so I think we're past the midway point. But it doesn't mean we'll go back to the ways things are in 2006 by the years 2010/2011. It means we'll go back to the ways things were in 2003/2004 by the years 2010/2011.
As I like to say to people:
1) Don't worry, this too will pass, but
2) Worry, this too will come again, or
3) Be happy, this too will come again and everything will be on sale again, so
4) Be prepared for it when it comes again - there will be plenty of opportunities (as mentioned above) when it comes again
One other thing on the "when is this gonna be finished" question:
It depends on what you mean and the expectations. The tech bubble of the late 1990s is not going to repeat itself anytime soon. You'll have your occasional Googles, RIMs, etc. - but back in 2002, no one should be expecting things in the tech sector to go back to "normal" in 2000 - because it wasn't normal. Similarly - some sectors of finance this time are in what can be termed a structural recession - which will take longer because the entire underlying business model needs to change. And in fact, some jobs/opportunities might just get regulated out of existence.
In 2001/2002 - the entire equity research sector was changed by regulations - so today, as a result, equity research analysts can't make that much money anymore. Similar things are likely to happen this time within proprietary trading, certain debt/derivative products, real estate, insurance, etc. - so for those areas - "when is this going to be finished" - answer: might never be / the job itself might be finished as we know it.
Man - that was a really long email - would be surprised if you actually read all of the above. =P
Best,
M
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