If you’re looking for investment advice, you know by now whom to ask: Twitter, internet message boards, 80s hair-metal bassists. Perhaps a lesser known but equally important tip is: don’t ask investment bankers.
The Wall Street Journal talked to about a dozen senior bankers about what they were doing with their personal accounts, and “most disclosed investment strategies that were both ultraconservative for financial experts and at odds with their banks' advice to companies, fund managers and individuals.” Some examples include:
"I am 80% in cash and Treasurys," said a top investment banker who in previous conversations hadn't once failed to extol the virtues of complex derivatives as a way to reduce risks in the financial system.
"What about using some of those derivatives in your own portfolio?" I asked, countering fear with logic. "No chance," came the reply. "I don't want to take any risks."
Another executive, a member of a big bank's management team, even showed glimpses of panic. He confessed that, as markets were buffeted by bad news from the U.S. and Europe in recent weeks, he changed his allocations from roughly 60% stocks and 40% bonds to a portfolio laden with U.S. government bonds and other investment-grade paper.
This sounded familiar to me, as most bankers I know have portfolios somewhere between “100% in TIPS” and “Marc Faber style physical gold in remote locations.” As the Journal points out, it is a somewhat incongruous position to take for bankers given that a big part of their business is basically convincing clients to lever up to make equity investments.
The Journal’s explanation is that bankers were scarred by the 2008 market crash, which crushed both their restricted stock holdings and their testicles: “memories of having that close-up view during as painful a crash as the 2008 crisis can explain why bankers are throwing their courage to the wind, stashing their money in cash and Treasurys.”
But there’s probably a more defensible reason. Investment bankers are pretty accustomed to valuing things based on their future cash flows. And when mid-career bankers run their valuation models on themselves, they generally find that, however much they have saved, the bulk of their expected value is in future earnings from their jobs. And those earnings tend to be highly levered to equities, because banks usually pay more when they earn more – which tends to occur in good markets, because bankers get laid off in bad markets, and because larger comp packages generally come mostly in stock.
If you’re a banker with $5 million in cash and expected PV of future earnings of $10 million, you’re effectively invested 2/3 in equities. (Bankers nearer the end of their careers will have less future earnings – but more of their savings will be in restricted stock in their own banks.) More than that actually: if you think of that $10 million as invested more or less in the success of your bank, it’s more volatile than the typical stock, with a beta of 1.3-ish at many big financials and 2+ at BAC or C. So your overall portfolio looks more like $2 million cash and $13 million of equities. That’s more equity-heavy than most banks would recommend to clients, and outside of loading up on cash there’s nothing you can do about it. Except short bank stocks, which is kind of a no-no for bankers even when it’s allowed for everyone else.