From the monthly archives:

October 2011

Competition for investment banking jobs and admission to the top MBA schools is crushing. No doubt you’ve heard tales of candidates with gold-plated resumes and extracurricular activities who still didn’t get in.

So you may be interested in a guest article by Cal Newport, MIT Ph.D., an all-round whiz at competing against the odds, published on Tim Ferriss’ FourHourWorkWeek blog. In it, he describes the “Superstar effect” which bestows disproportional riches and recognition to those who are the very best in their field, even though they may only be slightly better than the next few competitors.

For example, he tells the story of the opera singer Juan Diego Florez who wowed audiences during a 2008 performance of a notoriously difficult piece, hitting 9 high C’s in a row. The acclaim was overwhelming, and Florez was summoned back for an encore at New York’s Metropolitan Opera House.

But back in 1972, a young tenor by the name of Luciano Pavarotti also made a name for himself performing Donizetti at the Met. Like Florez, he too hit the high C’s. But the audience at the Met on that day demanded 17 encores. Newport notes that “both Florez and Pavarotti are exceptional tenors, but Pavarotti was slightly better — the best among an elite class. The impact of this small difference, however, was huge. Whereas we estimated that Florez was well off but not wealthy, when Pavarotti died in 2007, sources estimated his estate to be worth $275 to 475 million.”

A paper published in the American Economics Review in 1981 by the economist Sherwin Rosen identified this as the “Superstar Effect.” The logic is simple: consumers reason that if Pavarotti is the best and they can only buy one album, they might as well get the best. The result is that the vast majority of purchasers’ millions goes to Pavarotti, even though his talent advantage over Florez is small.”

The same Superstar Effect works with class valedictorians. A researcher named Paul Atwell looked two students, both with 700s on their SAT tests. The first was class valedictorian; the second was ranked number five in the class. Rationally speaking, the difference in G.P.A. is negligible. But using statistics from Dartmouth College admissions, Atwell discovered that the valedictorian had a 75% chance at acceptance at the Ivy League college, versus only a 25% chance for the number-5 ranked student.

But here’s the point of the whole article. Newport also tells the story of Michael Silverman, a fairly average high school senior with modest SAT scores and only one advanced placement course. At a time when Stanford University is turning away students with math SAT scores higher than 780 and 3.75 G.P.A.’s, Silverman still managed to get accepted. Silverman found a way to “hack” the Superstar Effect and use it in his favor.

“Michael avoided the crushing course load that diminishes the will of so many college hopefuls, instead taking only a single AP course during the dreaded junior year. He kept his extracurricular schedule equally clean — joining no clubs or sports and dedicating his attention to no more than one outside project at any given time,” writes Newport.

To discover Silverman’s secret to “hacking” the Superstar Effect and getting into Stanford, you really should read the full narrative of Newport’s piece at FourHourWorkWeek blog. It could very well give you a leg up on competing and winning an investment banking job in a very competitive environment. Once you’ve had a chance to review it, we’d be interested in your comments below.

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MBA grads at the very top business schools are pursuing investment banking jobs and other finance positions in record numbers, reports the Wall Street Journal. Recruiting at the big MBA schools hit a post financial-crisis high of 39% of job-seeking 2011 grads at Harvard and Yale, 36% at Stanford and a whopping 51% at Columbia Business School.

Despite the news of major layoffs in the sector, shrinking bonuses and the highly public protests against Wall Street, MBAs are still charging toward finance jobs for the same reasons as they were before: money and prestige.

But those landing jobs right now are entering an investment banking industry that is undergoing massive change. The big banks are tightening their belts as revenues from proprietary trading disappear, regulations tighten, and investors flee in the face of market turmoil. This new crunch could dim prospects for MBAs in future years, as well as dampen prospects for those with 3-7 years of experience.

“You’re vulnerable if you’re in that five-, seven- or nine-year range,” said Alan Johnson, managing director of compensation-consulting firm Johnson Associates Inc. “You’re expensive and you don’t have clients.”

Johnson added that investment bankers with roughly 5 years of experience can command compensation in the $400,000 range. While new hires from the top business schools can expect about one-third that amount.

This could explain why some banks are continuing to hire at the entry level even as they squeeze costs. However, the director of career services at Yale reports that investment banking recruiting and hiring is beginning to slow down, amid the uncertainty.

MBA students at Harvard and other schools are adapting to this new, changing environment. They’re exploring smaller, boutique investment banking firms and venture capital firms. The Journal article interviewed John Tough, a second-year student at University of Chicago’s Booth School of Business, who interned at venture-capital firm Kleiner Perkins Caufield & Byers over the summer and said he plans to look for openings at other venture-capital companies. His school friends are broadening their search for finance jobs in the corporate sector as well.

How about you? If you’re looking to land a first job in investment banking or switch firms, what are you doing to improve your hireability? Add your comments below.

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Earnings season has kicked off and all eyes are on Goldman’s quarterly report coming out this Thursday. Long regarded as the most formidable of the investment banks, some analysts predict Goldman’s profits will slump to only its second-ever quarterly loss since it went public in 1999, reports London’s Telegraph.

What does this mean for investment banking jobs, salaries, bonuses at other banks? Is Goldman, along with the other bulge-bracket banks, fighting against new and threatening “currents” that will forever limit growth?

Like many of the other banks, Goldman’s oversized profits for the past 15 years were driven by its capital markets and proprietary trading businesses. Now, with the Dodd-Frank financial reforms moving along, they’ve had to cut back dramatically on that part of their business.

There’s also a swirl of anti-banking sentiment rising, both in government and on the streets, as the Occupy movement expands around the world.

While one quarter’s results do not spell doom for Goldman, a former senior Goldman partner told the Telegraph that the firm is facing headwinds. “In the current environment the investment banking model doesn’t work. All banks have prospered in the last decade with supernatural profits because of the securities business. But thanks to regulatory intervention and low volumes, those days are now over.”

On the flip side, a Goldman insider says it’s all just business as usual, and we need to think long-term. “The reality isn’t complex, we match people that have capital with people that need capital, whether that’s through an IPO, an M&A deal or a trade. We play an intermediary role and this is a business that’s been here a very long time and will not disappear any time soon.”

Okay, so we can agree the days of big trading profits may be over for now. And that no bank is going to be as profitable as it was before Dodd-Frank, according to author and former banker William Cohan. But that doesn’t mean Goldman, or investment banking jobs, are going away.
“Goldman’s great strength is that they’re the perfect Darwinian machine for making money,” says Cohan. “Once the dust settles, they’ll figure out the new regulatory, economic and political environment.”

What about you? Does the current political and public climate influence your goal of landing an investment banking job? Add your comments below.

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Why Investment Banking?

October 10, 2011

It may be the most common question in an investment banking job interview. But answering it in an uncommon way will give you the edge in landing an investment banking job. “Why do you want to work in investment banking?” The first step is avoiding, or touching only lightly on the pat answers, such as […]

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Investment Banking Trading Jobs Face Pay Restrictions

October 3, 2011

Investment banks would have to change the way that some of their traders are paid, if one of the proposed restrictions in the evolving Volcker rule comes to fruition, reports Businessweek. The new rule is part of the Dodd-Frank Act, which is being crafted by regulators from five Washington agencies and could be released in […]

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