Musings on the Financial Markets...

A couple weeks ago I came to the sobering realization that I only have two more months left to enjoy my MBA experience. (Even though the actual graduation ceremonies take place at the end of May, just about everyone is done with classes/finals/projects by the first week of May). Like most of my classmates, I've got mixed emotions about finishing school. On the one hand, it's exciting to think about making the transition to a new career and start getting a paycheck for doing something that I'm passionate about. On the other hand, I've made a lot of friends over the past two years and it's going to be hard to see them all leave at the same time. The social fabric of my class is going to change once everyone leaves Ithaca and disperses all over the world.

On a completely different note, can you believe the news about Bear Stearns that surfaced last week? Astonishing. As I've mentioned in a previous blog, I spent my summer internship with Bear Stearns Asset Management and had a great experience there. Although BSAM was a relatively small piece of the whole Bear Stearns franchise, I was able to meet quite a few people over the course of the summer. The colleagues I worked with on a daily basis and the professionals I met from other divisions were all smart, driven, and very genuine people. My heart goes out to all of my friends and acquaintances at Bear Stearns as I hope things work out favorably for them.

I've been trying to wrap my brain around how it's possible for such an accomplished firm like Bear Stearns to approach the verge of bankruptcy so quickly. Just a year ago every big bank was awash in liquidity and now Bear needs emergency funding from the Fed to keep from going under. I've come to the conclusion that the "self-fulfilling prophecy" effect is a powerful concept in financial markets. Rumors and perception can morph into reality and cause funds and firms to fail. It's really an amazing concept. John Meriwether of LTCM fame said that a "hurricane is not more or less likely to hit because more hurricane insurance has been written. In the financial markets this is not true. The more people write financial insurance, the more likely it is that a disaster will happen, because the people who know you have sold the the insurance can make it happen." To some extent, the same principle applies to a lot of people shorting the same stock. The fact that a large group of investors are expecting to profit from a negative view of the stock may actually cause the fundamentals to deteriorate as customers/suppliers/partners act in a different way than if the negative sentiment wasn't transparent. Rumors of illiquidity are also damaging (although it's unclear how much was rumor and how much was truth in Bear's situation) since it may cause some counterparties to stop trading and some clients to pull their cash, which starts the downward spiral of a rumor turning into reality.

Warren Buffett was recently talking about how he doesn't look at Berkshire's stock price every day and he said "The market is there to serve you and not to instruct you." Maybe it's just because I have a lot more to learn than Mr. Buffett, but I don't know if I completely agree with him. I may be contrarian to the core, but I still think there's wisdom in understanding the movements of the markets.

Decision Time

Over Christmas break, I had a lot to think about. I had just changed my post-MBA plans from launching a fund with some partners in Texas to pursuing something more stable right out of school. I had the option to return to the asset management firm that I interned with, the Cornell endowment fund had given me an offer to be part of their investment team, and I was also considering other buy-side positions that would take me closer to family back west.

Deciding on an internship was easier because I knew I'd only be in the position for 12 weeks and I could easily pursue a different path after the summer was over if the job turned out to be a poor fit. Not only was I was stressing about the full-time decision since I knew it would have an enormous impact on how the rest of my career would unfold, but I was having hard time pinpointing which criteria was the most important. Each opportunity offered something completely different than the others.

Joining the Cornell endowment fund would be very rewarding since I would have the opportunity to work for an institution that I truly cared about. Returning to the firm I interned with was appealing since I really enjoyed the team dynamic and the freedom use my own process to pick stocks. My wife and kids are obviously an integral part of my life so work/life balance was important to me, and location was also a big consideration since my wife and I have close family members and friends living in the west.

After countless discussions with my wife, a few alumni, and some friends in the industry, I decided the single most important criteria boiled down to which job would give me the best learning experience and open the widest door to the investment management industry. Once I finally put aside everything else, it quickly became clear that the endowment gig was my best opportunity. I'm excited to report that I'll be staying in Ithaca upon graduation to work for the Absolute Return group at the Cornell Office of University Investments. I've got a few more thoughts regarding my decision process that I'd like to write about, so I'll probably do a follow-up to this post next time...