The Investment Banker Playbook for Any Weather

In this article, we look at how investment bankers can prosper in any financial climate. To understand this resilience we examine how they survived the financial crisis, how the concepts of risk parity can mitigate their portfolio risk, and how a broad list of competencies provides career longevity.

The catastrophe of the 2008 financial crisis left the investment-banking world attenuated and uncertain. Mergers and chapter 11 filings resulted in a consolidated roster of players. Those who survived did so by transforming themselves. Case in point: these investment banks converted to bank holding companies (BHC). This change was part of a broader strategy to capture some of the funding from the government bailout. In many cases, however, last minute maneuvering was inadequate compared to a mountain of debt accumulated in pursuit of collateralized debt obligations.

Many hard lessons came to the fore in 2008. Today, investment bankers are wiser and more ethical. The improved moral landscape comes partially from a drive to act ethically and partially from the adherence to the law. “We talk more about what should we be doing as a firm, not just can we do things, what should we be doing?” reflects Goldman Sachs President and COO Gary Cohn.

The subtext of Cohn’s remark is simple: investment bankers need to return to proactive thinking. A proactive approach is necessary for survival. Globalization has left the world more interconnected and therefore more delicate. Those who eschew all else in pursuit of sensational profit will risk the devastating losses seen just eight years ago.

Cohn, it seems, is sticking to his word. Recently Goldman Sachs decided to abstain from the practice of selling European contingent convertible bonds. The issuer-friendly structure and complex underpinnings invite too many comparisons to the faulty products that sparked the downfall of so many firms during the crisis.

Goldman Sachs and other survivors are wise to play long-ball. Surviving is what you do before disaster strikes. Remain proactive and heed the lesson of the past.

Managing Risk

Investment bankers pursue growth. This goal is often in opposition to traditional methods of risk management. One such method is the traditional 60/40 stock/bond portfolio. The bond portion is designed to help the investor withstand a down equities market. The problem: bonds offer unfavorable returns compared to the historical earnings enjoyed by riskier all-stock portfolios.

Risk parity is a method of risk designed for the equitable distribution of risk across all holdings. These holdings (equities, gold, commodity ETFs, Treasuries and more) are selected, in part, based on their low correlation to one another. Such a portfolio strives to weather all market conditions.

A study from Lazard Asset Management illustrates the effectiveness of this strategy. During May 2002 to July 2016, a risk parity portfolio outperformed an equal weighting portfolio. The two styles generated returns of 4.91% and 4.08% respectfully. The most compelling aspect of risk parity, however, is the combination of higher returns and higher Sharpe ratios. The same study determined that the risk parity composition carried a Sharpe ratio of 0.66 compared to 0.37 for the equal-weighted option.

Critics cite the risk of leveraging which is a practice sometimes seen within the strategy. Moreover, periods of a high correlation between bond and stock movements can further blunt the risk mitigating aspects of the concept. However, over the long-term, the results of the Lazard study underscore the effectiveness of this approach to volatile markets.

Broadening Your Competencies

Some have labeled volatility as the friend of investment bankers. These conditions spur transactions. How do investment banks weather quiet times? As New York Times author Steven Solomon explains investment banking firms like Goldman Sachs act like an “accordion,” contracting during less profitable periods. “When the markets are down, Goldman slims down. Goldman has cut 10 percent of staff since 2010 and moved many employees to lower-cost locations like Salt Lake City. But when the markets heat up, Goldman’s plan is to expand,” he explains.

Managing these undulations means building your arsenal of competencies. Become indispensable by becoming flexible. The time to build, or rebuild, other financial skills is now. “The transformation of Wall Street is likely to leave a few big banks as global players as the rest retreat,” warns Solomon.

This changing economic landscape represents the external pressures. The internal stressors are every bit as intense. Each banker is an army of one and those who are more established cast a large shadow. “Where does an 800lb gorilla sit? Answer: wherever he wants to sit. This summarizes an investment bank pretty well,” laments a journalist writing for The Guardian. The demand to earn your keep is intimidating.

One investment banker learned that success “Is very much to do with defining, claiming and defending your niche or segment; what kind of products are you licensed by the bank to sell to clients and in what geographical area?” These niche areas prove useful when a once large firm becomes attenuated in rough times.

The investment banker goes on to assert the importance of designing new products. The competition comes not only from other companies but also from the person sitting next to you. Practical and profitable innovation strengthens the relationship with a client. These relationships become critical when you’re building a book of business and working to hit your budget.

Investment bankers must remain proactive in their thinking and focus on the long game just as firms have since 2008. Manage the pursuit of aggressive returns and risk management with an exploration of strategies like risk parity. Finally, broaden your competencies to accommodate the changing needs of your firm.


Ben Taylor

After completing my MBA I spent a decade in the business world working for firms like Vanguard where I earned ground level experience. This practical background has served me well in my personal finance writing. My work is designed to distil the most important truths from financial research thereby empowering the reader with clear direction. My work includes Ebooks, articles, whitepapers and blog posts. In June of 2016 my Kindle book "The 90 Minute Personal Finance Plan For Life" reached the number one spot on Amazon under Personal Finance.