The Game E-Book

Alex Buchanan

• Herausgeber: Elliott & Thompson
• Kategorie: Fachliteratur
• Sprache: Englisch
• Veröffentlichungsjahr: 2010

Seitenzahl: 351

Beschreibung

If we have learnt anything from recent economic upheavals, it's that, rightly or wrongly, bankers get big bonuses. Avaricious stereotypes aside, people don't get money for nothing. So what exactly do they do to earn this level of financial reward? Few people really know - least of all themselves. There's no magic trick that turns someone into a City superstar. It's often not the cleverest of the most hard-working who hit the big time - it's the people who listen, learn and understand that finance is really nothing more than a game. A game that, played correctly, reaps huge rewards. The Game: How the City really works gives you the tools to do just that. Whether you aspire to work there and want to find out what really goes on, have been ensconced there for years and fancy a look in the mirror or simply desire to learn the truth about a world so publicly vilified, this book provides a light-hearted, objective and accessible insight into the City, its people and its machinations.

Leseprobe

THE

GAME

HOW THE WORLD OF FINANCE REALLY WORKS

ALEX BUCHANAN

First published 2010 by Elliott and Thompson Limited 27 John Street, London WC1N 2BXwww.eandtbooks.com

EPUB ISBN: 978-1-9076-4210-4

Copyright © Alex Buchanan 2010

This edition published in 2013

The right of the author to be identified as the author of this work has been asserted by them in accordance with the Copyright, Designs and Patents Act 1988.

All rights reserved. No part of this publication may be reproduced, stored in or introduced into a retrieval system, or transmitted, in any form, or by any means (electronic, mechanical, photocopying, recording or otherwise) without the prior written permission of the publisher. Any person who does any unauthorized act in relation to this publication may be liable to criminal prosecution and civil claims for damages.

9 8 7 6 5 4 3 2 1

A CIP catalogue record for this book is available from the British Library.

Typeset by EnvyDesign Ltd.

Every effort has been made to trace copyright holders for extracts used within this book. Where this has not been possible the publisher will be happy to credit them in future editions.

CONTENTS

Introduction

Author’s Note

1 STOCKBROKINGor EQUITY SALES

In a Nutshell

The Early Bird Catches the Worm

Back to School

Morning Glory

What You Say and Do

Investors: All Creatures Great and Small

Callow Youth

It’s a Jungle Out There

Red Tape

The Competition

Coining it In

Climbing the Management Ladder

At the Top of the Tree

Listening In

Making the Coffee

Sleeping or Star Gazing?

Keeping the Customer Sweet

Looking to the Future

Leaving the Office

How and What You Get Paid

Conclusion

2 TRADINGor DEALING

In a Nutshell

Once Upon a Time in London: A History Lesson

How it Works Today

It’s Not What You Know. . .

Parlour Games

Conclusion

3 EQUITY RESEARCHor ANALYSIS

In a Nutshell

Hit the Snooze Button

Drama School

Playing James Bond

Croissants with the Competition

Talking a Big Game

Cattle Trading

Working Hours

Cashing In

Conclusion

4 FUND MANAGEMENT

In a Nutshell

A Mug’s Game?

Heads I Win, Tails You Lose: A History Lesson

Exit the Cavalier, Enter the Roundhead

Capital Indiscipline

Sparring with the Sell Side

Morning Glory

Trouble and Strife

Star Wars

Viva Las Vegas!

Stepping Down From Your High Horse

Waking the Dead

Working Conditions

Conclusion

5 CORPORATE FINANCEor INVESTMENT BANKING

In a Nutshell

Cult Following

Mumbo Jumbo

A Broad Church

Old is Beautiful

Passing the Buck

Moving with the Times

One Big Happy Family

Talking Tactics

Flashing the Cash

Dark Arts

Loose Tongues

Bonus Behaviour

Conclusion

To Mum and Dad

ACKNOWLEDGEMENTS

Many people made invaluable contributions to this book, both to the original edition and to this updated version. In particular I would like to thank Geordie, David and George for their insights, Will, Alastair and Charles for their editorial assistance, Giles for his forbearance, Hubert, Jasper and George for kindling the fire of ambition, Lorne Forsyth and the team at Elliott & Thompson for making this happen, Mum, Dad and Charlotte for their endless support and Valentina for taking sales and marketing assistance to the most wonderful lengths.

