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Introduction:
It is common wisdom today that the key to building wealth is taking risks. People who take higher risks get the higher returns and wealth. There are risk/return graphs in investment and business that prove this. Most of us by now have heard that stocks have higher risk and volatility but higher returns over time than investments like bonds. New entrepreneurial ventures have higher risk and failure rates than established business and tend to create greater fortunes. This is definitely true.
But the best entrepreneurs, executives, and investors who actually achieve the highest returns and build the most wealth don't see it that way!
Despite often being involved in unproven ventures and changing management or investments, they don't perceive that they are taking big risks at all. They are simply doing the obvious. They are very definite that what they are doing or investing in must and will succeed. They have a clear understanding of change and fundamental trends that seem all but inevitable to them. They appear risky and unclear only to people who don't understand such changes and naturally cling to familiar patterns that are more comfortable.
In "The Millionaire Next Door", the authors' surveys of wealthy people have found that the typical millionaire achieved such status by systematically underspending and oversaving from modestly above-average incomes. The law of compounding interest and investment returns built wealth over time, not overnight successes or excessive risk-taking.
The next two stories should give you a little perspective on how life at "Wall Street" really is.
How much is enough? The kid keeps asking the millionaire raider and trader.
How much money do you want? How much would you be satisfied with? The
trader seems to be thinking hard, but the answer is, he just doesn\'t know. He\'s
not even sure how to think about the question. He spends all day trying to
make as much money as he possibly can, and he cheerfully bends and breaks
the law to make even more millions, but somehow the concept of \"enough\"
eludes him. Like all gamblers, he is perhaps not even really interested in
money, but in the action. Money is just the way to keep score.
The millionaire is a predator, a corporate raider, a Wall Street shark. His name
is Gordon Gekko. Played by Michael Douglas in Oliver Stone\'s
\"Wall Street,\" he sits behind the desk in his skyscraper office,
lighting cigarettes, stabbing them out, checking stock prices on a bank of
computers, shouting buy and sell orders into a speaker phone. In his personal
life he has everything he could possibly want - wife, family, house, pool,
limousine, priceless art objects - and they are all just additional entries on the
scoreboard. He likes to win.
The kid is a broker for a second-tier Wall Street firm. He works the phones,
Trying to get new clients, offering second-hand advice, buying and selling and
dreaming. \"Just once I\'d like to be on that side,\" he says, fiercely looking at the
telephone a client has just used to stick him with a $7,000 loss. Gekko is his
hero. He wants to sell him stocks, get into his circle, be like he is. Every day for
39 days, he calls Gekko\'s office for an appointment. On the 40th day, Gekko\'s
birthday, he appears with a box of Havana cigars from Davidoff\'s in London,
and Gekko grants him an audience.
Maybe Gekko sees something he recognizes. The kid, named Bud Fox
(Charlie Sheen), comes from a working-class family. His father (Martin
Sheen) is an aircraft mechanic and union leader. Gekko went to a cheap
university himself. Desperate to impress Gekko, young Fox passes along some
inside information he got from his father. Gekko makes some money on the
deal and opens an account with Fox. He also asks him to obtain more insider
information, and to spy on a competitor. Fox protests that he is being asked to
do something illegal. Perhaps \"protests\" is too strong a word; he \"observes.\"
Gekko knows his man. Fox is so hungry to make a killing, he will do anything.
Gekko promises him perks - big perks - and it arrives on schedule. One of
them is a tall, blond interior designer (Daryl Hannah), who decorates Fox\'s
expensive new high-rise apartment. The movie\'s stylistic approach is rigorous:
We are never allowed to luxuriate in the splendor of these new surroundings.
The apartment is never quite seen, never relaxed in. When the girl comes to
share Fox\'s bed, they are seen momentarily, in silhouette. Sex and possessions
are secondary to trading, to the action. Ask any gambler.
Stone\'s \"Wall Street\" is a radical critique of the capitalist trading mentality, and
it obviously comes at a time when the financial community is especially
vulnerable. The movie argues that most small investors are dupes, and that the
big market killings are made by men such as Gekko, who swoop in and snap
whole companies out from under the noses of their stockholders. What the
Gekkos do is immoral and illegal, but they use a little litany to excuse
themselves: \"Nobody gets hurt.\" \"Everybody\'s doing it.\" \"There\'s something in
this deal for everybody.\" \"Who knows except us?\"
The movie has a traditional plot structure: The hungry kid is impressed by the
successful older man, seduced by him, betrayed by him, and then tries to turn
the tables. The actual details of the plot are not so important as the changes
we see in the characters. Few men in recent movies have been colder and
more ruthless than Gekko, or more convincing. Fox is, by comparison, a babe
in the woods.
