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Top 10 Wall Street Rookie Mistakes

Via ConvergEx's Nick Colas,

Summary: We occasionally dedicate these notes to passing on some of oral traditions of Wall Street to the next generation of traders, analysts, and other young professionals in the business. Today’s version: rookie mistakes you should try hard to avoid.  We took our own experiences, along with some from other senior managers at Convergex, and assembled a Top 10 list of the unforced errors of youth and inexperience.  Yes, we were there once too. 

The most important lessons: be 100% mentally present, communicate efficiently, look at the whole financial model (not just the income statement), and remember that everyone has an agenda.

Above all: figure out what you do better than most people and develop those skills as much as you can.  Don’t show the world what you can’t do; show us what you CAN do.

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My first job on Wall Street was in the back office of a mutual fund company during summer break from college in 1984, and by all rights it should have lasted all of 2 weeks.  Shortly after starting, I found myself in an office – I didn’t know whose – doing data entry on the only PC the firm owned.  Yes, this was a long time ago.  A middle aged man walked in and said, “I need to use that computer”.  My response: “OK – I will be done in about 10 minutes”.  He looked puzzled, but he left.

The next morning, I walked into my boss’s cubicle, and there was the same guy.  He pointed at me and said, “That’s the kid that kicked me out of my own office!”  Turns out he was the CFO of the whole place.  Instead of firing me on the spot, he just laughed.  It turned out that he appreciated my diligence and desire to finish the task at hand.  Which is fortunate, because every job I have had on Wall Street since – and getting into a decent business school – all came from that first summer job.

It was a rookie mistake, of course, not to know that I was in the CFO’s office using his computer.  Ask anybody in this business and you’ll hear similar stories of unforced errors that could have led them into a different line of work before they ever really got started.  I asked a few senior people at Convergex about their own rookie fumbles, and everyone has similar stories.  You don’t know what you don’t know…

In the spirit of helping our younger readers avoid a few of these pitfalls, and perhaps reminding all of us that this business has its own peculiarities, today’s note is a list of 10 rookie mistakes.  I have separated them into basic job classifications – traders and analysts – because over the course of my career I have had the chance to make those beginner’s screw ups in both areas of the business.  Do as I say, not as I have done.  There is a lot of cross over in terms of lessons learned, however, and plenty for those readers who work in other areas of financial firms.

And now, the list…

Working on a Trading Desk

1)    Be 100% mentally present.  Trading can seem like the old adage about warfare – long periods of boredom punctuated by short bursts of intense activity.  You can’t let down your energy level during those quiet times, however, because you never know when the mortars will start to land. Yes, this holds true for any job, but everyone can see you on a trading desk.  And believe me – they are watching.

 

2)    You will be constantly tested.  I have worked on some of the liveliest (think of an environment akin to the exercise yard at Attica Correctional Facility) as well as restrained desks on the Street, and they all have one thing in common.  Older traders are constantly testing younger recruits.  There’s the ego test – “Get me a coffee”.  And the honesty test – asking some arcane question to see if you will make up an answer rather than just say “I don’t know, but I will find out”.  No interaction is just a harmless exchange.  In the real world, everything is on the test.

 

3)    Details matter.  I have long used a quick test to assess how well a given salesperson or trader really knows their accounts: do they know the name of the receptionist at their client firms?  If they do (extra points for the person at the desk actually knowing my guy/gal’s name too) then chances are excellent that we were going to have a good meeting.  It is a little thing, but it shows how many times they are actually in the client’s offices.  And the worst rookie mistake in this regard: not knowing that a client has moved and showing up at the wrong address.  Yes, I have seen that happen. More than once.

 

4)    Practice communicating efficiently.  Nothing screams “Rookie” like a long answer to a simple question. Blank stares are also a big tip off.  So practice answering questions in a methodical manner. Learn to read the person asking the question. Some people can listen attentively for several minutes, other for just a few seconds. Know your audience.

Fundamental Equity Analysis

5)    Do the whole financial model, not just next quarter’s earnings.  While I classify this as a rookie mistake, it’s a pretty widespread problem.  Analyzing the balance sheet and cash flow statements force you to consider all the important questions that drive stock prices.  Where is the company investing?  Is it doing so with internally generated cash?  Will incremental Capital Expenditures translate into accelerating earnings?  You will miss all that if you only focus on this quarter’s earnings.  Rookie test question: “How much cash does the company have on the balance sheet?”

 

6)    Everything is about percentage change.  This is a tough one, but really important.  Growth and contraction matter more than any other single topic, but you have to measure against a baseline.  Simple, yes.  And, unfortunately, simple to forget.  Easy example: “How many days can a company’s stock price decline by 5%?”  If you said “20”, you’ve made a classic rookie mistake.  The answer is infinity.

 

7)    It’s all about units, price, mix, and costs.  Financial analysis is, ultimately, the numerical framework around which you form an investment thesis. Don’t just assume revenue growth will run at the same average percentage rate as recent history. Do the work. Break it out into units, price and product mix.  Understand the costs inherent in the business, and tie them to revenues.  Everything has to fit together and make sense.  Easy litmus test question: “Walk me through the market share assumptions you use for all the companies in a given industry.”  The rookie’s assumptions will always equal much more than 100%.

Macro Analytics

8)    Learn your history.  Back in the early 1990s, a seasoned Wall Street analyst told me “Old age and experience beats youth and exuberance every time.”  His logic: he had been around for several economic cycles so he knew how things worked better than I did.  At the time, he might have been right.  With the Internet, however, anyone with a modicum of motivation can analyze thousands of historical data series.  This isn’t a total substitute for experience, but it will save you from the rookie mistake of not knowing basic information like where the S&P 500 peaked in 2007 or how oil traded during the 1979 Iranian revolution.  

 

9)    Everyone has an agenda.  For whatever reason, most macroeconomic/market analysts have a distinct political agenda.  This colors their commentary to such a degree that reading their work is akin to stretching out in a minefield for a nap.  So read everything and make up your own mind. Left, right, center, anarchist… You can’t finish a jigsaw puzzle until you have all the pieces.

Final Lessons

10) Make it your own.  Wall Street jobs run the gamut from computer programmers to traders to analysts to financial staff to general management.  You have to decide where you fit within that broad spectrum.  And while I have focused here on avoiding mistakes, it is just as important to understand where your abilities allow you to excel.  After I wrote my first research report, back in 1991, my mentor commented “You are going to make your living on your writing.  Anything else you do probably won’t be as good as that.”  OK, so maybe he could have stopped after the first statement. But he was right.
 
11) Bonus point: have a career plan.  Malcolm X said it well: “If you don’t stand for something you will fall for anything”. Have some idea about where you want to take your career. You know the drill: talk to others, develop a network, get some mentors who want to help.  After all, you can only call them “Rookie mistakes” when you are actually a rookie.  After a few years, they are just mistakes.

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