INTRODUCTION

THINK THE WORLD OF FINANCE has nothing to do with you? Think again. What might appear to be a remote but corrupt oasis of privilege is in fact a giant oak tree that towers over the global economy, affecting each and every one of us. Whether shaping corporate strategy, managing pension pots or raising capital for companies and helping them grow, how the City fares has a direct impact on savings, house prices, job prospects and the prosperity of businesses across the world, from travel agencies in Melbourne to hairdressing salons in Mumbai and shoe shops in Madrid. As recent history has shown us, when the City catches a cold we all start sneezing.

The last few years may not have been fun, but reports of the industry’s demise are premature. Writing off the City has long been a popular pastime – no obituary has been penned more often or with greater enthusiasm – but history has shown the industry to be resilient and resourceful, specialising in bouncing back from calamity. The twentieth century alone saw two world wars and major market crashes in 1929 and 1987, but each time the industry’s response was to stand up, dust itself down and move on. There’s no reason to believe it should be any different this time. For all the talk of credit crunch and the extra regulation, fewer jobs and lower pay that will follow, the world of finance will one day emerge from the gloom.

It has to, for all our sakes. Our political masters know it better than anyone. Bashing bankers and their bonuses may have become a national sport in many countries, but look closely and you’ll find that retribution hasn’t always matched the rhetoric. The financial services sector is the heartbeat of the global economy. Strangling it would mean jeopardising billions of dollars’ worth of tax revenue and many billions more of associated economic and social benefits. In London alone, each City job is reckoned to support four additional jobs.

Finance is a people business, pure and simple, and people are the focus of this book. Across the world millions work in the industry every day, and attempts to characterise each and every one as unscrupulous gluttons are as wide of the mark as assertions that bankers and their brethren are all innocent pawns at the mercy of a despotic few. The City has its fair share of both saints and sinners, all of whom contribute to an ever-bubbling cauldron of intrigue, subterfuge, petty jealousies and personal agendas.

To an outsider, City practices can seem arcane, but peel away the layers of jargon and self-importance and you’ll soon find yourself transported back to the world of the playground. Many of the products and instruments the industry deals in are hugely sophisticated, but most of its methods and all of its mood swings are familiar to every single one of us.

In this book we reveal the industry and its people for who they are. We explain what stockbrokers, traders, analysts, fund managers and investment bankers do and how and why they do it, focusing on the tricks they employ and the webs they weave as they race each other to the top of the professional tree. Whether you aspire to work there and want to find out what really goes on, have been ensconced there for years and fancy a look in the mirror, or simply desire to learn the truth about a world so publicly vilified, this book provides a light-hearted, objective and accessible insight into the City, its people and its machinations.

If the events of the last few years have taught us anything, it is this: that for all the hand-on-heart conviction and repeated pronouncements, few people in the world of finance have any real idea of what is going on. It’s not only stockbrokers, investment bankers and fund managers who are at a loss. Finance Ministers, Prime Ministers, Presidents and regulators are just as clueless.

In their helplessness they lurch from one extreme to another. Yesterday they favoured debt and today they’re crying out for cash. The oil price is either too high or too low. Inflation and deflation each take turns to masquerade as the devil.

The market is the cruellest of mistresses. Compliant one minute and vicious the next, she chews you up and spits you out the moment you think you’ve mastered her. If success equated to second-guessing the market then most people would be stuck in the slow lane.

But finance is a game, a baffling, grown-up game admittedly, but a game nonetheless. The people who go furthest aren’t always those with the keenest insights, the greatest skills or the finest qualifications, but those who understand the system and how to exploit it. Appearances can often be more rewarding than reality.

This book is about people, the ways they interact and their never-ending thirst for one-upmanship. It’s about the game and how to play it. In the City, strange as it may sound, more often than not it’s the psychologists and not the economists who hit the high notes.

AUTHOR’S NOTE

When I first wrote this book my intention was to describe life in the City – London’s financial district, also known as the Square Mile – because that’s what I knew about. However from researching the book and talking to colleagues and readers it’s clear that its content applies more widely to financial centres around the world, from New York to Paris, Tokyo to Frankfurt. The names might be different but the roles are essentially the same. I have therefore given the book a new subtitle to reflect this but have retained references to the City in the text – to stand for the wider global industry – to avoid any unwieldiness.