Stone\'s most impressive achievement in this film is to allow all the financial
wheeling and dealing to seem complicated and convincing, and yet always
have it make sense. The movie can be followed by anybody, because the
details of stock manipulation are all filtered through transparent layers of
greed. Most of the time we know what\'s going on. All of the time, we know
why.
Although Gekko\'s law-breaking would of course be opposed by most people
on Wall Street, his larger value system would be applauded. The trick is to
make his kind of money without breaking the law. Financiers who can do that,
such as Donald Trump, are mentioned as possible presidential candidates, and
in his autobiography Trump states, quite simply, that money no longer interests
him very much. He is more motivated by the challenge of a deal and by the
desire to win. His frankness is refreshing, but the key to reading that statement
is to see that it considers only money, on the one hand, and winning, on the
other. No mention is made about creating goods and services, to
manufacturing things, to investing in a physical plant, to contributing to the
infrastructure.
Imagine we could step back to Manahattan's financial district circa 1869, we
might see a man in a frock coat and high silk hat hurrying along the cobblestone streets. This could be Marcus Goldman, an immigrant from Europe and maturing entrepreneur. Would he have ever thought that he would be the founder of the "greatest financial success stories of the twentieth century?" (Endlich, 1999)
Goldman Sachs is a global leading investment banking and securities firm.
It commenced as a little-known business, founded by Marcus Goldman in 1869. Almost 20 years later, Samuel Sachs joined his father-in-law, Marcus Goldman, and created Goldman Sachs as a private partnership with a "minor reputation and a huge dream" (Endlich, 1998). After more than a century of substantial growth from 2 to 200 private partners, the firm became a public company in 1999, creating a publicly traded organization worth $48 billion.(fortune, 1999). Along with a presence in over 90 countries, across three continents, the Goldman Sachs group Inc. is headquartered in New York City and has 41 offices nationwide. Goldman is the investment banker to companies such as Microsoft, Ford Motor Company, General Electric, and American Express.
This prestigious investment-banking firm is one of the oldest, largest and best companies across the globe. The two main services provided by Goldman Sachs include investment banking and equities. The departments of the Investment Banking Division include "The Corporate Finance Department", which advises clients worldwide on structuring and carrying out financial strategies, to meet their financial objectives across a wide range of industries including "retail, high technology, chemical production and transportation" (Business Week, 1997). The Mergers and Acquisitions Department provides advice worldwide regarding "acquisitions, divestitures, joint ventures, recapitalizations, leverage buyouts and takeover attempts" (New Yorker) The merger and acquisition process involves analyzing features of companies and industries; determining likely buyers and sellers; and marketing, negotiating and closing transactions. The real estate department provides complex and original investment banking services worldwide to the primary real estate companies. Their clients include "real estate investment trusts, the hospitality industry and a variety
of fortune 500 companies" (Fortune, 1997).
The Equities Division of the Goldman Sachs empire is another profitable business for the firm. This division offers every kind of equity feature and plays a large role in the primary equity markets across the globe. Working with corporations, institutions, governments and individuals, the equity division develops customized investment strategies and facilitates activity in both public and private equity markets (Goldman Sachs pamphlet, 1997). Their wide range of expertise allows them to successfully achieve their clients' goals, which include; trading large amounts of equity securities in various currencies; portfolio hedging and restructuring; providing market information, investment perspective and guidance; facilitating initial public offerings
and governmental privatization programs (Goldman Sachs pamphlet, 1997) and advising wealthy individuals and families on ways in which to build and protect their liabilities. One example of how the equities division provides a great deal of business for the firm is when 1997 Goldman Sachs made one of the biggest equity trades through buying and selling a 2 billion dollar block of British Petrolium within 24 hours. This evidence is authoritative because it is provided in the recommended and prevalent Business Week Magazine.
Smaller services provided by the firm entail: Fixed income, currencies and commodities, asset management, Global Operations, technology, treasury, Controllers, Credit, Tax, Management controls and legal advising.
