Producer’s note: Someone on Quora asked: What are some mind-blowing facts about Wall Street? Here is one of the best answers that’s been pulled from the thread. Thank you to the team at Quora for making this happen!
Some observations having spent my better years walking on the street:
1. Work hours as a junior banker. As a junior investment banker you consistently work 80 to 100+ hours a week. Sometimes over 120+ hours a week, which is nearly 18 hours a day for 7 days a week. I remember pulling two all-nighters in a row, went home for a short sleep, came back to the office and pulled another two all-nighters. Looking back, it was just plain stupid (Read more: Why do investment bankers need to work long hours?).
2. Nature of investment banking. People don’t realize investment banking is primarily a “sales” job. Like your neighborhood car salesman, a banker will say almost anything to get a deal done. Expert advice is frequently just educated guesses, and at times, complete fabrications. (Read more: What’s something that is common knowledge at your workplace, but would be mind-blowing to the rest of us?)
3. Banking salary. The average salary is about $300,000 – 400,000. The figure, however, is distorted by an army of “lowly” back office and support staff. A seven-figure payday is really nothing special. Personally, I have no problem with the few rainmakers bringing home the bacon. Many are very talented individuals and deserve every dime they make. However, in “aggregate,” the pay is not well-deserved. I won’t dwell on this point as most people probably recognize this already.
4. Other People’s Money (“OPM”). OPM is one of the most perverse problems that permeates every corner of Wall Street. Heads I win and tails you lose. Traders get paid lavishly when they make the right bet, but it is always OPM when the bet goes wrong. Actually, by the time the bet goes wrong, the trader has probably moved on to a different company/department and not held accountable. Excessive risk taking is therefore encouraged. (Read more: How do Wall Street banks get around the Volcker rule?)
5. Investment management is a zero sum game. The fund management industry in “aggregate” does not really add value. When a trader wins, another trader must lose (or miss out). As a collective, the fund management industry is just the market (more or less). I’ve always found it amazing the number of young talent and amount of management fees that flow into a sector that in “aggregate” simply cannot add value. How unfortunate.
6. High frequency trading. I won’t go into the details, but basically it has become an arms race of being a millionth of a second faster than the other guy. The exchanges (NASDAQ and NYSE) started offering co-location within their facilities and traders started fighting for the best physical real estate within the co-location center (ie. literally trying to be a few feet closer to the exchanges’ computers). Some of the high frequency traders complained about how “unfair” it was to be a few feet farther away. The exchanges conceded and added “latency,” basically a few feet of cable, so everyone within the co-location center is equidistant. It baffles me that financial progress is moving in this direction.
7. Prediction by “experts” and pundits. Why do people still believe in pundits and “experts” on TV? If “experts” could predict the future with any accuracy, they would be doing something else. They are not always wrong, they are simply not right consistently enough to provide meaningful value. I’m always surprised how confident and certain people sound on CNBC (I rarely feel sure of anything). Keynes got it right when he said, “If you must forecast, forecast often.”
8. Madness of crowds; Forget and repeat. Scientific knowledge is cumulative, but financial knowledge is definitely cyclical. Financial history is forgotten and repeated, again and again. Every stock market cycle and every asset class bubble, people get sucked by a good story at the top and sell at the bottom in a panic. It can’t be helped. A great read of various bubbles and manias is Charles MacKay’s Extraordinary Popular Delusions and The Madness of Crowds — although someone should revise it and add new chapters on the Nifty Fifty bubble of the 1970s, Japan bubble of the 1980s, Asian financial crisis of 1997, dotcom bubble of 2001, and the US housing bubble of 2007. The crises/bubbles seem to be increasing in frequency over time.
9. A million deaths is a statistic. There is an odd detachment on Wall Street when it comes to large sums of money. “A billion here, a billion there, pretty soon you are talking real money.” Rogue trading bets gone bad, bank bailouts, massive quantitative easing, etc., feel like a statistic and just not real. People can grasp the day-to-day reality of “thousand” and “million,” but when it comes to “billion” and “trillion,” what does that really mean? Just a statistic. Personal detachment contributes to recklessness.
10. Magic of compounding (or not). Albert Einstein called compounding “the eighth wonder of the world.” Warren Buffett is frequently quoted as an example. $10,000 invested with Buffett in 1956 is worth north of $300 million today compounded at a little over 20% per year. But Buffett is truly an exception. Most people can only compound at very low rates, assuming they don’t end up losing their money to Wall Street.