Investment banks might trade everything and anything, from government debt to coconut oil, but to make things simple we’ll concentrate on the instrument with which people are most familiar – namely stocks (or ‘cash equities’) – and bring in the other asset classes where relevant. Ultimately the selling, trading, analytical, investment and advisory processes are more or less the same whether you trade stocks, bonds, currencies, derivatives, heating oil or orange juice.

Alex Buchanan April 2013

— 1 —

STOCKBROKING OR EQUITY SALES

‘I’m now convinced that the worst thing a man can do with a telephone, without breaking the law, is to call someone he doesn’t know and try to sell that person something he doesn’t want.’

— MICHAEL LEWIS, Liar’s Poker

PICTURE THE SCENE. It’s six o’clock in the morning. You’ve already been up for an hour and are now sitting slumped on the train surrounded by the flotsam and jetsam of humanity. Everything is still, lifeless even. The strip lights flicker and then cough their fluorescent glow over puffy eyes, sagging skin and double chins.

Sounds awful, doesn’t it? Welcome to the world of high finance.

In a Nutshell

Stockbrokers (or ‘equity salesmen’ or ‘brokers’) sell investment advice to professional investors (‘fund managers’ or ‘clients’) in return for commission. While servicing the client will involve certain ancillary duties that we’ll explore later in this chapter, the commission that you generate is the yardstick by which you are judged. In essence, your job is to tell investors which shares to buy or sell and get them to trade these shares through your firm in return for commission.

The Early Bird Catches the Worm

Most stockbrokers arrive at the office anywhere between 6am and 7.30am GMT. This is an uncivilised hour at the best of times, but one that is particularly grim on a bleak morning in February. Those who live far from the office can expect to hear the alarm go off as early as 4am.

Now that’s not funny, is it?

Sadly you don’t have much of a choice. European stock markets open at 8am and brokers, traders, analysts and fund managers must all arrive early enough to prepare for the day ahead.

Exactly what time you arrive will depend on your own ambitions or on the guidelines set by your firm, but it invariably follows that the more ambitious you are or the more aggressive your firm is then the earlier you will arrive. How you get to work is up to you – some take the underground or bus, others drive scooters and a handful take taxis (but these tend to be either the crème de la crème or the habitually late). Some use the journey to read the Financial Times or Wall Street Journal or will catch up on sleep. You’ll soon get used to the early mornings – everyone has to – but most nights you’ll be tucked up in bed long before others in less exacting jobs have even considered leaving the pub.

In the larger broking firms the trading (dealing) floor is the size of a football pitch and holds hundreds of people. Brokers, traders (we’ll discuss what they do in due course, see Trading) and a vast array of support staff sit crammed together like hens in a battery farm, floundering in a sea of screens, telephones and (misplaced) egotism.

Back to School

Many brokers don’t have time for breakfast at home and so eat at their desks. An amusing game is to look up from your cereal bowl and see which of your colleagues is late for work. Salesmen who turn up late (this might mean arriving at 6.01am) will try to slip into their seats unnoticed, but more often than not will run the traditional gauntlet of disapproval from their more punctual colleagues. A late arrival will cause lips to be pursed and heads to be shaken. It’s true – people really are this childish. In some firms those who arrive after the appointed hour are forced to buy lunch for the entire team (although not at a venue of the laggard’s choice).

In terms of pettiness the average trading floor is no different from the average classroom. Substitute the teacher for the Head of Equities/Sales and the pupils for the brokers/traders and it’s a close-run thing. It’s all about denigrating the weak and sucking up to the person in authority.

AS IN ALL other City jobs, a hangover is not an excuse to be late for, or skive off from, a day’s work on the trading floor. Honour demands that you arrive on time no matter how little sleep you’ve had or how much you’ve drunk the night before. You’ll soon get used to sitting slumped at your desk and wishing the world would end. Look around the room on a Friday morning and see how many others are in a similar predicament.

Morning Glory

Most firms hold a meeting at around 7–7.30am GMT. This is the time when research analysts update the salesmen on any relevant stories (companies tend to make statements first thing in the morning) or on new research published on their stocks that day. In the larger firms you will stay at your desk while the analysts speak to the dealing floor over a microphone, while in the smaller houses salesmen and analysts are herded into the same room. You must then note down what the analysts say.

