Love Goldman Sachs
When foreigners are asked to name an American college, they answer "Harvard." Baseball team? "Yankees." And a Wall Street firm? "Goldman Sachs."
Yes, it's been involved in more than its fair share of controversies and government investigations recently. But part of the reason for the unwanted attention is the notoriety it's gained as Wall Street's preeminent big dog.
If you doubt this dominance, let me pose one question: Even assuming no shadiness, would you want to be on the other side of a trade with Goldman Sachs?
Me neither.
That being said, there's a company out there that I'd rather invest in. Truth be told, there are many, but this one is special. It shares a lot of Goldman Sachs' strengths, without any of its weaknesses. Think of it as a Goldman Sachs upgrade.
Why Goldman rocks
Before I tell you about that company, let's review what makes Goldman Sachs so special. It breaks down to three factors. Goldman:
- Attracts the best talent
- Incentivizes that talent
- Fosters its best-in-class aura
Now, you may argue these factors aren't unique to Goldman. I myself can quickly think of three companies in three different industries that could claim Goldman's advantages. Animators and creative types flock to Disney
But Goldman has an added advantage that they don't -- it operates in an industry that allows its employees to "eat what they kill." And it's the biggest predator in the jungle.
Put the next few numbers on a billboard, and see how much talent you can attract. According to the Medical Group Management Association, the typical primary-care physician makes $186,000 a year. Doctors who specialize make $340,000. The average Goldman Sachs employee (factoring in kids right out of college, assistants, and any support staff) made more than $450,000 in 2009!
Why Goldman is dangerous
This virtuous cycle of talent begetting aura begetting more talent is a goldmine for all best-in-class firms. But unlike Disney, GE, and Microsoft, Goldman Sachs gives that gold to its employees, not its shareholders.
As one former partner famously noted: "I determined many years ago that if you want to make money on Wall Street, you work there; you don't invest there. They just pay themselves too well."
Excessive compensation the only thing that worries me about Goldman -- and for that matter, its cohorts JPMorgan
- Short-term focus
- Significant leverage
- Short-term borrowing
- Heavy use of derivatives
- Proprietary trading (i.e., making its own bets, not just for clients)
All of the above enhance the buzz when things are going well -- and it frequently does for the fortune-favored Goldman. But all add excessive risk that could cripple Goldman with little warning. And as Citigroup and Bank of America can attest, even extraordinary government aid may not save shareholders.
The company that blows Goldman out of the water
Enough with the backstory. Let's get to the happy ending. I promised you a better option for your money. Recall Goldman's recipe for success.
- Attracts the best talent
- Incentivizes that talent
- Fosters its best-in-class aura
Like Goldman, the company I'm thinking of is a people-driven company that benefits from its best-in-class reputation. In fact, I've called Accenture
However, Accenture doesn't motivate its people through on-the-verge-of-ridiculous compensation schemes that rely on serious risk-taking. Just like Goldman, it was structured as a partnership before it went public. The rank and file make great livings, but the big bucks at Accenture are reserved for those who "make partner."
Accenture pays its people less than a quarter of Goldman Sachs' $450,000+ per employee average. By incenting its employees primarily through the partner carrot, rather than huge annual bonuses, Accenture makes a killing.
And the spoils flow to shareholders. In Goldman's bubblicious glory years, it produced returns on equity of around 30%; in the last five years, Accenture has averaged returns on equity above 60%. That's with significantly more cash than debt the whole time.
I love businesses like Accenture: best-in-class companies that require very little capital, employ very little leverage, and deliver strong returns to shareholders. My colleagues at our Inside Value newsletter agree. They recommended Accenture to their members all the way back in 2005. It's beaten a flat market by more than 70% since then (and topped Goldman by more than 30%).
If you'd like to see the Inside Value team's entire write-up on Accenture, and all their other recommendations, take a 30-day free trial. Click here to start.
Anand Chokkavelu knows Accenture firsthand, since he worked there before joining the Fool. He wouldn't have minded a six-figure bonus at the time. He owns shares of Accenture, Disney, Citigroup, and Microsoft. Accenture, Disney, and Microsoft are all Motley Fool Inside Valueselections. Disney is a Motley Fool Stock Advisor pick. Motley Fool Options has recommended a diagonal call position on Microsoft. The Motley Fool has a disclosure policy.
