Friday, May 19, 2017

Making the Leap from a Liberal Arts Major to a Finance Career

I recently heard a presentation by Paul Smith, the president of the CFA Institute. One of the data points he shared was that, among CFA Charterholders over the age of 50, about half had liberal arts undergraduate degrees. For those under 50, liberal arts degrees were just a small minority.*

As one of those liberal arts Charterholders, I found this statistic troubling - but not at all surprising.  

There are many reasons for this shift - more majors today, more specialization, etc. - but there's a massive opportunity for liberal arts majors to make an impact in the investing field today. 

Namely, the quantitative side of the business is becoming increasingly industrialized and overwhelmed by computing power. What's still missing are the "softer" skills (e.g. critical thinking, reasoning, writing, etc.) that are cultivated in liberal arts courses. 

Just as important - investing is a liberal arts major's dream job. In fact, there's a thoughtful book written on the topic: Robert Hagstrom's, Investing: The Last Liberal Art. As you develop as an investor, you'll increasingly call on a vast array of knowledge sources - drawing from the sciences, history, philosophy, etc. - in an attempt to weave them together into original ideas.

For these reasons, I'm an advocate for more liberal arts majors in the investing field. When I speak with college students who are undecided on a major or liberal arts majors wanting to make the leap into finance, here's the advice I give.

Minor in business (or audit an accounting course)

If it's not too late, major in a liberal art (something that you're passionate about) and minor in business. The reason I recommend a liberal arts major is two-fold.

First, the vast majority of what you need to know about finance you'll learn on the job. Minoring in business will show companies that you're not completely clueless.

Second, once you graduate, you're unlikely to find a company that will pay you to study ancient philosophy. They will probably, however, help you pay for an MBA or a valuable industry certification. Capitalize on the precious time you have to study liberal arts as an undergrad. 

If you're a senior or just out of school, at least audit an accounting course. Accounting is the one subject companies will struggle to teach you on the job, but it's absolutely critical to know if you want to work in the field.

Start looking into the CFA or CFP programs

Employers should look favorably on the fact that you've started down the path toward a professional certification. It shows that you're committed to the industry and are less likely to jump ship your second week on the job. 

Take a bottom rung job and make an impression

One of my early mentors explained that your undergraduate achievements are like a Christmas present to the company - wrapped up nicely, with a big bow, and full of promise. What really matters is what happens once the present is opened on day one. 

If you don't have a shiny finance resume, your present might appear wrapped in old newspaper to the employer. But that's okay. The key is getting in the door, even if it means starting at the bottom. Once you're in, you can show off your qualitative skills.

For example, with the benefit of hindsight, the best thing I did at my first job (working as a registered rep at one of Vanguard's call centers) was to write a research paper on currency risk. I hadn't the slightest idea what currency risk was before I started, but I knew it was a major topic being asked by investors. It made an impression and led to more opportunities for advancement. 

Focus your first job search on larger financial institutions

It's much easier for a liberal arts major to get an entry level job at a large financial firm. Small firms don't have the resources to let you learn the job on the fly - they'd prefer to hire someone who can hit the ground running. Large firms typically have dedicated training staff and are comfortable with developing talent for the long term.

Bottom line

Making the leap from a liberal arts major to a finance career isn't easy, but then again, nothing worthwhile in life is. The key is to not get discouraged by the fact that you have a liberal arts degree. The businesses that you'd want to work for in the first place should embrace cognitive diversity and value your background.

Stay patient, stay focused.

Best,

Todd

*The CFA Institute is working to get me the actual data. I'll share it if/when I receive it.

Some of you have asked why I haven't updated the blog in a while. I've been helping launch my employer's blog, writing a monthly column here, as well as doing some writing for Monevator and Investors Chronicle. Thank you for your interest - and my apologies for not communicating this better.

The opinions expressed here are the author's and not those of his employer. For a full disclaimer, please click here

Saturday, December 3, 2016

Moats and Knights

One of my favorite Warren Buffett quotes is a lesser-known one. It comes from a transcribed conversation he had with University of Maryland MBA students back in 2013, where he was asked about Morningstar's work on economic moats. 

Here's part of what he said:
If you have a castle in capitalism, people are going to try to capture it. You need 2 things – a moat around the castle, and you need a knight in the castle who is trying to widen the moat around the castle. 
Buffett disciples should be well familiar with his economic moat philosophy, but this was the first time I heard him use the metaphor of a "knight" widening the moat.

It's a great concept, isn't it? But this ideal combination of moat + knight is rarer than you might think.

First, the presence of a true economic moat is by definition an infrequent occurrence in capitalism. Right off the bat, then, we can eliminate a majority - 75%-plus - of companies from moat + knight contention.

Second, let's think about what Buffett means by "widening the moat." He lays out his definition in the 2005 Berkshire letter to shareholders:
Every day, in countless ways, the competitive position of each of our businesses grows either weaker or stronger. If we are delighting customers, eliminating unnecessary costs and improving our products and services, we gain strength. But if we treat customers with indifference or tolerate bloat, our businesses will wither. On a daily basis, the effects of our actions are imperceptible; cumulatively, though, their consequences are enormous. 
When our long-term competitive position improves as a result of these almost unnoticeable actions, we describe the phenomenon as “widening the moat.” And doing that is essential if we are to have the kind of business we want a decade or two from now. We always, of course, hope to earn more money in the short-term. But when short-term and long-term conflict, widening the moat must take precedence. 
This is a tall order for any executive to achieve - delight customers, cut costs, all while investing in the business - particularly when that executive has to meet Wall Street's quarterly expectations. Focusing on short-term operational performance is one thing, but if a CEO or CFO is overly concerned about how investors might react to 90 days worth of performance, they aren't concurrently focused on widening the moat.

Unfortunately, that eliminates even more companies from moat + knight contention.

Third, management must be in it for the long haul and they must love the business. Note that in the above quote, Buffett is talking about building a stronger business decades from now. In stark contrast, there are far too many mercenary executives today with great resumes who are in their roles to maintain the status quo, collect big paychecks, get a car allowance and country club membership, and look the part. Executives with one eye on the door do not make good knights. Or squires for that matter.

One of my favorite college basketball players growing up was Xavier University's Brian Grant, who was drafted by the Sacramento Kings in 1994. I remember reading that when Grant was asked how much he wanted to be paid, he said $2.50, "enough for a Dr. Pepper and a bag of chips." The guy just wanted to play basketball at the highest level*. If you find that kind of passion in a CEO or CFO, you might have found yourself a knight.

Finally, management must have a knack for capital allocation. I've been fortunate in my career to speak with a lot of different companies and I've learned that the ones who truly "get it" regarding capital allocation are few and far between. Sure, there are plenty of teams that can keep the trains running on time (and plenty who can't!). The ones who have a clear and repeatable process, however, for reinvesting capital (internally or through M&A), returning cash to shareholders, and making their companies tougher to compete with are unusual.

So what are we left with? Maybe 5% of all companies having a moat + knight combination? It might even be lower than that. Whatever the rate may be, the key takeaways are:

  1. The moat + knight combination is a powerful one.
  2. Moats are rare.
  3. Knights are rare.
  4. Moats + knights are extremely rare. 
  5. When you think you've found a moat + knight combination trading at a reasonable price, be sure to capitalize on the opportunity.
Stay patient, stay focused.

Best,

Todd
@toddwenning 


*Despite his low first offer, Grant made $808,000 in 1994.

The opinions expressed here are the author's and not those of his employer. For a full disclaimer, please click here