Some brokers will write down nothing at all. These individuals think either a) that they know it all already, or b) that the firm’s analysts are useless and so should be ignored or c) that there’s no point writing anything down because they stopped caring years ago. Don’t be under any illusions – indifference, feigned or otherwise, is all part of the act. Watch as they lean back in their chairs, roll their eyes and yawn ever so conspicuously.

THE FINANCIAL WORLD IS full of people with God complexes. It’s easy to spot a self-styled big hitter – most follow the same behavioural code. They suck up to their superiors, disparage or flatter their rivals (some enemies are best kept closer than friends) and ignore the rest of the world altogether, behaving as a king might in front of his courtiers. If a young broker comes to their attention it’s because he’s either very good or very bad at his job.

What you note down is up to you – it depends on what you think your different clients will want to hear. Much of what the analysts say might seem unremarkable or even irrelevant, but brokers can afford to put up their feet and put down their pens only when sure of their status.

Here’s an abbreviated example of the sort of thing an analyst might say:

‘This morning we have Q2 numbers from Martin and Wellbourne. Revenue was in line with expectations but EBIT was 5% short of consensus forecasts as discounting took its toll on the gross margin. EPS was 8% light thanks to the higher tax charge. Going forward the company expects the positive trend in like-for-like sales growth to be maintained. Early indications are that Q3 like-for-likes have been in the region of 2%. We1 maintain our full-year forecasts and our outperform recommendation, believing that on 7x EV/EBITDA the stock looks good value versus the peer group.’

And here’s another:

‘You’ll find on your desks a report we published last night on Automobiles de France. We maintain our in-line recommendation. Despite our conviction that the sector [industry group] has turned something of a corner, we feel this has been fully discounted by the market. Susan and I will be laying out our arguments in greater detail at midday today.’

What this actually means will be fully explained in a later chapter (see Equity Research). In the City there’s much to learn in terms of jargon, and any new recruits are soon whisked off to the nearest classroom and indoctrinated in the lingua franca of the financial world.

When the morning meeting comes to an end most salesmen will pick up the phone and begin to call their clients (indeed, some might be making calls well before the meeting has even finished). Only the very successful or the very disillusioned will get up from their desks at this stage, the former to stand and flex their muscles in true Master of the Universe style and the latter to wander off to the lavatories where they’ll sit in contemplative gloom.

IN THIS INDUSTRY success does not always correlate with intelligence nor disillusion with a lack of it. Ultimately it all comes down to what extent different people care about money or status, or both. Individuals with idealistic sensibilities will quite readily abandon these for the sake of acquiring a larger house or climbing another rung on the promotional ladder. We’ll return to this theme time and time again, but in the City if you don’t care then you’ll struggle to succeed.

What You Say and Do

Most mornings will be spent contacting your clients either by telephone, email or Bloomberg (see box below) and telling them what you think they might want to hear.

In theory brokers phone clients in order to give them investment advice. In return they will expect to receive ‘orders’. An order is when an investor buys or sells a stock through his broker’s firm. Commission is earned by charging the investor a tiny percentage of the value of the order. Orders can range anywhere from the tiny ($5,000) to the gigantic ($30m+) – it all depends on how much money the client has and how much he trusts you or your firm.

Trading stock is a not simple process. It is, in fact, a political minefield. Never mind the actual mechanics of the buying or selling (or ‘dealing’ – see Trading), in most firms more than one salesman speaks to the same fund management house, and so it is often unclear which salesman generated the order. The picture becomes further blurred when one takes into account the armies of analysts and traders who have their own contacts with the institution in question. In this industry there are many snouts in the trough – apportioning credit where it is due is never straightforward. Learning how to grab the credit (especially when you don’t deserve it) is the canny broker’s greatest trick.

In reality brokers will look for any number of excuses to phone their clients – for appearances’ sake they must be seen to be on the phone as often as possible. Investors tend to encourage this frequency of contact, not necessarily because they set any store by brokers’ opinions but because they regard them as indispensable shoulders to cry on in times of trouble (of which there are many: a fund manager is the ultimate masochist – see Fund Management).

