I. reasons why I’m learning finance
II. my beef with finance and suggestions for it
III. a corporate mindset
Been trying to get into finance and investing lately, definitely something my 18 year old self would have frowned upon. I don’t mean to join the industry but I want to understand their jargon and their thinking.
I guess there’s two reasons for this new-found interest in the subject
1. Inflation is the greatest enemy. I had always assumed that if I worked hard enough in my primary career that I wouldn’t have to worry about having enough money for retirement. But the fact is inflation destroys everything. The couple percentage points of inflation diminishes the value of your money year after year. So the only way to beat inflation is to put your money into things that rise with inflation, meaning equities, bonds, but rarely cash. This is stuff they don’t tell you anywhere during your schooling, which in my opinion is a great crime.
2. Learning about listed companies is a great way to learn about the world in our free market capitalistic society. The existence of listed companies from agricultural giants to aerospace companies is a human phenomenon that demonstrates the benefits of economies of scale and the attractiveness of money.
I think it used to be more true that things that happened elsewhere in the world had little effect on us. For the most part, our lives were segregated. But with the dawn of globalization, it’s not simply a matter of investors reacting to negative news from other regions anymore, our economies are interconnected. For an easy example : look at the iPhone in your hand, and now look at the following figure that lists the number of suppliers across the world that supplied parts for that iPhone. The world is an interconnected place (, which I suppose in some ways is not such a bad thing as we as a human race need to feel as one) Thus, one could say that a healthy understanding of the state of world affairs is a necessary requirement for being a global citizen.
All of this is pointing us towards a singularity, which I suppose can be good or bad. The benefits of large systems are efficiency. The risks are the opportunities for manipulation it presents. The issue has never been in systems but in the people who run the systems.
Figure 1 : List of Apple Suppliers (source : http://www.apple.com/supplier-responsibility/our-suppliers/)
Other references : http://operationsbuzz.com/2010/11/the-iphone-4-supply-chain/
Throughout my browsing and reading, I’ve started coming across a lot of writers and individuals who write a lot of analyses about current events. and it is certainly quite interesting to imagine a job as one of these people, whose jobs are to read and analyze the current situation. This is particularly important for finance people as really all their trading on is speculation. But definitely a job description that might be interesting.
I still have beef with the finance industry, maybe less than I had when I was younger. Under a very broad definition, I will define finance industry as encompassing all activities that profit from making investments. When I was young, my primary reason why I didn’t want to go into finance was because I didn’t think the industry creates anything of value, and also because I didn’t want to work purely for money. I think those opinions were also formed in the aftermath of the 2008 financial crisis.
The first criticism is against the industry in general. I still don’t really understand the purpose of the industry. I guess you could say it exists to help investors beat inflation, or to provide a high alpha while remaining a low beta, or to mitigate a company’s risk by putting that into financial tools that will guarantee some kind of safety net, (such as an aluminum company might actually hedge its own risk by shorting aluminum in the commodities market).
But that brings me to the second criticism against the culture of the industry, or the people in it. I recognize the efforts of active managers who handle the portfolios of pension funds for people to use for their retirement. But the industry in general seems to attract a group of people who are attracted to the industry because of the money. One of the most terrible things of the industry is the performance-tied pay and its epic effect of a person’s salary. Whereas in other industries like professional athletes, it promotes behavior of hardwork and dedication (when PEDs are not involved), it promotes a very dangerous emotion in the finance industry : greed. And greed leads some of these people to take insane amounts of risk on the entire portfolio, billions worth of dollars. And we have also seen how a couple bad players can create so much risk that an entire financial system can collapse ie 2008 financial crisis. There’s also another phenomenon that people who are closer to the money make more if it. As an example, an aluminum trader on the commodities market will always make more money than an aluminum miner.
The finance industry simply attracts a type of person who imo, lives to make money and I think that is problematic as our financial systems become increasingly interconnected. The easiest way to fix it I suppose is to remove the performance-tied-pay from the industry. The finance industry should exist only as a gatekeeper into the markets, that they charge a processing fee, rather than a performance percentage. I think we are approaching that as we start getting into exchanges done by machines, so the cost of buying/selling effectively become zero. The only other issue is the storing and transferring of money.
I do have another more daring proposition, which is to do away with the whole idea of active managers. Everyone needs to be responsible for their own money. Then, active managers won’t put your money at risk by taking huge bets and money will also be effectively dispersed among many parties so that there will never be too much risk in one location.
The finance industry needs to Perhaps it’s one of the necessary evils of a free market economy, but I think it isn’t.
So you might ask why am I learning finance. I guess it’s an admission of defeat in some ways but life is like that, isn’t it, recognizing realities as we move further along in life. Life is a bittersweet endeavor.
As my start date draws near, I’m trying to mentally prepare myself for what is coming ahead. I think there’s a conflict in the corporate world that is hard to reconcile. Much of one’s adult life is revolved around our full-time jobs. Out of our 16 hours of wakefulness, 8-9 of them are spent in the office, another 2 hours before and after to travel to and from work, which leaves you with about 5 hours to eat, exercise, sleep. So really your entire existence revolves around you in some way preparing for your full-time job.
If you do want to excel at work, then you have to put effort in it, to improve your craft. It thus isn’t that surprising that we get attached to our jobs, because our jobs form the center of our lives. We develop relationships with the people we work with, just as we develop relationships with the people we went to school with.
But it’s very different, because at any moment, someone can come in and tell you you are fired. And I suppose that’s reasonable, management would rather sacrifice one person than the entire company, so goes the reasoning. But how does that feel for that someone whose whole life revolved around working for you.
It’s all very conflicting. Much of this was after I read about a [post] inspired by Microsoft’s layoff of 18,000 people of flesh and blood. It’s easy to frame it as a statistic.
Some people would disagree but I think there are many benefits to a shorter work-week and even a basic income for all citizens of a country as we move towards a post-scarcity economy. But as it is right now, the world, especially the corporate world, is a cruel place. It doesn’t quite wait for anyone so we do have the responsibility to ourselves to keep sharpening our professional knives and hope for the best. The world doesn’t stop improving, and we have to keep up with it.
So being constantly aware of that dichotomy and that relationship between us and our job is important. Putting in enough to do well but not letting it define one’s life.