As I’m reminded by my younger friends, it’s that time of year. The time when college students across the country start jockeying for the summer internship of their dreams. For many, that’s a summer analyst position in investment banking. The trouble is, most students have no idea how to prepare for investment banking interviews, and even less of an idea what the job would entail if they were hired. So in the spirit of “passing it on”, I’d like to offer some of the most valuable advice that was given to me when I was in college, and a few tips and commonalities that I picked up myself. The below is distilled from my time as an investment banking analyst and summer intern, as well as the over 40 interviews with at least 15 different banks that it took to land my full time job and summer internship. It’s specifically targeted at college juniors interviewing for internships, though much of the advice is equally applicable to those interviewing for full time analyst positions.

What will I really be doing as an intern at an investment bank?

A lot of people don’t have a good grasp of what investment bankers actually do. There are a ton of definitions out there, but a simple summary is that investment banks help companies to raise capital (through debt or equity offerings) or sell themselves (M&A). In both cases, bankers prepare all the marketing materials and help to broker the deal (similar to a real estate agent selling a house). As an intern, your job is to help out with things like industry research and PowerPoint slide creation, with occasional runs to pick up takeout or coffee for the team.

Are the hours really as long as I’ve heard?

That depends what you’ve heard – and it also depends where you work. Your hours will vary a lot based on the deals you are staffed on, and some groups at some banks are notorious sweatshops. However, most full time (post-college) investment banking analysts will spend between 70 and 90 hours each week in the office. That’s roughly equivalent to 9am-midnight on the weekdays (65 hours), and then variable hours during the weekend depending on your workload. When a deadline is looming, hours can get crazy – I once caught an hour of sleep sitting up in a bathroom stall at 4am before returning to my desk to finish cranking out a pitch book. As an intern your hours might be a little shorter, but never leave the office until you’re sure the analysts you’re working with don’t need any more help, and never complain – you’re there to work for the summer and get that return offer, not to see the city (sorry).

What questions are they going to ask me in the interview?

A lot of students freak out before interviews for an investment banking internship, expecting to be peppered with technical questions about bond math and fixed charge ratios. The reality is that your interviewer knows you’re still a junior in college and haven’t been exposed to a lot of this stuff – they’ll tailor their questions accordingly. The key things you want to demonstrate are an understanding of the job, a strong work ethic, and that you’re a generally normal and social person.

However, since I know you want more specific details, here are three questions you can be almost certain will come up:

Q: Why are you interested in investment banking?
A: If the best thing you can come up with is “I want to make a lot of money” you might as well cancel your interview now. The correct answer here is dependent on the group you’re interviewing for (M&A, industry coverage, etc) but the thesis is the same. The key is to convey an understanding of what the job entails – contrary to what you may see in the movies, it’s not all power ties and screaming pit traders. One of the most interesting things about investment banking is the opportunity to learn a ton about your clients – in an M&A group, you might spend 3 months selling a defense contractor, then the next 3 months diving into the quick oil change industry. If you’re interviewing for an industry coverage group, make sure you emphasize your interest in that specific sector.

Q: Why do you want to join our firm specifically?
A: Here’s another one where you need to have done your homework. Now’s a good time to parrot back some of the things you learned about the firm in the information session (you did attend their information session didn’t you?) You can also prep for this question by using your career services office to contact alumni that work at the bank – ask them what makes their firm unique.

Q: What are 3 ways to value a company?
A: Ah, finally a “technical question”. Despite what you may have heard, this is about as hard as it’s going to get for internship interviews. You covered the first valuation method in your introductory finance class – discounted cash flows. Use the time value of money to obtain a present value for the firm’s future cash flows. If you’re a little rusty on this, click here for a refresher.

The other two methods are comparative – we’ll compare the company you’re trying to value with others that are similar to it. There are two different types of yardsticks – public comparables and precedent transactions. “Comps”, as they’re called in the industry, are publicly traded companies that are similar to the one you’re trying to value. “Deals” are completed acquisitions of public or private companies. These externally validated valuations give you an idea of what your similar company is worth. The key concept to understand here is called the “multiple” – you don’t compare the values of the comps and deals directly, you compare their EBITDA multiples. Divide a company’s market capitalization (comps) or sale price (deals) by its EBITDA, then apply that multiple to your company’s EBITDA to get the expected valuation.

What part of the interview do students mess up most often?

Far and away, the most common reason prospective interns get dinged is for personality. Even if you nail all of the above questions, you’re not getting the spot unless you click with the interviewer. It sounds unfair, but it’s true. If I’m going to hire someone and then spend 90 hours a week with them, we need to click personality-wise. More students just need to relax and be themselves – connect with your interviewer and show them you’re a normal person who’d be fun to have a beer with. That’s the secret that career offices never tell you.