BLOOMBERG IS THE financial world’s most extensive and expensive research tool, without which most City jobs would be considerably harder. At an individual cost of several thousand US dollars a month brokers, traders, analysts and fund managers can access information on practically any subject they choose, from stock prices and company information to sports news, restaurant reviews and adverts for cars and property (people will happily sell Ferraris or luxury apartments to each other via their Bloomberg terminals – there’s no better proof of credit worthiness than a Bloomberg account!). Management never stop complaining about the cost and are always threatening to replace the system with something cheaper, especially when times are tough. However, not having your own Bloomberg terminal can be something of a social slur – it alerts both colleagues and clients to your (relative) insignificance.

In this job the most important maxim is ‘know your client’. The good broker wears many different hats – he is psychologist, detective, agony aunt, nursemaid, administrator, entertainer, information filter and investment adviser all rolled into one. It matters not so much what you say (some investors will have forgotten a conversation as soon as they put down the telephone) as how you say it. If your tone is compelling and your manner is sympathetic then you soon become a drug they cannot do without. This world, like so many others, is all about trust. Convince a client you have his best interests at heart and you’re up and running. The City’s penchant for ‘relationship building’ is what keeps so many cocktail waiters, restaurant owners and wine merchants in business.

Let’s have a look at some of the things you might say and do.

a) Call the client and repeat verbatim the morning meeting.

Reading from the sheet is the preserve of the unimaginative, the uninspired or the terminally depressed. It is the City equivalent of the human speaking clock or the actor who stands on stage and reads his lines from a script.

It’s also what many brokers do. It’s the easy option.

There is one catch, however. If all you do is read from the sheet, you may find yourself in a tight spot when your client wishes to dig a little deeper.

Much of what is said in your morning meeting will be repeated in other morning meetings in other broking houses the length and breadth of the City. If we take the earlier example, the response to the Martin and Wellbourne financial performance, we can safely assume that yours won’t be the only broking house able to offer an opinion on this well-known company. Furthermore, if the investor cares about the stock and is any more than vaguely competent, he will have already interpreted the figures for himself (which the company will have made publicly available at 7am that morning).

Therefore when he wants a little more information and asks you,

‘How does the valuation compare with that of the rest of the sector?’

Or,

‘What like-for-like sales growth do you have pencilled in for the second half?’

Or,

‘What is the present value of the lease commitments going forward?’

You’ll need to be on your toes. What you do next is up to you. You can either a) look up the answer on your firm’s comprehensive intranet, b) tell the client you’ll get back to him or c) bluff.

Bluffing requires the least effort and is hence the most common response. The world of finance is built on bluff and counter-bluff.

Generally speaking, however, brokers get away with it when they read from the sheet. You’ll be lucky to elicit as much as a grunt from an investor when you phone him early in the morning. In fact most fund managers with any sense don’t answer their office phones before 11am. Some are still in bed while others are screening their calls, unwilling to encourage brokers they don’t like, don’t know or don’t rate.

THE LESS INTELLIGENT the fund manager is the more likely he is to ask you searching questions. It makes him feel important and his existence that little bit more relevant.

b) Call the investor and give your own interpretation of the morning meeting.

You don’t always have to agree with your colleagues in Research. In most firms you’ll be encouraged to deviate from the company line if it makes good commercial sense. Moreover analysts often get it wrong and, as we’ll explore (see Equity Research), will sometimes say what they don’t believe.

Let’s use the Martin and Wellbourne example again. Here’s what the analyst said,

‘This morning we have Q2 numbers from Martin and Wellbourne. Revenue was in line with expectations but EBIT was 5% short of consensus forecasts as discounting took its toll on the gross margin. EPS was 8% light thanks to the higher tax charge. Going forward the company expects the positive trend in like-for-like sales growth to be maintained. Early indications are that Q3 like-for-likes have been in the region of 2%. We maintain our full-year forecasts and our outperform recommendation, believing that on 7x EV/EBITDA the stock looks good value versus the peer group.’

And here’s what you might say (after you’ve dispensed with the small talk),

‘I thought the M&W numbers were pretty uninspiring. The analyst thinks it’s cheap and he’s probably right, but I can’t see the market getting too excited.’

