This is assembled Top 10 list of the unforced errors of youth and inexperience.
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.
