JUSTINE UNDERHILL: Welcome to How I Got My Start in Finance. In this episode, Mohamed El-Erian chief economic advisor for Allianz, chats with Larry McDonald about the lessons he learned during his journey from academia to the marketplace.
MOHAMED EL-ERIAN: So the big secret is none of this was planned.
LARRY MCDONALD: OK.
MOHAMED EL-ERIAN: None of it was planned. I was doing my PhD in England. And I was going to be an academic. And then my father passed away suddenly. My mother had never worked. My sister was seven years old. So the issue became who pays a PhD economist? And at the time, there were only really two organizations that did, the IMF and the World Bank. So I ended up at the IMF in Washington, DC for 15 years. Had the time of my life. It was incredible exposure to policymaking.
I was turning 40. I had never tried the private sector. I thought I better try it now before my human capital disappears completely. And the IMF had this wonderful program, where you could leave for two years and come back at the same level. So basically a risk free move.
LARRY MCDONALD: But wasn't there still some comfort, a comfort zone there? Or is it really--
MOHAMED EL-ERIAN: There was, but there was also a sort of drive, you better get to know how the private sector work. So I went to Salomon. Now if you want a shock, go from a bureaucracy in Washington--
LARRY MCDONALD: Wow.
MOHAMED EL-ERIAN: --to Salomon at that time.
LARRY MCDONALD: What was your big break to get into Salomon?
MOHAMED EL-ERIAN: So I literally went to the Emerging Market Research team.
LARRY MCDONALD: OK.
MOHAMED EL-ERIAN: And they offered me a job to head that. Nine months into that, I got a phone call from a head hunter saying there's this very large investment management firm on the West coast. They've identified 20 people for the EM team. They're looking for one-- would you like to go? And I thought great. They're going to fly me to California. I've never been to California. And I went and I met the smartest people that I have ever come across.
And I had a series of interviews. And I remember being told, we're going to hire you for the portfolio management team. And I said, but I've never traded a bond in my life. And they said, we can teach you that, that's not why we're hiring you. So they helped the transition. So it went from academia, policy, the sell side--
LARRY MCDONALD: Yeah.
MOHAMED EL-ERIAN: To the buy side. But none of it was planned. It was all a series of good fortune all along.
LARRY MCDONALD: So you make the move from academia to the buy side, which is the asset management side. Now you're at the highest level of asset management. And the difference, in terms of your daily routine, the inspiration, did you find it was a little bit tougher bar each day to hang with that crowd, in terms of daily inspiration and, I guess, achieving alpha?
MOHAMED EL-ERIAN: A lot tougher, and for two reasons. One is at PIMCO, the people that were in the room were the smartest people I had ever met, in fact, I've ever met. I haven't met a group of smarter people and more driven people. And it puts you in a completely different environment. And the second is that you've judged every single day by the markets.
And if it's not going your way, which, as you know, happens, you've got to figure out why-- is it a question of time? Did I get something wrong? So you can't just rest. Every single day you're being questioned. And even if it is going your way, you have to think, well, has gone as far as it will go? So it was quite a shock to the system, but something that I really enjoyed. And I was very lucky to be at PIMCO.
LARRY MCDONALD: When I was at Lehman, one of my most impressive investors that I've ever met and worked with was Mike Gelband, who now runs Exodus Point. And Mike used to come by the desk, and he used to say-- he'd look at your position. He's stare you in the face, and say, "Are you long because you like it, or do you like it because you're long?" And how do you--
MOHAMED EL-ERIAN: And it's amazing how many people end up in the second bucket.
LARRY MCDONALD: Yes.
MOHAMED EL-ERIAN: And we always used to say if we didn't have to trade on it, we'd put it on now. And we try to question that. I tell you, I've had lots of major events that have changed my life. One was my first day at Salomon. So I come with a research driven, policy driven approach. And my boss is a 24-year-old trader. And I wrote about this in the book. And he tells me, look, I want you to understand there are days when I'll listen to you. And there are other days if you come anywhere near me, I'll shoot you.
And the difference is that sometimes the market trades on fundamentals, sometimes it trades on technicals. And I don't want to see your face when the market trades on technicals. And that, for me, was sort of an early indication that I better figure out what those technicals are. Otherwise, I'm going to be relevant for just part of the time.
So it was a really important way of understanding a broader point, which is, while we like to specialize in one of four circles, either the academic side of it, or the policy side of it, or the market side of it, or the political side of it, that's not where the world solves. The world solves at the intersection of all four. And you've got to realize that most people specialize in one of the four, or two of the four. But if you are going to serve your clients, you bet understand how they intersect.
JUSTINE UNDERHILL: Mohamed El-Erian didn't expect to leave academia and policymaking, but life took him in another direction. While he didn't have the qualifications to be a portfolio manager, those who hired him saw a unique skill set that would set him apart. In a market that plays on either fundamentals or technicals, El-Erian learned to prepare for both. For Real Vision, I'm Justine Underhill.