At this juncture the client might agree and that will be it, and you’ll move on to another subject, or he might say something along the lines of,

‘Everyone’s behind the curve. They’re trading really well and margins are going to surprise everyone on the upside.’

What happens next? You are either

1) on top of your game and ready to debate all day long the whys and wherefores of Martin and Wellbourne without resorting to help from an analyst. It’s safe to say many brokers will not be so well prepared.

or

2) unsure as to whether or not the client is right but ready to offer your support. You might make some spurious remark such as ‘I think you’ve got a point there’ or ‘it makes sense – all the analysts have thrown in the towel’. You’re now hoping he gives you an order to buy shares in Martin and Wellbourne.

Most phone calls don’t translate directly into orders. Fund managers receive a barrage of ideas on a daily basis, a large number of which they consign to the dustbin. If an idea you come up with happens to fit in with the way they are thinking then they may well act on it immediately, but more often than not they’ll go away and do their homework before forming a view. How much homework an investor does depends on the individual. Some will spend days or even weeks poring over facts and figures while others will quite literally flip coins or throw darts at a board.

It’s not uncommon for a broker to phone an investor with an idea and for the investor to turn round and do exactly the opposite. What is more common is that you come up with one idea and the investor asks you to trade in a totally separate stock, or that he trades through your firm without you having phoned him first. What counts is how you and your firm service the client over the course of the year and not on a particular day.

What can also happen (and imagine how galling this can be) is that you give an investor an idea and he goes and executes the order through another broker. He doesn’t necessarily do this to be perverse – the flood of information is such that he might easily forget which brokers gave him which ideas. A more common occurrence is that your client won’t be responsible for the actual buying or selling of stocks but will delegate the process to a dedicated colleague or ‘dealer’ (see Trading). The dealer will have some (often too much) discretion as to with whom and how often he trades and should know which stocks to trade with which firms. Some firms will be more capable in certain names (stocks) than others, especially if that name is regarded as illiquid (hard to trade).

c) Call or email the client and tell him something relevant (ie about a stock/issue he has been following).

Let’s assume that you know a particular client has an interest in Martin and Wellbourne. You might say,

‘I’m hearing that M&W is going to surprise us all in Q4.

The analysts have all low-balled their estimates so the stock could easily squeeze from here.’2

And he might reply,

‘That’s what the bulls want you to think. It’s going to get worse before it gets better. I’m a seller at these levels.’

Or he might say,

‘Thanks – I’ve been hearing that too. I think I’ll increase my position [buy some more stock].’

The point is that every conversation has limitless permutations. What should also be becoming apparent is that every person working in the industry is engaged in a game of educated guesswork, or just plain old bluff. No one – neither you nor the analyst nor the investor – knows the truth, but you’re all employed (and very well paid) to guess what it might be.

d) Call up the investor and give him a new investment idea.

Analysts tend to be reactive (as opposed to proactive) and so much of what they peddle is their reaction to a company’s announcement. Investors will lament that analysts rarely come up with any decent ideas, and this isn’t totally unfair. We’ll have more on this in a later chapter (see Equity Research), but much of the time analysts are involved in games of political football and are not encouraged to speak their minds. There are other issues too – equity research is a crowded field with many firms chasing the same ball.

As a consequence, originality is a rare commodity. Most ideas are rehashed versions of old ones – sheep in wolves’ clothing as it were – and go round and round the City until everyone is converted to the cause (cf before prices crashed in the summer of 2008 every single investor seemed to own shares in the mining sector). At this point the only way for a stock is down – there are no buyers left to push up the price. As a broker you can filch your ideas from anywhere – analyst, client or even the tabloid press – and it’s all about the presentation. While it’s likely that the client will have seen the idea before, he may not have seen it from your particular angle.

Therefore, as a broker you’ll be doing well if you come up with more than two or three genuinely good ideas a year. Whether or not the client takes any notice of you is another matter entirely. If you ring him and say,

‘By the way, have you looked at the mining sector recently? Everyone assumes that China is going to grow by 10% next year but I think that’s crap. All the analysts are smoking something. We should be selling these stocks.’

The client might reply,

‘Yes, that’s a very sensible idea. I think I’ll sell my BHP [one of the world’s largest mining companies].’

Or he might brush you off with,

‘You’re probably right, but I can’t do anything today. It’s the end of the month and I’ve got a whole load of reports to write.’

