Getting into the investment industry

[Packer16]

I know a number of folks want to get into the investment industry but why not invest what you have from your current job and continue to learn and experiment on your own in niches of the market the institutions can't touch.  There are many areas that are too small for institutions to get involved with and if you get a job in the industry you will be working for the most part with large money constaints and competing with a much saavier group of investors.  Just my 2c.

 

Packer

[mevsemt]

I totally agree with Packer...

 

Before I got into the investment industry I used to think it was my dream job.  However, years ago I got the opportunity to work in private equity and within months of taking the job was completely miserable (granted, I was a grunt chained to my desk, but you probably will be too).  Luckily, one of the partners got offered a CFO role and brought me along with him, and I am much happier in corporate finance (occasionally doing a merger or divestiture but otherwise working a much more reasonable 50-55 hours per week).  Additionally, since I'm still very interested in investing I was able to carve out some time to start a blog to talk about my stock picks, www.mevsemt.blogspot.com. 

 

Anyway, just food for thought.

[Rabbitisrich]

Ultimately  Shane it's a numbers game. Breaking in requires just a bunch of interviews and a good dose of luck. In the meantime, work on beefing up your analytical/accounting/financial modeling skills.

 

How important do you all think that modeling skills are?  Or should I say, how advanced should modeling skills be?  The advice that I have gotten from several value investors that I highly respect is that the modeling is probably where I should focus the least amount of my time.  The majority of my time should be spent reading (both books and financials) and getting a better understanding of businesses.  I'm under the impression that the "valuation" should be a fairly simple process and most of the folks that I talk to don't put a lot of weight on complex dcf models.  I have a Wall Street Prep program but didn't finish as I felt my time was better spent elsewhere. 

 

What are the thoughts around here?

 

It's a good idea to know your way around excel, as well as to have a good understanding of the logic behind different DCF methods. But the investment industry is still sort of like an apprenticeship system (on the buyside, I don't know much about the sell side), where your employer will prefer that you don't have any "bad" habits. It's a good idea to tailor your resume to the firm, which is yet another reason why networking is the most important tool in your job hunt. Nothing else comes close.

 

 

A multiple is no less specific than DCF. It also produces a single number. DCF simply forces you to acknowledge some of the pathways to the number. It's just a tool.

[ExpectedValue]

How important do you all think that modeling skills are?  Or should I say, how advanced should modeling skills be?  The advice that I have gotten from several value investors that I highly respect is that the modeling is probably where I should focus the least amount of my time.  The majority of my time should be spent reading (both books and financials) and getting a better understanding of businesses.  I'm under the impression that the "valuation" should be a fairly simple process and most of the folks that I talk to don't put a lot of weight on complex dcf models.  I have a Wall Street Prep program but didn't finish as I felt my time was better spent elsewhere. 

 

What are the thoughts around here?

 

Most value investors, especially experienced, veteran investors profess to spend almost no time modeling. And I think that’s true. But just because they don’t spend time modeling, does not mean you should not spend time modeling. I think everyone should do it, just to learn it because its one of the easier aspects of investment analysis to pick up. You can literally put in a few hours and practice to get good at it and then move on to the harder stuff.

 

I think there’s a few good reasons in its favor.

 

1. It teaches you the dynamics of accounting and finance:

 

Putting together LBO models or 3 statement models can be really really helpful. You basically end up learning the dynamics of a company’s capital structure (especially diverse, more complicated structures) and how the cash flows of a business move through the different line items on the financial statements. This is incredibly helpful. It’s one thing to read the 10K of AutoZone, it’s entirely another thing to spend time where you play around with different projections in the line items of the business and see how they affect the end result. You end up learning about how to really quantify the different aspects of the business and once you’ve modeled a lot, you can start doing much of the work in your head and outside of excel.

 

Everyone talks about how they don't use DCFs and really, a DCF can kind of be done in your head via multiples. The thing though is that the CF in DCF is derived from what's going on with the business. Simply taking current FCF x 10 might not tell you too much. Think about what Eddie Lampert did with AZO, where he pushed the company to extend AP out to increase cash flow (since working capital was decreasing) and use the proceeds to buyback stock. This is the sort of situation where a rear view look at what is happening with just 1 year's number does not really help, but being able to model it out and project this sort of possibility can help out tremendously.

 

I honestly think modeling is a lot like a hands on way to learn accounting. The biggest thing is to just not get any false confidence in your models. Understanding their limitations is a big part of this.

