For certain jobs and those particularly in finance, the value addition that a person can do doing a job can seem very minimal. In some professions such as, say front-end investment banking, I do not find much value at all. Their job is essentially to sell their clients large deals to ego-hungry acquirers who have too much cash, and to sugarcoat these deals with the word 'synergy'. Now, you (and everyone else) are allowed to disagree with this, but my opinion is based on studies which prove my point of view. It has to be said however that there ought to be studies which prove the exact opposite point of view as well. Investment banking jobs are the cream of the crop of course in the world of finance and are sought after by a pretty large majority, mainly because of the enormous pay and to a smaller extent the lifestyle. Do investment bankers add value individually that can amount to hundreds of thousands of dollars per year (or millions in some cases)by 'valuing' a few companies and doing a bit of math? Highly questionable, and even those who disagreed with me on the earlier point- at least some of them may agree with me here. The huge salaries paid to them are a mixture of the success of the firm as a whole (investment banking is an oligopoly and dominated by a few banks which can bend the rules and at some places even create the rules by lobbying). It comes down to the fact that there is demand for investment banking services and someone has to do it. In spite of all the hatred for investment bankers (kind of), I would myself consider say a Goldman Sachs to be the strongest contender to do a deal if I had to raise an IPO for my company, instead of doing it with some academics. It's a matter of experience in dealing with the lawmakers, the brand appeal that they have etc. and the technical expertise while important is not the most important thing. If investment banking is so lucrative(and pays big- seemingly irrespective of the number of people in the industry), what prevents everyone from being an investment banker and earning big? It's not really a technical field in any case (at least at the front end). Firstly, we know that these banks have so much demand that they can afford to pick the highest IQ people and those with the best backgrounds. This automatically makes them the best people to take up the job in the first place. But all intelligent people do not end up in these institutions. The amount of pressure- from peers as well as clients is so high that not everyone can survive. This ensures that the demand for such jobs never increases disproportionately and if it does, fellow bankers will become still more competitive to retain their jobs in case the low performers are kicked out. In summary, although the value added by investment bankers is low (and generally negative), there will be a continuous need for deal-making and thanks to their oligopoly and vast experience, investment banks will continue to add some kind of value in some way.
There are other jobs such as in technical analysis which are essentially useless. Technical analysis, as any academic with any sense will tell u- is a bit like homeopathy. It might seem to work for those who believe in it, but it has absolutely no scientific background. In such a case, a technical analyst adds zero value in general (negative if you pay them something for their research). Unlike in investment bankers' case where they got paid partially because of the oligopoly, partially because of their experience (which in turn is arguably because of the oligopoly), and partially because of just the demand- technical analysts earn money ONLY because of the demand for such research. And this demand comes from ill-informed clients who are unaware of the pointlessness of technical analysis. I would like to mention that I'm not a big fan of fundamental analysis (or any kind of analysis) since it is difficult to come up with accurate estimates of price- the basic methods of discounted cash flow or gordon growth are very simple (and using trading/transaction multiples for pricing is simpler) and can be used by any 10th standard student. There are no advanced formulae that have been proved to work consistently, but at least there is some sort of theory backing the analysis of fundamentals. If the reader is unfamiliar with academic finance, I would like to mention here that I'm not talking gospel- Efficient Market Hypothesis is one of the strongest theories in finance and was suggested by the Nobel Prize winning Eugene Fama- and it essentially says the same thing. One may also refer to the bankruptcy of LTCM, which had the biggest geniuses of finance managing a the hedge fund.
Many people are under the impression that finance is a technical field where you need to know formulae and theories and numbers and be extremely intelligent. This is false to a reasonable extent. Unlike the founder-CEO of a software firm - who would know the inside out of most of the technical details related to programming, the CEO of a big bank would have little idea about the technical details of risk management within the bank. He would obviously know a whole lot of things relevant to him, but even the CRO (Chief Risk Officer) of a bank may not know how to, say, apply extreme value theory to calculate the losses beyond a certain limit. What he will be good at is dealing with people, knowing the mood of the market, being a good managers and in general- having good intuition and ability to convert empirical evidence into sound decision (something I mentioned in my immediately previous post). To be honest, there are no formulae in finance that help you make money by applying them- it is definitely more of an art and less of a science. Even in the most technical risk management practices, (which I went through in FRM part 2) risk managers end up using empirical formulae for the best results. While, say a Black-Scholes can be assumed to be a near-perfect model (some assumptions regarding the distribution of a share price etc. are not 100% accurate), it cannot be used to make money in any way since the whole world knows about it. It is worth mentioning that the earliest traders who adopted the Black-Scholes formula DID make a lot of money but in a few months, everyone became aware of it. A CAPM formula or a Gordon-Growth formula are, needless to mention- useless in adding value to anything by themselves. But when in the hands of someone with experience working in an monopolistic kind of firm; when the guy understands how things are shaping up in the market and can make sound judgements based on his experiences- the formulae and the guy become more than a sum of their parts, and value is created and money is made.