Or,

‘Thanks, but I know that already.’

Or even,

‘I don’t agree. Iron ore pricing is going in only one direction and that’s up. There’s still a huge supply constraint.’

Sod’s law dictates that if you’re right and the client does nothing he won’t thank you for the idea. It’s also more than likely that if you’re right and he follows your advice he’ll think it was his own idea and will pat himself on the back.

But what do you think happens if you’re wrong?

Yes, of course, it’s your fault! He’ll either say,

‘Thank God I didn’t touch that stupid idea of yours! It was obviously a disaster waiting to happen.’

Or he’ll ring you up and berate you with,

‘Why did you ever get me in to that piece of shit? Get me out NOW!’

GERMAN AND AMERICAN fund managers are quick to express their displeasure when things go wrong. Perhaps it’s a cultural thing, but they feel quite comfortable savaging those who do their bidding. The English, by contrast, are less direct. They prefer to make sly digs or slag you off behind your back.

Get it wrong too many times and the investor will cut you off, however influential or important your firm might happen to be. But the beauty of the industry is this: no matter how dire your advice you can never be pursued for professional negligence. Compare this to a profession such as medicine, where you only have to sneeze before lawyers appear on your doorstep.

This is the reality of investment – it’s a subjective not an objective exercise. Whatever fund managers might like to believe, they’re nothing but speculators, educated speculators admittedly, but speculators nonetheless. If they get it right 60% of the time then they consider they’re doing well, and that means if you as a broker achieve something similar then you’re doing well too. If we’re to believe John Maynard Keynes, the good investor should not be afraid to speculate. In his capacity as Bursar for King’s College, Cambridge, Keynes wrote in 1938 that ‘a speculator is one who runs risks of which he is aware and an investor is one who runs risks of which he is unaware’.

WHERE FINANCIAL MARKETS are concerned, investors receive different layers of protection depending on the depth and breadth of their expertise. Professional investors are well aware of the risks involved and receive little or no protection. Private individuals, on the other hand, are not and hence have greater legal recourse if things go wrong. Most stockbrokers/equity salesmen deal only with professional (or ‘institutional’) investors. If your firm handles private client or ‘retail’ money then this will be dealt with by your colleagues in Private Wealth Management.

Investment ideas go in and out of favour with the passing of the seasons. In 2007 ‘cash’ was a dirty word – fund managers and analysts alike pressed companies to hand it back to investors rather than save it for a rainy day. Bankers fell over themselves to lend money that companies could then pass on to shareholders. Fast forward several years and the picture had become quite different. No bank had any money to lend and companies were crying out for cash, especially those who had given it all away.

e) Call the investor and confirm something he already believes.

This is an obvious and common tactic and one that seldom fails. If you know an investor already happens to be thinking a certain way then telling him something that strengthens his conviction is only going to endear you to him. For the sake of commerce, brokers can be the most shameless sycophants.

‘I think I remember you telling me that you’re positive on the brewers? Well, we’ve just written a note [research report] on Heineken and the analyst says it’s a screaming buy. It looks like you’re one step ahead of him.’

f) Call the investor up about something unrelated to the stock market.

This might mean thanking him for an order, proposing meeting for dinner or enquiring how his son fared in the school rugby match or how his wife’s appointment with the specialist went. In other words you’ll look for any pretext to get him on the phone. At the end of the day the investor–broker relationship is all about pulling the right social and personal levers. You get to know him, get him to trust you and, hey presto, he’ll be doing business with you. How much you tell him that’s of any professional worth can soon become a secondary consideration.

IT USED TO be the case that if you knew the investor well enough to call him on his mobile phone then you should always try to, but in recent years the authorities have grown wise to this tactic. Calling a fund manager on his mobile or sending him a text is sometimes the only way to get hold of him – most don’t have the time or inclination to answer their landlines or open more than a handful of the hundreds of emails they receive each day – and so you have to track him down to the one place he cannot hide. Every time he answers you or returns your call you take one step further into his socio-professional inner sanctum, something that can be only to the benefit of your future business relationship.