 

2. It allows you to analyze complicated situations:

 

A lot of guys on here are fine sticking with small, easy to understand companies. But if you ever have aspirations to really make it big and invest in areas that cannot be supported on small sums of capital, you’ll likely need to start analyzing complicated situations. Again, here, modeling helps because you end up taking something which might look complicated and hard to analyze and break it down into understandable pieces.

 

I’m reminded of the time Michael Burry spent analyzing mortgage backed securities and the great opportunities he found in CDSs (which were later used by Fairfax). That’s a case where it really paid off to go and spend time on things that are more complicated. I think as time goes on, the easy value plays are going to be arbed away as more and more automated trading systems hit the market. As a result, being able to properly analyze a special situation would be really helpful and might necessitate some modeling or at least an ability to analyze complicated corporate events.

 

3. It makes you more employable:

 

For people who are hoping to break into the investment business, modeling skills can be pretty key. There’s a reason that a lot of the top value funds end up making new hires folks with backgrounds in investment banking -- it’s partly because those guys already know how to model really really well. At most funds the jr analysts do more number crunching while Portfolio Managers focus on big picture thing/qualitative analysis of companies.

 

I don’t really think there is anything wrong with this approach. I know some of you disagree and think it’s a waste of time, but if it gives you the chance to get to work closely with great investors, who have been in the field for a long time, why not do it?  Being the number cruncher gives you an opportunity to add value to them and you are getting a lot of value by being able to work closely with experienced investors.

 

 

[EdWatchesBoxing]

I think there is a lot of value in Tariq's post. It helps to understand how to play the game if you're looking for a job in finance.

[capitalistcollective]

I just wanted to refer you to this thread, "Shameless plug alert: looking to hire two equity analysts".  It was my thread so I guess this is a shameless plug about a shameless plug....but it seemed people commenting here would be interested and I am looking for junior (and senior) analyst talent:

 

http://cornerofberkshireandfairfax.ca/forum/index.php?topic=4286.0

[Shane]

Some interesting things I have learned from modeling is that it allows you to identify the assumptions being made in the current stock price, which could help you identify if something is out of whack or identify I great short.  It's probably not needed if your highly experienced, but if you have unlimited time would not hurt.

[Shane]

Interesting food for though, however, I simply prefer to spend my time picking stocks.  If I won the lottery I would pick stocks with my winnings, It's just something I find gratifying I suppose.  Maybe when I am confident I know what I am doing a will lose interest (I doubt it very much), but for now I just find it exciting to find new information and try and apply it.

 

As an M.S. student I was constantly staying late in the lab to finish everything in time because I would 'waste' so much time reading about my investments... I just thought maybe I should do what I want to do instead of what I was always supposed to do (My family business is environmental consulting, I had always been expected I would end up there).

[Guest misterstockwell]

Misterstockwell, this response is basically the reason why I want to manage money because I see many people who lose money in the market. Unfortunately, not everyone is fit to invest money. I would like to make a difference so they can have enough money to live comfortably. One question if you don't mind answering is why do you want to get out and why the market isn't the same anymore?

 

After an asian currency crisis, Long Term Capital crash, bursting bubbles in 2000, recessions, housing crashes, almost-depressions, etc.,  one gets a bit guarded. I have brought my clients through all those events in good shape, and I feel sometimes like I shouldn't tempt fate since the next time might not work out. I've also made my nest egg. I can wind things down over a number of years.

 

As for the market--well, too many changes to list. If I was starting now, I would get a job at an HFT firm.

[Myth465]

I just wanted to refer you to this thread, "Shameless plug alert: looking to hire two equity analysts".  It was my thread so I guess this is a shameless plug about a shameless plug....but it seemed people commenting here would be interested and I am looking for junior (and senior) analyst talent:

 

http://cornerofberkshireandfairfax.ca/forum/index.php?topic=4286.0

 

Thanks for bringing the opportunity to the board.

 

Also I agree with Tariq, the guy knows what he is talking about.

[stahleyp]

 

 

shane, if you don't mind me asking, what firm did you interview with?

 

I'm not very comfortable sharing that information sorry, I am hoping that they will keep me in mind for future positions and don't want to risk having that information out on the internet.  It was a institutional firm with $7 billion in assets, I doubt many people would have heard of them though.

 

ahhh, good point, shane. I just wanted to know. While you're new, you seem like you have some potential. I hope I avoid that asset manager in the future! :)

[Shane]

Thanks for the kind words!