A Clue as to Why Goldman is So Good

The Times this morning has a flattering piece on Goldman-Sachs. And no wonder: they took hedge positions that have increased the company's profitability at a time when other investment banks are having, shall we say, serious problems.

The Times gives some reasons about why the company is so good, but let me suggest another. My limited exposure to people in the company suggests to me that part of the culture is actually to encourage reflective study. Instead of making decisions coming "straight from the gut," people at the company read current literature and appreciate the history of financial markets. Unlike its competitors, Goldman has people who understood that house values could not go up forever in all markets. This simple insight was fundamental to the company having a very sensible (and in the end) profitable risk management strategy.

It is often the case that ex post high payoffs result from nothing more than a favorable draw from a distribution of outcomes. But every now and then, one sees an institution that gets the favorable draw time-after-time. Berkshire-Hathaway seems to be one of these institutions, GS is another. The probability of getting great draws at random again and again becomes vanishingly small. I am willing to believe that Goldman Sachs is just plain smarter than its competitors.