Nicholas Colas pens an opus this morning, out of nowhere. He’s clearly feeling introspective today…
After 30 years in and around Wall Street, I feel like damaged goods. That’s not necessarily a complaint, but rather a simple and factual observation. An example to illustrate the problem: I have mental stop losses for just about everything in my life. If I have a bad meal at a restaurant, I never go back. If a personal relationship goes south, I “Take it off my screen”. Very few things have a second chance with me. If it doesn’t work out, well, one and done…
Consider this “Top 10” list of other examples
#1 – You start personal conversations with “I have three points to make today.” Aside from business consultants, most people do not think in PowerPoint or outline form. But after a decade or so in finance, you somehow decide that anything worth saying must have three supporting points. For stock analysts it always comes back to “Industry dynamics, company strategy/financials, and valuation.” For traders, it is “Market direction, sector moves, and company trading dynamics”. Three things, always… No one else thinks or talks this way, as my wife often quietly – but firmly – reminds me.
#2 – Emotions are life’s “beta”. The concept that a stock moves with either more or less volatility than the market seems a neat analog for life. Sometimes you are the windshield, sometimes you’re the bug. We’ve all had beta 3 days, both for good or for bad. But no one except a finance person would try to quantify that with a number. “How was your day, honey?” Answer: “Oh, a gap up open when I got a new customer to trade with me, but a lousy close when the market went nuts after the Fed meeting. Definitely a beta 2 day. Hopefully tomorrowwill be calmer.”
#3 – You ponder the time series correlation between your spouse’s/significant other’s emotional state and your own. In business school a professor told my class that he would never buy a house in the neighborhood near the school. “Bad diversification” was his logic – property values were too closely tied to the success of the university. By the same logic, you might look for a romantic partner whose emotional state moves out of sync with your own. That would be “Good” diversification and get you closer to some efficient frontier of household happiness. Again, no one outside of Wall Street thinks this way and any worthwhile partner will tell you to get lost if you try to explain it.
#4 – A fight with your spouse/SO is like a management call after a big earnings miss. “How could you miss the quarter after you presented at the Goldman/Morgan/CS conference not a month ago and said everything was fine?” Happiness is all about beating expectations to anyone who spends their lives analyzing companies and markets. And when the people around us “Miss the number” we have a lot of trouble remembering that they aren’t a losing position in an otherwise perfectly fine portfolio of relationships.
#5 – Momentum drives life. Ask a clever young MBA what moves asset prices and you’ll likely hear something like “The second derivative of key fundamentals”. Things get better or worse at an accelerating or declining rate, and the resulting change moves price. As a result, the Wall Street trained mind will always look for that pattern – are things getting better or worse, and how fast? That’s not the way the world works all the time. There are plenty of days where nothing actually happens and you’ll go nuts looking for inflection points that don’t exist.
#6 – You try to look for comps in everything. The most popular way to value any security is by looking at similar investments and deciding if the asset in question is cheap/expensive to the alternative choices. A good approach in the office, but a horrible one anywhere else. On any given day someone else’s child will seem better mannered or another person’s spouse kinder to their partner. And it doesn’t actually matter.
#7 – You are openly jealous when you watch “House Hunters” and realize not every house in the United States lists at $2.0 million for a tear down on a quarter acre. New York is to finance what Silicon Valley is to venture capital and Paris is to haute cuisine – the physical location where professionals congregate and create powerful network effects within a specific industry. That creates a lot of groupthink, however, since the most convenient conversation is with someone who probably looks and sounds a lot like you. Seeing that the rest of the world is very different is an important touchstone to maintain any sense of balance.
#8 – You mark your whole life to market every day. In the 1980s, mutual fund managers had an often-repeated way of explaining the humbling nature of their jobs: “They print your IQ in the paper every day.” Yes, before the Internet most people had to wait until the next morning to track their investments. Now, any investor can track their entire financial net worth tick by tick, on their smartphone while grocery shopping. Most, wisely, do not. However, the whole concept of mark-to-market is a pervasive one if you work in the business. For financial assets, that’s fine. But when you start to do that with the rest of your life the intraday volatility may be more than you want to handle.
#9 – “Reversion to the mean” should work for everything, right? Every asset class has a long term historical rate of return and a standard deviation around that mean. One approach to investing is to find the underperformers just as they are about to cycle back to their average long run potential. Works well in investing, but in life you are often better off staying with the best in class rather than bottom feeding for the reversion trade.
#10 – You can make more money; you can’t make more time. The wealthiest guy I ever worked for told me that one day, and I have never forgotten it. Those of us fortunate enough to work in this business have many options and are paid well to work with clever people. It is a privilege. Time is the scarce resource in the equation, and spending it wisely is the real challenge. Family, friends and colleagues are the real assets in our lives. Just don’t use your day-job skills to keep them close to you.
You’ve Been in This Business Too Long If… (Convergex)
Nicholas Colas, chief market strategist at Convergex, a global brokerage company based in New York.