Into the Eye of the Credit Storm

Our Sloan student is ready to enter the job market, and in these uncertain times, he's heading straight for the high-yield and distressed debt sector

Three hundred minutes. That's the total amount of class time in my schedule per week for the final six weeks of the semester. MIT Sloan breaks up semesters into halves, so while most courses are traditional full-semester courses, there are a handful of options for H1 and H2 (first-half and second-half). It's common knowledge that half-semester courses are more credit-efficient, that is, credits per hour are higher than those of the full-semester courses, so I decided to front-load my semester with a bunch of half-semester courses and now I'm down to just five class hours per week to fulfill my graduation requirement.

On the surface, this makes me look like a slacker. I have Tuesdays, Thursdays, and Fridays off, plus weekends of course. However, my argument (specifically to my wife) is simply—I'll be working my whole life, and working pretty hard, so I'll use this time to explore things which time will not allow me to do in the future. So maybe a few hours of golf lessons are in order. I'm starting to put a dent in the stack of books that I've accumulated from the business section of Barnes & Noble—When Genius Failed, Irrational Exuberance, The Intelligent Investor, and a few others. I have yet to dust off Security Analysis, but that may be due more to intimidation than lack of time. So reading and golf lessons probably make me out to be another cookie-cutter MBA. Add to that: Xbox 360 with Halo 3 and a Live subscription, and a carbon-fiber bike to prepare for a few triathlons I probably won't have time to do.

Enough about the personal stuff. The highlight of this semester for us investor-wannabes will certainly be the Buffett Trek—a trip out to Nebraska to visit the Oracle of Omaha. Ironically, the shirts we printed up for the trip (a corny gesture) sport one of the many oft-cited Buffettisms: "Business Schools reward difficult, complex behavior more than simple behavior, but simple behavior is more effective." And those may be words to live by, particularly at a time when "toxic" CDOs and other sophisticated structured products and leveraged or synthetically leveraged investments have littered investor portfolios and bank balance sheets—just ask Bear Stearns (JPM) investors, both common equity and hedge funds.

Devoted to Asset Management

I will have twice graduated at relative market bottoms—2002 and 2008—not bottoms in terms of financial asset prices, but bottoms in terms of hiring in the finance sector. My guess is that the number of job offers and total compensation are pretty good leading indicators of a sector peak. This would certainly be skewed by student preference (interviewing for consulting vs. I-banking), but that might make it much more authentic—as people are attracted to certain jobs during good times. I'd also bet if you asked my Class of 2008 peers, I-banking isn't so cool this year.

I was devoted to asset management throughout the b-school process, and ended up with two offers—both extremely attractive. Either one I'd be able to accept with 100% confidence for the job, the people, and the compensation. But at the end of the day, I felt compelled to enter the eye of the credit storm, so to speak, via a job in high-yield and distressed debt.

Two factors persuaded me, in addition to the tactical timing mentioned above: First, the people who offered me a job are experts in their field. I could elaborate here, but the bottom line is these people know their industries and underlying companies extremely well.

Second, the company is highly respected in its field and a long-term investor, one that does not use leverage to goose returns. Granted, I won't enjoy the hedge-fund-style payday that many find attractive. However, such paydays come at the risk that the firm may not exist the following year.

Confident They'll Honor Their Commitment

Seth Klarman, one of the most talented deep-value investors of our time, said, regarding leverage, during his speech to us this fall, "Depending on the precise terms of the debt, a decline in the value of your holdings could force you either to put up more collateral—which you may not have—or to sell off some of the investments you purportedly like, to meet margin calls. By borrowing, you have ceased to be the master of your own fate and allowed the lender—or actually the market—to be. How ironic to allow the market, which has dished up your current portfolio of opportunity, to dictate to you the need to sell your attractive holdings in order to survive."

I figure with hard work and care, the firm will continue to honor the offer of employment, and as a result, I won't be looking for the next hot job opportunity. At the same time, while I'm aware of the ever-present probability of some fat-tail event, I am fully confident that my employer will be a going concern for the foreseeable future, given its long-term track record and investment methodology.

As with all things, time will tell.