Wrapping It Up

So there it is prospective junior masters of the universe – get the above concepts down cold, and you’ll be more prepared than 99% of your classmates (assuming they haven’t also read this post). Make sure you grasp basic financial concepts, and relax. The most important things are to show a genuine intellectual curiosity for the job and to connect with your interviewer on a personal level.

Hopefully this helps a few people out – I’m more than happy to answer additional questions in the comments.

My younger brother just graduated from college this year and is getting settled into a new job, life on his own, and financial independence. Along with his first paycheck, he’s also been bombarded with a lot of new financial choices and a lot of acronyms (IRA, 401k, etc). Everyone knows they should be saving money, but the reality is that nobody ever tells you exactly how to go about it short of stuffing cash under your mattress. This post isn’t going to be an in depth discussion of what stocks to buy or how much of your net worth to put in bonds – rather, I want to focus on the mechanics of how to organize your finances as a single, newly independent young adult in order to set yourself up for prosperity and success.
(more…)

I wrote earlier about the increasingly visual nature of media and news in today’s society. The prior post focused mostly on photography, but there is another visual technique that has risen dramatically in prominence in recent years, particularly online – the infographic. Infographics aim to make complex data sets easy to digest and understand. An entire newspaper has risen to prominence due to the quality of its infographics. There are whole blogs dedicated to the subject. A good infographic can pack a lot of data into a small space and help the viewer to draw out a pattern or conclusion. However if the infographic is poorly or deceptively constructed, that conclusion may not be the same one you’d see if you examined the underlying data. While there are many great and useless infographics out there, I’d like to take a bit of time to focus on a couple deceptive ones.

Deceptive Infographic #1: The Heathcare Vote

The first infographic I want to highlight comes from the otherwise excellent Political Math Blog. The diagram aims to portray the House of Representatives vote split for the recently passed healthcare reform legislation in comparison with the vote splits for other major social reform. It is an interesting diagram because it illustrates how objective information can be displayed in a manner that influences your perception of the data.

In the first three vote blocks, the dividing line between “Yay” and “Nay” is drawn down the middle of the “split” party, indicating that there are party members on both sides of the debate. However, in the final vote block on heathcare reform, the creator of this diagram has specifically arranged the colors such that the Yay/Nay dividing line runs directly between the parties, with the dissenting Democrats hidden off to the right side. This increases the contrast between the parties, and makes the Heathcare Reform vote appear more partisan and divisive than it actually was.

When viewing an infographic (or any seemingly “objective” data), make sure you consider whether or not the designer is trying to “lead” you toward drawing a specific conclusion or feeling a certain way by presenting the data in a certain manner.

Deceptive Infographic #2: Household Income vs. Debt

I originally found the next graphic on Digg, where people were whipping themselves into an outrage about how unfair life is, how capitalism is broken, and how America is headed to hell in a handbasket. Except this graphic is totally flawed (click for a full size version).

The graphic compares the trend in average household income (the green bar) with the trend in total household debt (the red bar), and reaches the “nightmare” conclusion that the latter is quickly outpacing the former. The problem in this graphic is that comparing annual income to total debt is apples to oranges. Suppose I make $50,000 a year and owe $250,000 on my mortgage. Is this necessarily a Bad Thing? No. Here’s why:

This comparison completely neglects the other side of the household balance sheet – assets. You borrowed $250,000 on that mortgage to buy the house, so you also own an asset (the home) worth $250,000 (putting aside the housing crash for a second). You also have likely saved some of your income each year, which is building up as an asset in your bank account. Both of these assets can be liquidated to eliminate the debt. The debt is only dangerous if it is not matched by an asset of equal or greater value.

In addition, the diagram assumes you never use any of the income you earn in the time between each bar (several years) to pay down any of the debt, yet you continue to borrow. If that’s the case, the prison is of your own making. I could go all day, but the bottom line is, this is a completely flawed comparison. Debt is not inherently a Bad Thing. Irresponsible debt (debt that is not counterbalanced by assets) is a Bad Thing.

The lesson here is that you should pay attention to context and the validity of comparisons before drawing conclusions, especially when data visualization is involved.

In Summary

Infographics are incredibly useful for conveying a lot of data at a glace, and draw the eye with bright colors and interesting shapes. Often an infographic is the best way to communicate data to a relatively unsophisticated or novice audience. However, when you come across a flashy data visualization, sure the author didn’t create it to tell a specific story. Always take some time to envision the data behind the chart – would the data table create the same reaction that the infographic elicits?

Update: Here is a great infographic that was sent over to me today by my friend Vanessa – it depicts the magnitude of the recent Deep Water Horizon oil spill that occurred last week in the Gulf of Mexico. It does an excellent job putting the magnitude of the spill in context with other well known spills (Exxon Valdez, Amoco Caldiz) and also illustrating just how much oil was spilled relative to the world’s daily consumption. Check it out. Even better, they make the underlying data available here.

