That Old Black Magic
Have I mentioned that I’m retired? That is supposed to mean that if I have anything to worry about, its about whether my deck renovation is on time and in budget or my new plants are getting enough or too much water. But despite being retired, I have an urge to stay engaged in the business activity in which I spent my productive years. I am not entirely sure why that is necessary for me, but I doubt I’m the only guy who doesn’t want all that experience and expertise to go to seed any sooner than it must. So, I have taken on the roles of professor of finance at the graduate level and expert witness in investment management. In those capacities I get vetted regularly on several levels. I am challenged about the depth of my vestigial knowledge and expertise. And I am challenged about the applicability and degree of currency of my knowledge to the here and now world in which we live in 2021. Some of the experience I draw on is from the 80’s and 90’s and it is hard for laymen (academics in the case of the teaching and lawyers in the case of the expert witness litigations) to grasp exactly how relevant my experience is or is not to their current problem and/or need. That requires me to sell my ability to perform well at the task at hand using and drawing on those skills and experience to make for a compelling argument or case study.
In the realm of academia, I am the guy with the real world chops that students want to hear from to help prepare them for entry and success in the big bad business world they are aiming themselves towards. They view my success as an important indicator and, indeed, role model that they want to tap for wisdom. The important decision that an academic administrator needs to assess is not only whether I still truly have that wisdom, but then whether I am able to digest and regurgitate it in the form of a compelling teaching process. Can I build a lesson plan that transmits information of value to the students and that will cause them to evaluate me and the course as productive and helpful to them. The students will ultimately determine whether I have added value to them, which is at it should be.
It’s a quite different vetting process in the expert witness arena. Where academics have an abundance of knowledge, they lack the practicum to determine whether my experience translates well for students. Lawyers are generalists in the realm of whatever they will be litigating and they rely entirely on the experts for that knowledge and expertise. They have to determine how an expert will play to the court or how scary they will seem to the opposition (and thereby induce a favorable settlement). Litigators must be very strategic in their selection of experts, choosing the right kind of experts that are both very credible and long of tooth in an experiential manner (experience specifically fitted to the circumstances of the case), but also still compelling with an eye of the tiger on cross-examination. They seem always conflicted about whether they want a “left eye” specialist expert or a “big picture” expert who can speak from the authority of on-high and be convincing. They want you to be able to do the analysis, be up-to-date on all the latest techniques and technologies, and yet they want you to be savvy and senior enough to stand up to opposing scrutiny and opposition turbulence.
In the last two days, I have had to address both situations in regard to a new teaching opportunity and a new high-profile expert witness assignment. Here I am at age 67 after a 45-year successful career with lots of experience under my belt. I have a decade as a Clinical Professor of Finance at an Ivy League graduate business school. I have a decade of experience as an expert witness including three very successful and diverse cases over the past year. And yet, I am still singing for my supper and pitching myself and my ability to do the job to both of these situations.
The less difficult sell is to the teaching situation. Quite frankly, I don’t do that for the money and it doesn’t pay all that well. I do that to stay sharp in my field and to give back. I enjoy the teaching process and feel I have a lot to give. My teaching style lends itself to my storyteller mentality and I get well-reviewed by the students for the most part. I was planning to teach a Project Finance course I had taught last year. That has good and bad. The good is that the bulk of the prep work is done and only some simple updating and refreshing is needed. The bad part is that there is a sense of diminishing interest when you re-teach a course. It simply isn’t that interesting the second or third time and soon thereafter it can get positively boring if you’re not careful. Boring leads to less compelling storytelling and that leads to inferior evaluations. The economic concept of diminishing returns lingers like a shroud. In this case, there were not enough students interested in the project finance topic so, the course is being cancelled. I thought that was the bad news call I was getting. Instead, I got the call to teach a bigger and broader course covering general corporate finance topics. It has the flexibility to go in whatever direction I choose and that should be a great thing for someone like me. It can be designed to emphasize what I know best and what I feel is most important. I can draw on outside cases or use my own. Perfect…maybe.
The expert witness case is a very high-profile situation involving an arrangement with a massively successful billionaire and why he is being over-compensated via some sort of arrangement that seems to these lawyers to be too chummy. The compensation involves a complex multi-factor option (I built and ran one of the leading derivatives and options businesses), valuation methodologies leading to market capitalization (I ran three of the largest and most sophisticated money management businesses), and it involves the value impact of inclusion in various indices (one of my investment management companies was a leading provider of passive management…aka index funds….in the world). Combine all of that with the fact that I managed highly compensated individuals who were paid as high as $80 million per annum, and I feel I am reasonably well-qualified, perhaps uniquely qualified to address this issue. Nevertheless, I had to get grilled by several young legal associates who were just born when I was a partner at a major Wall Street firm.
What is the black magic of finance? It doesn’t actually grow businesses, but it is a critical element in that growth. It isn’t really cut and dried, it is, in practice, far more subjective than that. Financial option pricing, as an example, doesn’t really lend itself to a closed-form, finite and definitive value equation. These are subjects of what are called contingent claim analysis. That means probability. Things that are called names like Monte Carlo simulation, a term one of those legal associates threw out at me. Fancy name, but very basic concept. You need to look at the probability (that is, statistical analysis) of events occurring and how various factors effect that sequence of events and outcomes. It’s quite mathematical, but ultimately it is a sophisticated guess and the way in which a contracts parameters set the tone for that guess can be quite important. This is angels on the head of a pin territory for sure.
So, suddenly, I am thrown back into the laboratory of black magic, both to teach it and to opine and pontificate about it. I see my role as one of demystifying, not of providing clear-cut answers. In fact, it is a toss up as to how much of the black magic has to do with the Eye of Newt in the pot or the costume and Kabuki I perform as I dance around the pot. In either case, its great to be back at the cauldron…I think.