#4

I. reasons why I’m learning finance
II. my beef with finance and suggestions for it
III. a corporate mindset

I.

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.

Apple Suppliers

 

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/
https://technology.ihs.com/388916/iphone-4-carries-bill-of-materials-of-18751-according-to-isuppli

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.

II.

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.

III.

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.

1: http://www.lorrinmaughan.com/coaching-blog/corporations-are-refrigerators

It’s all very conflicting. Much of this was after I read about a [post][1] 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.

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One thought on “#4

  1. As someone who entered and walked away from your broadly labeled and mischaracterized “finance” industry, here are my responses to your thoughts; disclaimer is that I have my beef with the finance industry as well, but not for the reasons you listed above

    i.1 inflation, however modest, is still way, way, way more preferable than deflation or static monetary value, just look into history and you can see that when the world’s currencies rested on some commodity like gold/silver, people can make a lot of money quickly when new gold is discovered but then everything everyone owns becomes devalued because there is more gold, it is simple demand/supply, and then the deflationary spirals, most recently during the Great Depression, literally crashed everything and the poor were hit as hard if not harder than the rich, so deflation benefits no one. Low and steady inflation that is easily predictable (so knowing that it will be 2% for the next 40 years, which has been the case in US/Europe for the last 30 or so years) allows anyone from the most well-off to the poorest to plan financially and have their assets rise in value; also, you would have learned about inflation if you took any basic civic education or introductory economics classes, it’s one of the first lessons of macroeconomics

    i.2 understanding listed companies is so much more than understanding the attractiveness of money; as any company at the end of the day is delivering some value to its consumers, anything from agricultural produce, manufactured product, or service, and that is what we as humans create, and understanding companies allows us to understand product and services and distinguish what is of value and what is not of value

    ii. I think you have missed a huge chunk of what is defined as the modern finance industry; when people say they are in “finance”, they probably broadly fit into a few categories: corporate finance, sales/trading, asset management, wealth management, or private equity. What you described as activities is primarily surrounding the trading and asset management fields.

    Corporate Finance: mostly done by investment banks, the function of investment bankers is to help companies gain access to capital one way or another, and help execute financial transactions (so helping the company go public, selling the company’s bonds, M&A, falls here) – in essence, in its purest form corporate finance is of great value to society because it allows companies to gain capital in order to grow, manufacture better products, make longer-term investments, and hire more people, all of which requires capital

    Sales/Trading: mostly done by investment banks/brokers, the function of sales/traders is to make transactions, such as the hedging and swaps you mention, so I won’t continue

    Asset Management: this covers a wide range of activities, but includes broadly what you describe as fund managers and portfolio managers who’s jobs is to manage other people/institutions’ money and invest it; the fact is most people want to have retirement money, and do not have the expertise/time in this globalized, fast-paced world to learn to invest/manage their own funds, so professionals offer the service, and the risk can often be chosen by the person putting the funds themselves; in other words, I can choose a “low-risk/low-return” savings plan, and the dude at Fidelity who’s managing my money is supposed to follow that instruction; the hedge funds by definition are riskier, and people/institutions choose to put their money in hedge funds should know that it is riskier

    Wealth Management: similar to asset management, but for super rich individuals, not much to say here, except that this includes a lot of estate planning (aka inheritance dividing)

    Private Equity: much publicized during the 2012 US election due to Mitt Romney’s long and successful reign atop Bain Capital, PE basically invests in companies in their late stage while they are still private and help them to either become acquired or go public, providing operational expertise and financial means for many a start-up that ultimately allows them to grow, be profitable etc

    Now that we’ve defined the basic functions of each sub-field, here’s my beef with each

    Corporate Finance: corporations need capital, that’s indisputable, but often investment bankers may not give the best advice to a client on its capital needs as they get paid the bigger the transaction is, and of course, we all know about the hours, but more to that later

    Sales/Trading: agree with you here, commodities traders etc give very little extra value except to themselves, but there are many simple products that individuals do benefit from and is not at the expense of anyone else

    Asset Management: no real beef here, I think people choose what kind of funds they put their money into, and if they are really that afraid of risk, then they still have the option of managing their own, but odds are that someone who doesn’t manage money as a day job is unlikely to perform better at the market than someone who’s job/pay is determined by how professional he is in meeting targets; however, the problem here is that people may not know the risks when they choose to put their money in a fund

    Wealth Management: huge beef here, as inheritance is I believe one of the biggest reasons the world is unequal and continues to be unequal; but this is moral indignation because I individually will also benefit from a little help when I’m middle-aged as well, but there is something to be said for a billionaire to have even more help to become a multi-billionaire

    Private Equity: the most often beef here is that PE firms go into companies, destroy what they really are, and fire most of the workers, just for their own profits; this certainly happens a lot, and is very regrettable, but the flip side of the story is, many successful companies that now employ thousands of workers and produce great products were “attacked” by PE firms once upon a time and without the painful decisions would not be where they are

    Now to the notion that finance affects only people who are attracted to money. I think this is a half-baked truth. 4 years deep in Silicon Valley, what I have noticed is that for all the hoo-hah about start-ups, trying things out, coding great products, at the end of the day the easiest way to define a successful entrepreneur is how much her start-up is valued at, ultimately sold/gone public for, or how much funding they’re getting; and the end-goal of a lot of entrepreneurs seems to be to become a VC, which again is…..investing, so I think it’s BS when people say dreamers become entrepreneurs and vultures become financiers, it’s just an oversimplification; every industry attracts people who want to make a lot of money, there are just “cooler” and “trendier” ways to do it depending on the age.

    Now that the precedent is that the majority of people go into their industries to make money, then the matter of compensation and taxation becomes more relevant. And again here, I think the solution would be to create more progressive taxation regimes and tax consumption instead of everything else. For example, massive taxes on luxury goods would only target those who can afford it for goods that aren’t essentials. Progressive fines/penalties make it as “consequential” on a rich person who is caught in his Ferrari speeding as it is for the poor guy who’s rushing to get to his 2nd/3rd job who is speeding. Compensation that is tied to performance is essential, because what partly caused the 2008 crisis was that people (especially CEOs and bankers) were being paid not based on their performance (how the company is doing in the medium-long run, but by short-term metrics. Tying their compensation to stock-options or including clawback options would be more likely to work.

    iii. your last part is more about feelings and I don’t really get the point, so I won’t respond.

    But here’s what I would end with. There are a multitude of problems with the finance industry in general, but the best way to cure those problems is to really understand how the industry operates, how its professionals are compensated/incentivized, and how the regulatory/taxation framework is currently structured. Until a comprehensive and pragmatic way to correct this can be found, there is really no point being high and mighty. Because at the end of the day, I also think that like it or not, money is desperately needed as well in parts of the world, and private foundations/contributions have done a great deal to helping solve the world’s problems from eradicating diseases, to building critical infrastructure, to allowing voters to be better informed.

    The world is indeed an unforgiving and tough place, but it’s our responsibility to be better educated and understand it, and then seek to hone our craft and our place in the world in order to make it a better place.

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