Authored by Nicholas Colas via ConvergEx,
Talking to a journalist a few days ago I realized that I can now add “30-year Wall Street veteran” to my list of epithets. It’s not as catchy as “wily Odysseus” or “wine dark sea”, but then again my life on the Street doesn’t really qualify as Homeric either. Rather, it’s been more like watching an old school Broadway musical, complete with lots of big personalities whose stories are often best told with small anecdotes.
Along the way those people have taught me everything I know about a career in New York finance. They all bubble up to what sound like clichés, but only because they are true. But below the surface… Well, how you learn those clichés is never boring.
Lesson #1: Set expectations and then beat them. Everything on Wall Street carries with it the weight of expectations, from careers to asset prices. In both cases, their values only change when outcomes differ from what was expected.
The best example I ever saw: Years ago I worked with a wily investment banker who played the expectations game better than anyone else I ever saw. He knew that the success of an Initial Public Offering or secondary share issuance often came down to perception. Did the institutional buyside think he was marketing a hot deal, or a cold one?
Since his deals invariably had roadshow lunches in major cities like New York and Boston, he always did the following:
- If 100 investors had RSVPed for a lunch, he would have the room set for 70 people but order food for 100.
- As the crowd started to file for lunch, he would have the wait staff very ostentatiously reorganize the dining room and roll in those big pieces of plywood that serve as table tops past the waiting investors.
- This always worked to set up a buzz in the room. “This must be a hot deal if this many people showed up unexpected.”
Lesson #2: Know your client. Another Street cliché, but most people underestimate what the word “Know” really means.
Walking around town many years ago with the CFO of a US auto company as we visited investors, he told me that he knew even before the meeting started if it would be productive. I found this hard to believe. The meetings were with all different kinds of Wall Street players, set up by my firm’s salespeople weeks ahead of time.
“You watch… If your salesperson knows the receptionist by name and talks to them about their kids, that’s going to be a good meeting.” He was right. At the next meeting, we saw a chatty salesperson from my company looking at new baby pictures at the receptionist desk. Next two meetings – no rapport at the front desk, and listless inattentive investors.
Another example: know when your client gets hungry. Sitting at a conference table working on a large M&A transaction (the largest one in the auto space in the 1990s), the group needed to call the client’s Treasurer. I reached for the phone.
The senior banker told me to stop; “It’s 11:30am. Bob (not his real name) is on a diet – he needs to lose a lot of weight. Let’s let him get lunch. We’ll wait until 1:30pm.” And we did. The call went fine.
Lesson #3: Don’t worry too much about what you don’t know, but rather what you’re sure of that’s actually wrong. That’s an old Mark Twain saying, but it is a lesson you learn quickly on Wall Street as well.
Take, for example, the most basic assumption that corporate managements who own a lot of stock will try to do what’s best for the company. I have covered two companies (both investment banking clients of my firm) as a brokerage analyst where the CEOs eventually either went to jail for fraud or narrowly avoided that fate. A third company went bust in a fairly spectacular fashion, just a year or two after raising equity.
All three CEOs owned a lot of stock – maybe too much, which is combination with a lack of moral compass led them to unwise actions. Yes, management teams should always own some piece of the business they manage. But that’s no reason to assume that this will magically guide them to better performance. Sometimes it just leads to desperation.
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