Studying in the Morning

Life has been busy lately. Cases are long, and it’s definitely been harder to get in on the discussion. I’ve been thinking about it a lot lately (particularly since I feel like I’m working harder than ever yet seeing fewer returns when I skimmed the cases last year!)

Two potential explanations:

1. EC professors are more directive, so there’s less room for discussion and debate. I keep on waiting to respond to classmates comments, but the professors this year seem to forcibly lead the classes with questions rather than simply moderating to maintain momentum. Maybe I need to just start answering instead of sitting on my hands waiting.
2. I intentionally chose classes where my knowledge and experience is lacking, but I don’t think that was a universal principle. My finance classes are full of people from hedge funds and investment banks… Not ex-corporate guys with consulting experience. I actually have to read the book to understand what people are saying, and even then — it’s tough to synthesize the nuances of many of the arguments.

Back to cases!

Anyway, it’s a great, easy read — I highly recommend it!  The first half of the book provides an excellent summary of his hedge fund’s philosophy.  (For those who don’t follow this industry — a hedge fund is different from typical mutual funds in that 1) it’s private and 2) has less rules.  This gives the fund much more flexibility — chiefly, allowing it to “sell short”, that is, bet on a stock declining.)

Here’s a classic example: Let’s say that you think Pepsi’s stock price is a great deal.  You weighed your aluminum can the other day and discovered that it’s 25% lighter!  You think the material savings will be huge, and you don’t think anyone else has noticed the change yet.  If you were a mutual fund, you’d buy 10 MM shares of Pepsi stock and hope that it would go up as Pepsi started to realize the cost savings.  But… what happens if the economy goes into a recession and people stop spending money on soda?  Or what if China decides that soda rots your teeth and decides to ban all imports?  In both of these cases — you might be 100% correct about the new cans, but the stock would drop and you’d lose money.

A hedge fund, on the other hand, could buy Pepsi stock and “short” Coke stock.  That is, they would make money if Coke stock falls.  Why would they do that?  Well, it might have nothing whatsoever to do with any expectations they have about Coke… but it would help “hedge” their risk against market and industry uncertanties.  Consider what would happen in the scenario above if you were a hedge fund.  Both stocks would fall 30% based on economic news, but then Pepsi would rise by 10% based on their new cans.  For a hedge fund, the fall in Coke (by 30%) cancels out the fall in Pepsi (by 30%), which leaves them with the 10% gain from the new cans.  A much better outcome than the mutual fund could obtain!

So, back to Einhorn… Einhorn’s approach has less to do with “classic” hedging above, but is more along the lines of acting as a financial detective of sorts.  He (and his staff) spend time studying all sorts of firms looking for fraud and mismanagement.  I think what’s so interesting about this is that there’s a huge profit motive to uncover firms that are lying to the market…  This is a pretty amazing “self-correcting” market mechanism.  When you ask the question: “Why don’t corporations blatantly deceive investors and fabricate their financial statements?”, there are two answers: 1) the SEC and government or 2) market incentives.  This book makes a strong case for #2.

Anyway, that’s enough finance for one post.  I guess I find it particularly interesting because I’ve always viewed finance in a somewhat demeaning light…  after all, shouldn’t these people be making “real things” instead of just “shifting money around”?  The type of role described here (as detective / judge / advocate) makes me feel like there might be more here than just traders bleeding out miniscule value gains from efficiency by trading stocks.

1. Consulting: 4 of 8
2. Tech: 1 of 7
3. Biotech: 3 of 4
4. Finance: 1 of 4
5. Industry: 0 of 2 

All told, that gives me a hit rate of 9 of 25 (or 36%).  In my target industries (ie, the top three groups above where I thought there was a reasonable chance of an invitations), it’s even a little better: 8 of 19 (or 42%).  I’m pretty excited about this… from the little I’ve heard from my colleagues, this was a difficult year for interview invitations.  Many people walked away with only 1 or 2 when they were expecting far more. 

I was a little shocked that I failed so miserably in the technology area!  While I don’t have any direct industry experience, I do have some functional expertise and (at least, I thought), a pretty “why I’m interested and would be amazing” cover letter.  I think those jobs just must be incredibly oversubscribed at HBS.  It  sounds like a lot of the “career consultants” (the kids who plan on going back to consulting) applied to these jobs.  Spending the summer in San Francisco working for Google is fairly attractive regardless of where you’d ultimately like to end up! 

Anyway, it’s going to be a busy two weeks prepping for interviews!  Wish me luck!

HBS actually makes it quite easy to apply with strict rules for recruiters and a very polished “job bank” containing all of the descriptions for on-campus recruiting.  Keeping in mind that there are 900 first-year students, the general stats are: 370 Jobs Total, 170 Finance (46%), 200 Non-Finance (54%).  In the non-finance category, the breakdown looks something like this:

Non-Finance Jobs

First, a quick disclaimer:  even though there are only 370 total job listings, a number of them do hire multiple people.  Some of the bigger firms even end up taking 10+ people from HBS (in good years at least).  That said, two surprising things to note here:

1. Even within a downturn, finance internships still make up almost 50% of the opportunities! For all that they say about HBS being “general management”, it looks like finance still dominates.
2. There are actually 10 jobs categorized as “manufacturing”.  Who would’ve guessed this category still existed in the US?

As someone who doesn’t particularly like crowded, cold places, I was also particularly interested in the location distribution among the job opportunities:

Locations of Jobs

Not surprisingly, almost half of the single-location jobs are located in Boston & NYC.  It was good to see a fairly strong showing from the West Coast… On the other hand, I was disappointed to find that among the 60-some International jobs, only a few of those were appropriate for US citizens.

After much deliberation, I ended up applying to 20-or-so jobs.  Giving priority to the large consulting firms, then choosing a few general management / strategic planning roles at firms within attractive industries in attractive locations (ie, not the Northeast).  Part of me felt like this was a ridiculous number of jobs to apply for, but it’s extremely difficult to tell what my marketability will be like in this tough economic environment.  We’ll see how it goes!  Depending on the outcome of the next few months, I might end up kicking myself for not conducting a more thorough “networked” jobs search!

This is a great time for business schools.  Applications skyrocket, ivory-tower professors are looked upon once again for advice, and “expert” panels are formed left and right to diagnose the problem.  In recruiting news, BusinessWeek had an article recently about the shift of MBAs from investment banking to consulting.  I’m a bit dissapointed in this… while I’ve tossed around the idea of doing some sort of financial engineering for a hedge fund, I think I had set my sights on a consulting job with McKinsey (at least for the summer).  There’s still the possibility, but the market just got way more competitive.  Here are the career stats for the top four job functions for the class of 2008:

• 45% – Finance
• 22% – Consulting
• 11% – General Management
• 7% – Marketing

Those 45% of HBS grads have to go somewhere.  It’ll be very interesting to see what the breakdown is for this upcoming year…  (As a side note, this may be one of the “good” outcomes of the whole financial mess… talent will reallocate from being highly concentrated in finance to more productive uses throughout the economy.)