Neiderhoffer and Nassim: Two People All Investment-Banker-Hopefuls Should Know

A promiment Harvard undergraduate blogger once lamented about how all of her close and smartest friends “wanted to be investment bankers.”

Today, quantiative finance is one of the most popular majors amongst undergrads. Professors capable of teaching and breeding “Quants” – those who study and master the enigmatic mathematical models of quantiative finance – earn a comparatively larger dole than their counterparts who teach other majors.

There is little surprise that investment banking has become so popular in recent years: it is by far one of the most intellectually challenging and lucrative careers available.

In Japan, an increasing number of undergraduates are pursuing careers in “gaishi-kei” companies: that is, foreign companies based in Japan. Domestic firms and government jobs are becoming less-and-less popular as the international clout of Japan gradually but surely erodes. In light of this, many undergraduates (in particular, Japanese polyglots) have set their binoculars on “gaishi-kei” companies that will, in their eyes, provide them with a a brighter future.

Needless to say, that makes foreign investment banks one of the most sought-after jobs in Japan.

But of course, there is a catch.
Japanese undergraduates have very little idea of what the world of finance is all about.

The world of finance is, in short, the intangible world that governs the economy. Though Lenin identifies key industries such as steel, coal, railways, etc. as the “Commanding Heights” of the economy, there is little doubt that in today’s world, the reins of the world economy is held firmly in the hands of the finance industry.

Of course, the description I’ve given above is ambiguous at best and completely unhelpful at worst. But the reality is that there always remains a great divide in opinion whenever it comes to financial parlay.

Take, for instance, two financial titans: Victor Neiderhoffer and Nassim Taleb. They’re both incredibly successful financiers.

Yet the two could not be any further apart.

Neiderhoffer has founded and run several hedge funs, which usually generate astronomical annual earnings, even by hedge-fund standards.

Nassim Taleb, the author of several bestselling books including “Fooled by Randomness” (now a must-read for financial experts) and “The Black Swan,” runs a hedge fund as well. On most days – in fact, just about every single day, it loses money.

But once in a while, Neiderhoffer loses a fortune, while Nassim basks in newfound wealth.

What’s different about Neiderhoffer and Nassim is how they position themselves in the market. Neiderhoffer, after rigorous statistical and mathematical analysis, makes bets that, as far as track records are concerned, are usually right. In other words, in information economic parlance, Neiderhoffer uses information asymmetry to his advantage: he takes his time to gather superior information, which is how he repeatedly makes a killing.

Nassim positions himself completely differently: he bets that he doesn’t know anything at all. To make a complicated story short, he bets on market irregularities; he bets on the kind of things no one predicts will happen: like Sept. 11th and the global financial crisis.

That means on most day Nassim’s hedge fund will be bleeding. But every once in a while, on those days when every trader’s hands are flailing and clawing in despair (including Neiderhoffer), Nassim will be smiling.

Speaking of his hedge fund (which has become enormously successful thanks to the financial crisis) at a conference following the launch of his now much-acclaimed book The Black Swan, Nassim said: “We have billions under management now [...] and we still know nothing.”

The story of investors has a very long history. In fact, tulip futures had been bought and sold in the Netherlands centuries ago. Today, the world of finance is much more complicated, but the rules of the game are largely the same: for every investor’s position, there is an investor taking the opposite position and that only means one thing – someone’s betting on exactly the opposite thing you’re betting on.

And when investors nowadays have MBA’s and Ph.D’s from the most prestigious academic institutions in the world, when investors think they’re smarter than everyone else, when the only person left to out-smart is the genius next door, that only means one thing: get out while you’re still ahead.

//By Ryo TAKAHASHI

3 Responses to “Neiderhoffer and Nassim: Two People All Investment-Banker-Hopefuls Should Know”

  1. Shogo Okuda says:

    Very interesting. I agree that many students (including me) don’t fully understand finance. It was very interesting to hear from the head of the Derivative structuring from Barclays Capital that what is really important is can you sell the product, not can you make the product.

  2. Ryo says:

    Shogo>

    Wow Barclays? That’s awesome!

    Yeah, financial products (no matter how well they’re engineered) are meaningless unless you can pitch them to someone. That’s probably why it’s so important to be able to communicate well with others in the financial world.

    Well, unless you’ve got a backroom job.

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