I would argue that fund managers of mutual funds add zero value as well. In this case, the majority of studies point to the fact that the market as a whole tends to beat the top global fund managers well more than 50% of the time. However it must be noted that although an individual fund manager adds little value when you put your money with him, if fund managers were suddenly wiped out from this world, the markets would suddenly lose a major portion of their efficiency in pricing products and providing liquidity and so on. While individual fund managers do not add much value, fund managers as a whole are an integral part of the global markets. Similarly in the case of those who speculate with say derivatives on behalf of clients (like a derivatives trader or a hedge fund managers) also add value in a similar way. Although these people do not build physical assets such as a house or a car, or even a software- they do add enormously to the world of financial markets and thus to the world. The contribution of the financial markets to our well-being is of course beyond the scope of this writing!
There are other jobs such as in technical analysis which are essentially useless. Technical analysis, as any academic with any sense will tell u- is a bit like homeopathy. It might seem to work for those who believe in it, but it has absolutely no scientific background. In such a case, a technical analyst adds zero value in general (negative if you pay them something for their research). Unlike in investment bankers' case where they got paid partially because of the oligopoly, partially because of their experience (which in turn is arguably because of the oligopoly), and partially because of just the demand- technical analysts earn money ONLY because of the demand for such research. And this demand comes from ill-informed clients who are unaware of the pointlessness of technical analysis. I would like to mention that I'm not a big fan of fundamental analysis (or any kind of analysis) since it is difficult to come up with accurate estimates of price- the basic methods of discounted cash flow or gordon growth are very simple (and using trading/transaction multiples for pricing is simpler) and can be used by any 10th standard student. There are no advanced formulae that have been proved to work consistently, but at least there is some sort of theory backing the analysis of fundamentals. If the reader is unfamiliar with academic finance, I would like to mention here that I'm not talking gospel- Efficient Market Hypothesis is one of the strongest theories in finance and was suggested by the Nobel Prize winning Eugene Fama- and it essentially says the same thing. One may also refer to the bankruptcy of LTCM, which had the biggest geniuses of finance managing a the hedge fund.
Many people are under the impression that finance is a technical field where you need to know formulae and theories and numbers and be extremely intelligent. This is false to a reasonable extent. Unlike the founder-CEO of a software firm - who would know the inside out of most of the technical details related to programming, the CEO of a big bank would have little idea about the technical details of risk management within the bank. He would obviously know a whole lot of things relevant to him, but even the CRO (Chief Risk Officer) of a bank may not know how to, say, apply extreme value theory to calculate the losses beyond a certain limit. What he will be good at is dealing with people, knowing the mood of the market, being a good managers and in general- having good intuition and ability to convert empirical evidence into sound decision (something I mentioned in my immediately previous post). To be honest, there are no formulae in finance that help you make money by applying them- it is definitely more of an art and less of a science. Even in the most technical risk management practices, (which I went through in FRM part 2) risk managers end up using empirical formulae for the best results. While, say a Black-Scholes can be assumed to be a near-perfect model (some assumptions regarding the distribution of a share price etc. are not 100% accurate), it cannot be used to make money in any way since the whole world knows about it. It is worth mentioning that the earliest traders who adopted the Black-Scholes formula DID make a lot of money but in a few months, everyone became aware of it. A CAPM formula or a Gordon-Growth formula are, needless to mention- useless in adding value to anything by themselves. But when in the hands of someone with experience working in an monopolistic kind of firm; when the guy understands how things are shaping up in the market and can make sound judgements based on his experiences- the formulae and the guy become more than a sum of their parts, and value is created and money is made.
I would argue that fund managers of mutual funds add zero value as well. In this case, the majority of studies point to the fact that the market as a whole tends to beat the top global fund managers well more than 50% of the time. However it must be noted that although an individual fund manager adds little value when you put your money with him, if fund managers were suddenly wiped out from this world, the markets would suddenly lose a major portion of their efficiency in pricing products and providing liquidity and so on. While individual fund managers do not add much value, fund managers as a whole are an integral part of the global markets. Similarly in the case of those who speculate with say derivatives on behalf of clients (like a derivatives trader or a hedge fund managers) also add value in a similar way. Although these people do not build physical assets such as a house or a car, or even a software- they do add enormously to the world of financial markets and thus to the world. The contribution of the financial markets to our well-being is of course beyond the scope of this writing!
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