The auto industry’s recent troubles have shoved normally secretive private equity firm Cerberus Capital into the spotlight, as its portfolio company, Chrysler, heads to Washington to ask for a bailout. Much has been written decrying Chrysler’s audacity, claiming Chrysler is less deserving than Ford or GM because it is privately held, or with headlines like “If Cerberus will not invest further in Chrysler, why should the taxpayers?”

I strongly disagree with this argument, and the general one that just because Chrysler is not public, it is less deserving of a bailout than Ford and GM. You may be surprised at the actual ownership of Ford and GM – the majority of their shares are held by investment houses similar to Cerberus.71% of Ford’s outstanding equity is institutionally owned, and in addition, 40% of its voting rights are controlled by the Ford family. GM is 78% institutionally owned.

Also, why is the public not aghast that Ford and GM cannot raise additional equity from their existing shareholders? If Ford and GM cannot float additional equity on the public market, why should the taxpayer invest? The answer is that none of the Big 3 can raise additional equity because their market cost of capital is astronomical. This is why the government has to step in – neither the private nor public markets are willing to make any sort of further bet on these companies.

In addition, Cerberus has agreed to forfeit any profit it may make on its Chrysler investment if it receives government money. Ford and GM’s public shareholders have clearly made no such promise.

To be clear – I am in no way in favor of a bailout for any of the Big 3. These are sick companies, and they need to die. However, discriminating against Chrysler because they are privately held is really inappropriate.

As the presidential elections approach, we’re hearing more and more (especially from the Democrats) about raising or eliminating wage caps for social security taxes (as a side note – this would represent the largest tax hike in American history), repealing President Bush’s tax cuts for the rich, or other various plans that would further increase taxes on the top 25% of American wage earners.

I was forwarded the following parable, written by David R. Kamerschen, Ph.D. Professor of Economics at the University of Georgia entitled “Barstool Economics”. I think that while it is a bit simplistic, it is definitely timely and interesting.

Suppose that every day, ten men go out for beer and the bill for all ten comes to $100. If they paid their bill the way we pay our taxes, it would go something like this:

The first four men (the poorest) would pay nothing.
The fifth would pay $1.
The sixth would pay $3.
The seventh would pay $7.
The eighth would pay $12.
The ninth would pay $18.
The tenth man (the richest) would pay $59.

So, that’s what they decided to do.

The ten men drank in the bar every day and seemed quite happy with the arrangement, until on day, the owner threw them a curve. “Since you are all such good customers,” he said, “I’m going to reduce the cost of your daily beer by $20.” Drinks for the ten now cost just $80.

The group still wanted to pay their bill the way we pay our taxes so the first four men were unaffected. They would still drink for free. But what about the other six men – the paying customers? How could they divide the $20 windfall so that everyone would get his ‘fair share?’

They realized that $20 divided by six is $3.33. But if they subtracted that from everybody’s share, then the fifth man and the sixth man would each end up being paid to drink his beer. So, the bar owner suggested that it would be fair to reduce each man’s bill by roughly the same amount, and he proceeded to work out the amounts each should pay.

And so:

The fifth man, like the first four, now paid nothing (100% savings).
The sixth now paid $2 instead of $3 (33% savings).
The seventh now pay $5 instead of $7 (28% savings).
The eighth now paid $9 instead of $12 (25% savings).
The ninth now paid $14 instead of $18 (22% savings).
The tenth now paid $49 instead of $59 (16% savings).

Each of the six was better off than before. And the first four continued to drink for free. But once outside the restaurant, the men began to compare their savings.

“I only got a dollar out of the $20,” declared the sixth man. He pointed to the tenth man – “but he got $10!” “Yeah, that’s right,” exclaimed the fifth man. “I only saved a dollar, too. It’s unfair that he got ten times more than I!”

“That’s true!!” shouted the seventh man. “Why should he get $10 back when I got only two, the wealthy get all the breaks?”

“Wait a minute,” yelled the first four men in unison. “We didn’t get anything at all. The system exploits the poor!”

The nine men surrounded the tenth and beat him up.

The next night the tenth man didn’t show up for drinks, so the nine sat down and had beers without him. But when it came time to pay the bill, they discovered something important. They didn’t have enough money between all of them for even half of the bill!

And that, boys and girls, journalists and college professors, is how our tax system works. The people who pay the highest taxes get the most benefit from a tax reduction. Tax them too much, attack them for being wealthy, and they just may not show up anymore. In fact, they might start drinking overseas where the atmosphere is somewhat friendlier or not reinvest in the community.

Just some food for thought…