Episode 1 - A Cold Dose of Reality, Part 1

The first episode in our weekly series on landing a job on Wall Street and navigating it once you get there

“Take out a piece of paper and something to write with. We’re having a pop quiz today and it will represent 10% of your grade”.

That was the first thing I heard on the opening day of Corporate Finance class at the University of Chicago’s Graduate School of Business (now called the Booth School). My classmates and I just stared at the professor as he made that announcement. How could we have a quiz before we had even learned anything? Yet the professor – one of the most highly ranked teachers by the students of the school – seemed dead serious.

He lifted a sliding chalkboard to reveal a set of 10 questions. Where had the Dow Jones Industrial Average and S&P 500 closed on the prior day? What was the yield on the 10 year Treasury note? What was the spot price of gold and West Texas Intermediate crude oil? Where had the Nikkei closed the prior night? The rest of the quiz was the same sort of thing.

There was a collective groan from the room as the professor collected our papers and called out the name written atop the first set of responses in the stack.

“Mr. Collins… Your paper is blank.”

“Yes, professor.”

The professor shuffled through the stack of our answers, seemingly picking his second victim at random…

“Ms. Jones… You only answered two questions. Both your responses are incorrect.”

“Sorry, professor.”

He then flipped through the rest of the stack – there were over 70 people in the class. All the pages appeared blank or nearly so.

“Class…” the professor sighed and looked at all of us…

“You are attending one of the finest finance schools in the world. I presume this means you want a career in the field. And yet none of you can be bothered to know even the most basic information about capital markets.”

He took a pause and long stared around the room.

“I would suggest that you are wasting both your time and mine by attending this school and this class. Please do yourself and this institution a favor: never walk into a classroom or an interview without knowing the prices of important asset classes, the news of the day, and basic macroeconomic data.”

“Does everyone understand?”

“Yes”, we nodded.

That was the most important lesson I learned in my MBA studies, and it goes further than simply memorizing a few numbers.

I have thought a lot about that day in the years since, and here are the 10 pointers I would like to pass along to you:

#1. Being able to recite the prices for the S&P 500, gold, Treasuries and other basic market measures is only the starting point.

To this day I always check the price levels for every major financial asset before any client meeting and at the end of every day.

In addition, several times a week I will review the 5-day, one month, year to date and 1-year price performance for all those investments plus every industrial sector in the S&P 500. What sectors are doing better than others recently? Are they playing catch up, or extending their leads versus others? Is tech doing well? How about gold? And – most importantly – how do all these relate to each other? What story explains these moves?

#2. Read every story on the front page of CNBC.com and the Wall Street Journal/Financial Times EVERY DAY. This will take an hour or more when you start – there will be new words and terms to learn. Power through it. It gets easier with time.

You may be thinking “Obviously everyone on Wall Street does that.”

No, they don’t. But not because they are lazy; just the opposite, in fact.

One example: many years ago a very seasoned Wall Street investment banker at my firm called me in a real snit. “Why is Chrysler’s stock down a dollar today?” The company was his biggest client, and he wanted to call the CFO with his take on the decline.

“Um…” I started… “The whole group is getting hit today on a downgrade by another firm. It isn’t just Chrysler. Every automaker and supplier is down 3-7%. Chrysler is actually doing better on a percentage basis.”

The banker was myopically focused on his client and not attuned to the whole industry’s capital markets prices. It happens to everyone, but creating a discipline to follow broad trends will mean you make that mistake less than most people.

#3. Start playing a weekly game: where will stocks/bonds/commodities end the week? Write down your guesses and see how you do.

I am a big believer in game-ifying chores that would otherwise be dull or unpalatable.

Turn the necessary discipline of tracking capital markets into a contest, ideally with a group of like-minded friends or if necessary just for yourself. Pick a stock you like, write down what you think it is worth and why you think it will get there. Do the same with different assets (US stocks, European stocks, Asian stocks, gold, whatever…). Track your performance over time and if you do well, give yourself a reward or agree that the loser of a multi-person contest buys pizza for the group.

Some colleges and universities have investment clubs. If yours has one, join it and be active in the group. If your school doesn’t, consider starting one on your own.

We will wrap up this Top 10 list in Part II….

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@nick.colas

Your first Wall Street mentor