As early as 1880, relationships with major organizations such as several European banks were being formed to support the international needs for its clientele. Their relationships with Sears and Ford Motor Company are another two examples of their dealings with major corporations during the early 20th century.
An article in Fortune magazine, in 1997, reported Goldman Sachs paying $1.325 billion for a two-thirds of AMF, owner of 390 bowling centers and the world biggest manufacturer of bowling equipment. (GS.com) Goldman Sachs, joined the New York Stock Exchange in 1896, (GS.com) and quickly became a leader on Wall Street by the 1930s. During the 1950s, the firm played a leader role in establishing the U.S. municipal bond market as a means of financing public projects. And in 1981, the firm acquired J. Aron & Co., which later on became a leader in currency and commodity markets worldwide. (GS.com) Goldman Sachs reputation of being the best and brightest goes back to the 1920s when it was one of the first Wall Street Firms to recruit MBAs.
During the 1950s, it was first to establish a group of professionals advising institutional investors on trading large blocks of stock, at the same time serving the individual investor.
In addition, it was the first to set up a group to market it's the full range of investment banking services, an approached that came to be imitated by competitors.(GS.com) In 1970s, it formed the first Wall Street Mergers & Acquisitions and Real Estate department. Lately, according to Forbes magazine, Goldman Sachs launched an online platform enabling clients to access all the world's major equity markets on a real time basis. Since WWII, Goldman Sachs has followed a plan of aggressive global expansion. It's first international office was opened in London in 1970. Thereafter, offices were opened in Tokyo,
Zurich, Hong Kong, Beijing, Shanghai, Mexico City and other major commercial cities in the world.
In these 30 years, they gradually built up their global network covering 90 countries. The Goldman Sachs name is now recognized as one of the world's most pioneering financial groups. In September 2000 seven leading investment firms, including Goldman Sachs, Merrill Lynch and five other well-known firms, launched the global financial gateway known as "markets.com", which offers a wealth of information for investors on equity research, initial public offering information, corporate news, as well as market data. (Forbes, 2000)
Goldman Sachs has become renowned in terms of its worldwide scale and investments in new technology. These two characteristics relate to Chandler's ideas about how an organization's success is realized. According to Chandler, the economies of scale and scope, the efficiency of the organization structure and the innovation and strategy for market share and profits are three necessary requirements for an organization's to success. Indeed, during it's history Goldman Sachs has achieved a number of notable events, which refer to Chandler's idea. Goldman Sachs operates within a fast-paced, competitive, and rapidly changing environment. Since their clients' needs are constantly changing, the firm's ability to respond to their clients must always be parallel to their demands. Its diversified clientele includes corporations, financial institutions, governments, and high-income individuals.
Goldman Sachs provides a full range of services by consolidating it's various divisions. (GS.com) In recent years market for financial services has undergone some drastic changes. One of the major trends in this sector has been the creation of mega-firms through mergers. Banks, Insurance companies, brokerage firms and so on have been able to realize economies of scale by merging their many services into comprehensive packages in order to better serve their increasingly demanding clientele. Some clear evidence of this is the fact that in the past decade there has been an ever-increasing number of people involved stock market trading. For example, Statistics show that over half of all households in the U.S. now own some form of stock, either through direct ownership, mutual funds, or 401(k)'s (RRSP in Canada). (www.plunkettresearch.com)
Another factor allowing for integration of financial services has been the revolutionary effects of the Internet in connecting businesses and clients. This has rendered services ranging from simple banking operations to life insurance more accessible to Internet savvy customers. According to John E. Cleghorn CEO of Royal Bank Group: "technology is the key to offering our customers packages of services and information tailored to their financial situation. The ability to track their stock and access to free market research is essential in serving our clients effectively" (www.royalbank.com).
Financial institutions that have made investments in new information technology have been able to realize economies of scale by reducing the cost of their information processing. In addition new technologies have facilitated entry into this sector by small and medium sized firms having fewer but better trained employees providing information-based services. The reduction of legal barriers has also contributed significantly to the wave of consolidation in financial institutions.
