Wall Street Profitability Seen Ebbing Rest of Year

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By Edward Krudy

After a strong start to the year, Wall Street firms are likely to see their profitability slow in the remainder of 2013, setting the industry up for its worst year since 2011, according to a report by the New York State Comptroller’s office.

The report forecasts that profits generated the broker-dealer operations of New York Stock Exchange member firms could fall to $15 billion in 2013 from $23.9 billion in 2012 as higher interest rates, litigation costs, and the government shutdown weigh on business.

“Profits for the first half of 2013 of $10.1 billion were close to the pace of 2012 but appear to be slowing,” the report said.

The state Comptroller’s office has access to a range of financial data from companies that do business in the state. It uses this to monitor trends in the securities industry, which is a major source of income and employment for both state and city.

Following two years of record losses in 2007 and 2008, the securities industry had four years of profitability buoyed by low interest rates, including three years of record profits.

The report shows the securities industry continued to streamline this year. Industry jobs fell to 163,400 in August 2013, a 13.5 percent drop from pre-crisis levels. The report suggests the industry will contract further as it adapts to changing regulatory and economic environments.

Total compensation for the broker-dealer operations of member firms of the New York Stock Exchange increased by 5.5 percent during the first half of 2013. Although this suggests bonuses might be higher again this year, recent trends have cast doubt on this, the reports said.

The Comptroller’s office uses tax data to estimate bonuses for the previous year in February. In February 2013, it estimated that the cash bonus pool for securities industry workers in New York City paid during the bonus season grew by 8 percent to $20 billion.

  • Warren Buffett is a great investor, but what makes him rich is that he’s been a great investor for two thirds of a century. Of his current $60 billion net worth, $59.7 billion was added after his 50th birthday, and $57 billion came after his 60th. If Buffett started saving in his 30s and retired in his 60s, you would have never heard of him. His secret is time.

    Most people don’t start saving in meaningful amounts until a decade or two before retirement, which severely limits the power of compounding. That’s unfortunate, and there’s no way to fix it retroactively. It’s a good reminder of how important it is to teach young people to start saving as soon as possible.

    1. Compound interest is what will make you rich. And it takes time.

  • Future market returns will equal the dividend yield + earnings growth +/- change in the earnings multiple (valuations). That’s really all there is to it.

    The dividend yield we know: It’s currently 2%. A reasonable guess of future earnings growth is 5% a year. What about the change in earnings multiples? That’s totally unknowable.

    Earnings multiples reflect people’s feelings about the future. And there’s just no way to know what people are going to think about the future in the future. How could you?

    If someone said, “I think most people will be in a 10% better mood in the year 2023,” we’d call them delusional. When someone does the same thing by projecting 10-year market returns, we call them analysts.

    2. The single largest variable that affects returns is valuations — and you have no idea what they’ll do

  • Someone who bought a low-cost SP 500 index fund in 2003 earned a 97% return by the end of 2012. That’s great! And they didn’t need to know a thing about portfolio management, technical analysis, or suffer through a single segment of “The Lighting Round.”

    Meanwhile, the average equity market neutral fancy-pants hedge fund lost 4.7% of its value over the same period, according to data from Dow Jones Credit Suisse Hedge Fund Indices. The average long-short equity hedge fund produced a 96% total return — still short of an index fund.

    Investing is not like a computer: Simple and basic can be more powerful than complex and cutting-edge. And it’s not like golf: The spectators have a pretty good chance of humbling the pros.

    3. Simple is usually better than smart

  • Most investors understand that stocks produce superior long-term returns, but at the cost of higher volatility. Yet every time — every single time — there’s even a hint of volatility, the same cry is heard from the investing public: “What is going on?!”

    Nine times out of ten, the correct answer is the same: Nothing is going on. This is just what stocks do.

    Since 1900 the SP 500 (^GSPC) has returned about 6% per year, but the average difference between any year’s highest close and lowest close is 23%. Remember this the next time someone tries to explain why the market is up or down by a few percentage points. They are basically trying to explain why summer came after spring.

    Someone once asked J.P. Morgan what the market will do. “It will fluctuate,” he allegedly said. Truer words have never been spoken.

    4. The odds of the stock market experiencing high volatility are 100%

  • The vast majority of financial products are sold by people whose only interest in your wealth is the amount of fees they can sucker you out of.

    You need no experience, credentials, or even common sense to be a financial pundit. Sadly, the louder and more bombastic a pundit is, the more attention he’ll receive, even though it makes him more likely to be wrong.

    This is perhaps the most important theory in finance. Until it is understood you stand a high chance of being bamboozled and misled at every corner.

    “Everything else is cream cheese.”

    5. The industry is dominated by cranks, charlatans and salesmen

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