Broking firms have banned mobile phones on the dealing floor for some time, but only since regulators across the world started clamping down on insider dealing and other financial misdemeanours did they come clean as to the reasons why. Firms used to claim that mobile phones emitted signals that forced trading systems to shut down, but the reality was that information of a sensitive nature could be communicated without the authorities being able to intercept it. Fixed line calls and emails, by contrast, were never a problem – for many years now they’ve been recorded, preserved and scrutinised by compliance departments (in financial services what you say over the telephone is legally binding – you shouldn’t promise a client something you can’t deliver). As the market reached its zenith in 2007, too many brokers knew things they shouldn’t (and that their clients would love to know), and some bad apples couldn’t resist flying too close to the wind. If you happened to be taking a mid-morning stroll you might have seen any number of your colleagues out pacing the streets with mobile phones clamped to their ears. It’s pure speculation, of course, but they can’t all have been talking to their wives.

Rumour and mobile phones went hand in hand. Calling someone on their mobile from your mobile gave the impression you might know something you shouldn’t.

‘Hey, just thought you should know the rumour. I’m hearing British Telecom is going to get a bid approach on Monday.’

‘Thanks. That’s extremely interesting.’

More often than not British Telecom didn’t get a bid approach on Monday. You were just passing on the same worthless rumour someone had told you in an attempt to appear well informed. Whatever the reality a client would often thank you for it – some people love a bit of intrigue.

The authorities, drowning in a torrent of post-credit-crunch criticism, hit back. All personal mobile phone use for work calls was to stop. Instead employees were to be issued with company-approved handsets, all of which would contain recording software (which in turn prevented many from actually working). But how effective this will be is anyone’s guess. If someone has something to say and wants to evade detection his own phone is never too far away.3

CITY WORKERS AND their practices are policed by a combination of a) internal compliance departments and b) regulatory bodies such as the Financial Services Authority (or ‘FSA’) in the UK and the Securities and Exchange Commission (or ‘SEC’) in the US. Compliance departments, typically staffed by taciturn types with legal or accounting experience, delight in making life miserable for their more wayward colleagues (there is very little about compliance that is humorous). Being asked to ‘drop in for a chat’ is often a prelude for a slap on the wrist or worse – Compliance never seem to need to see you unless you’ve done something wrong. Much of the time the crime will be petty in the extreme, such as you failing to sign a form or return a document, but on occasions you might have done something that could attract the attention of the authorities (such as saying something you shouldn’t to someone you shouldn’t). Firms like nothing less than to cross swords with the regulator. Even if one is proven innocent, a brush with the law only leads to publicity of the negative kind. If at all possible, wrongdoers will always be quietly removed rather than strung up in public.

The likes of the FSA and SEC exist, inter alia, to safeguard the stability of the financial system. Their failure to police the banks and their passion for risk (see Fund Management) in the run up to the credit crunch drew widespread criticism and in recent years they’ve taken pains to redress the balance, pursuing wrongdoers whatever their exalted status (the conviction in June 2012 of Rajat Gupta, former McKinsey Chief Executive and Goldman Sachs board member, for insider trading, conspiracy and securities fraud being one such example). While long overdue, turning the screw on regulated firms and their employees has only added to the malaise. As revenue-generating brokers, traders and bankers stuff their belongings into plastic bags and head for the exits so expensive recruits arrive in Compliance and unpack their clipboards and red pens. If ever there was a case of the tail wagging the dog then this is it.

g) Call the investor and tell him what everybody else is doing.

The world of fund management is becoming ever more transparent. Performance figures are made publicly available and investors, particularly those in the hedge-fund world, are able to compare and contrast their performance with those of their peers on a monthly, if not weekly, basis. Fund managers love knowing what their competitors are up to, particularly those whom they suspect are cleverer than they are. They’ll happily sit around and discuss other people’s performance for hours on end. If you phone an investor and tell him,

‘Just thought you should know X has been building a position in Santander’,

he’ll always be grateful for the information. What happens next is up to him. If he thinks X is smart then he might follow suit. If he thinks X is an idiot then he’ll give the matter no more attention and move on. If he regards X as his rival then he’ll agonise over the issue for days, torn as to whether or not the other is right. If X is right and he follows him in then he’ll congratulate himself on his foresight; if X is right and he does nothing then he’ll curse X to high heaven, and if X is wrong and he does nothing then he’ll jump for joy. What happens if X is wrong and he follows him in just doesn’t bear thinking about.