This convergence has occurred both geographically and across the scope of financial services. For example in 1998 national interstate banking legislation went into effect. These changes allowed multi-state bank holding companies to merge their state banks. As a consequence of these mergers American banks now benefit from greater efficiency in processing transactions, improved customer service, increase in the availability of funds for research and development. One such case is the consolidation of First Union with Signet Bank and CoreStates Bank (firstunion.com). Similarly in Canada the Chartered Banks were strictly limited to banking services. Again since the recent deregulation institutions like Royal Bank have expanded into Royal Investment Group in order to offer a full range of financial services to their growing clientele.(www.ris.com)
Being a first mover in the financial services industry, Goldman Sachs benefited from many advantages and quickly dominated the market. First movers as described by Chandler were companies that capitalized on economies of scale and scope, invested internationally, and recruited teams of management. There are many factors that can affect the firm's performance. These include relevant economic, demographic and political aspects and market conditions. Economic factors that can influence Goldman Sachs include the notion of the
company going public "creating a larger capital base" (Newsweek, 1999), growing the business through acquisitions by acquiring other companies and finally by expanding the business in the United States and globally, hence increasing capital gain.
Chandler emphasizes economies of scale and scope, which is one of the first steps required in achieving competitive advantage. "Right now, Goldman Sachs is expanding rapidly, especially overseas. Every market they enter, they dominate" (Newsweek 1999)
The firm constantly strives to foresee the rapidly changing needs of their clients
and to develop new services to meet those needs. Despite the continuously changing needs, Goldman makes the best effort to sustain and expand their client relationships. However, their target market is restricted mainly to those with a high level of income. Political factors may consist of people's interest being influenced by authoritative figures in the media. Goldman Sachs' ranking in comparison to their competitors in the political realm may often influence the demand for their services.
In addition, regulatory restrictions prevent firms from providing services to their clients' competitors. Financially, Goldman Sachs revenue can be affected by increases or decreases in interest rates, inflation, taxation, or other sources that may alter stock markets. Behind the story of Goldman Sachs lies a series of events contributing to their success. In the 1880's, Goldman Sachs formed relationships with banks throughout Europe, leading to expansion, promotion and awareness of the firm.
In 1970, Goldman Sachs opened an office in London, which was the initiation of their business offices opened in Europe; four years later followed Tokyo and Zurich. This drive to expand abroad has permitted Goldman Sachs to be recognized internationally as one of the most successful investment-banking firm. As proposed by Chandler, this is the next step a firm has to take in order to maintain competitive advantage. After capitalizing on economies of scale, the firm needs to expand internationally as explained above as well as recruiting teams of management leading on to the next step Goldman Sachs took. Behind every success story lies a downfall.
In 1994, Goldman Sachs was temporarily suffering very low revenues. In addition to the commotion of large trading losses and failure of poorly executed overseas expansion strategy Goldman Sachs was forced to downsize. Moreover, key partners were unexpectedly retiring early, there was careless management leading to poor morale and excessive costs resulting in weak earnings. It was time to invest in quality management. Goldman Sachs decided that in order to recover, a good management team had to be brought in. This new team included Hank Paulson and Jon Corzine. Paulson and Corzine's management techniques brought the firm out of its temporary fall and will always be remembered for their role in taking the firm public.
In 1999, when Goldman Sachs issued their own IPO, management decided to incorporate employee ownership in the company. Making employees part owners, created less conflict between management and shareholders. This helped boost employee morale creating a more dedicated and productive workplace. Stephen Friedman had summed up the benefits of ownership by saying " no one washed a rental car" (Endlich, 1999). In other words, employees will provide full dedication and loyalty to what is now partly theirs. Conclusion Goldman Sachs' culture and history have been preserved for a long period of time due to its long standing dedication to maintaining and enhancing economies of scale and scope; as well as keeping in mind the importance if good management and international expansion. It has effectively done so through many factors, but particularly the ones mentioned above such as the ability to recruit consistently "some of the most talented people on Wall Street" (Endlich, 1999).
With the help of these practices "the firm was able to generate $3 billion in profits in 19997" (Endlich, 1999)
Since every firm's goal is profit maximization, the publicly owned Goldman Sachs can now maximize its shareholding wealth. The shareholding will help expand the growth of the company due to the fact that the company is exposed to more people throughout the market and because Goldman Sachs is growing internationally which will inevitably make it one of the most profitable organizations internationally. If only Marcus Goldman could visit the firm today he would be astonished at the amount of change in the company that bears his name. Now, 130 years later, Goldman Sachs is a newcomer in many parts of the world and "[they] seek to sustain the entrepreneurial spirit that guided the founder of their firm" (Endlich, 1999)
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