Many people think that all Wall Street firms are alike. The assumption is these investment banks all operate the same, in a what amounts to a commodity market. However, this is not the case, as risk profiles can change markedly from one firm to the next and what they choose to do can also vary dramatically. In this article, we'll examine three of Wall Street's pure investment banking powerhouses.

The Bellwether
It may not be fair to the company, but Goldman Sachs (NYSE: GS) has become the standard by which every other firm is judged. Goldman Sachs has changed over time, from a typical Wall Street brokerage firm advising high net worth individuals and corporations, to a very dynamic investment banking and proprietary trading firm. In fact, the majority of the firms revenue comes from trading and investing the firms own money.

Goldman Sachs has a world-class investment banking unit, perennially ranking at the top for merger-and-acquisition activity, and equity and debt underwriting. Goldman also has one of the top prime-brokerage units, those trading desks that cater exclusively to hedge funds. The firm has a very strong brand name that helps it gather assets for its asset-management group as well.

Goldman's financial results are remarkable, with the firm earning a net margin of 25% while seeing a year-over-year growth in earnings per share is over 75% and a return on equity of just over 33%. One has to hope the firm's trading acumen is as sharp in bear markets as it is in bull markets.

Mack is Back
John Mack is back at the helm of Morgan Stanley (NYSE: MS) and the performance of its shares would tell you as much. Prior to his return, the firm had an overly conservative management that put the firm's traders and in fact the whole firm, in irons. Wall Street firms get paid to take risks - that's what investment banks do. The old management didn't seem to understand this concept. The return of John Mack has been the resuscitation that the firm needed in its restructuring.

In the process of spinning off its Discover credit card business, Morgan Stanley, at this point in time, is something of a hybrid - a combination of proprietary trading firm like Goldman Sachs and retail brokerage firm akin to Merrill Lynch (discussed next). Financially, the firm has done well with a growth in earnings of 47% year-over-year contributing to a net margin of 23.5% and a return on equity of 25.5%.

Morgan Stanley does have some catching-up to do, as the previous management with their ultra-conservative attitude put the whole firm behind the curve in the mortgage business and equity derivatives. In addition, the firm has to ramp up its asset management capability and the average production of its retail producers.

Retail Powerhouse
Merrill Lynch (NYSE: MER) has adopted an approach where it takes care of a client's whole financial picture, not just its investment portfolio. Because of that, MER has the highest producing retail brokers and financial advisors on Wall Street - on $1.6 trillion in assets. This retail power is what distinguishes MER from other firms. MER also has a capable capital markets group and always ranks near the top with its investment banking business.

By having such a formidable retail army, MER is well positioned to take care of the retiring baby-boomers that just started turning sixty last year. The firm can also take on huge amounts in investment banking syndicates because the tremendous distribution that retail army has.

Merrill's financial results have been in line with other firms, with earnings growing 47% year-over-year, producing a net margin of not quite 25% and a return on equity of 25%. The question is, what will all those retail accounts do if we ever see a bear market?

Risky Business
An old cliché on Wall Street is "don't confuse brains with a bull market." Believe it or not, this quip is suprisingly accurate. Most people are naturally optimistic and like to buy stocks and only sell out of fear, desperation or panic. The Street knows this and devotes a considerable amount of time and effort training its brokers and advisors how to recognize and deal with certain personality types.

Trading is inherently very risky business, and one has to assume that Wall Street professionals know what they are doing. You can bet they are fully hedged. Still, sometimes you can't get out of the way fast enough.

Looking to cook up a market-stomping stock portfolio? Check out our FREE report "7 Ingredients to Market Beating Stocks" and get started right now!

Related Articles
  1. Investing News

    Does 2016 Mark the End of the Hedge Fund of Funds?

    Learn about how hedge fund funds had flat performances in 2015. Learn about the larger funds of funds and the rise of co-investment vehicles.
  2. Saving and Spending

    Where Does Bill Ackman Keep His Money?

    Learn about where prominent hedge fund manager Bill Ackman keeps his money. See how his short position in Herbalife has not been successful so far.
  3. Stock Analysis

    Elliott Management: An Activist Investor Analysis (HES, CTXS)

    Learn about the activist investor strategies used by Elliott Management. Read about the fund's positions in Hess Corp., Citrix and CDK Global.
  4. Investing News

    What You Can Learn from Carl Icahn's Mistakes

    Carl Icahn has been a stellar performer in the investment world for decades, but following his lead these days could be dangerous.
  5. Products and Investments

    There's a Reason They're Called Junk Bonds

    The closing of Third Avenue Managemet's Focused Credit Fund is a warning to investors and advisors. Beware the junk.
  6. Stock Analysis

    Tribune Media: An Activist Investment Analysis (TRCO)

    Learn more about the breakup of Tribune Company, once a powerful newspaper and broadcasting giant, and the role of activist investor Cliff Robbins.
  7. Stock Analysis

    Air Products and Chemicals: An Activist Investment Analysis (APD)

    Learn about the productive, and uncommonly friendly, activist investment made by Bill Ackman into Air Products and Chemicals.
  8. Stock Analysis

    Analyzing Altria's Return on Equity (ROE) (MO)

    Learn about Altria Group's return on equity (ROE) and analyze net profit margin, asset turnover and financial leverage to determine what is causing its high ROE.
  9. Investing News

    Icahn's Bet on Cheniere Energy: Should You Follow?

    Investing legend Carl Icahn continues to lose money on Cheniere Energy, but he's increasing his stake. Should you follow his lead?
  10. Stock Analysis

    Analyzing Google's Return on Equity (ROE) (GOOGL)

    Learn about Alphabet's return on equity. How has its ROE changed over time, how does it compare to its peers and what factors are driving ROE for the company?
RELATED FAQS
  1. What is securitization?

    Securitization is the process of taking an illiquid asset, or group of assets, and through financial engineering, transforming ... Read Full Answer >>
  2. Can hedge funds trade penny stocks?

    Hedge funds can trade penny stocks. In fact, hedge funds can trade in just about any type of security, including medium- ... Read Full Answer >>
  3. Are hedge funds regulated by FINRA?

    Alternative investment vehicles such as hedge funds offer investors a wider range of possibilities due to certain exceptions ... Read Full Answer >>
  4. Should mutual funds be subject to more regulation?

    Mutual funds, when compared to other types of pooled investments such as hedge funds, have very strict regulations. In fact, ... Read Full Answer >>
  5. Can hedge fund returns be replicated?

    You can replicate hedge fund returns to a degree but not perfectly. Most replication strategies underperform hedge funds ... Read Full Answer >>
  6. Can foreign investors invest in US hedge funds?

    U.S. hedge funds are open to accredited investors. When they distribute profits to investors, those proceeds are taxed at ... Read Full Answer >>
COMPANIES IN THIS ARTICLE
Trading Center