Being passionate about what you do is only part of the process of becoming a true rain maker. Once one finds their passion, he or she must become a true expert in that area. Tom Murphy is a Principal in the UHY Advisors FLVS New York office. He is a world renowned expert on derivatives. He holds a degree in chemical engineering, an MBA in accounting, a PhD in Finance, and a Juris Doctorate. He has spoken around the world on derivatives over the years in London, Amsterdam, Paris, Geneva, Copenhagen, and Hong Kong. But that is not what makes him an expert, nor is it how he got there.
Dr. Murphy, tell us how your career began.
I began my career as a chemical engineer with E. I. DuPont de Nemours, and my initial assignment was at a polymer products plant where I ran experiments to improve yield and quality. I really enjoyed both the technical aspects of the work and the interaction with the manufacturing division. As I worked hard at each assignment with DuPont, I was promoted through a series of positions in engineering, manufacturing, marketing, and research. This gave me a broad view of how businesses work. I became very interested in the capital investment process and finance. To get to the next level at DuPont, I needed an MBA degree, so I returned to graduate school where I majored in accounting. I discovered that accounting had many of the same concepts that I learned in engineering. I was also very intrigued with quantitative finance, especially option theory and its application to real assets and management decisions. My dissertation was inspired by Lenos Trigeorgis, who earned his doctorate at Harvard as I was starting my PhD program. This was an interdisciplinary area of finance where the “light bulb” came on for me, and I pursued my passion with a dual doctoral degree program: PhD in Finance; and JD in Law at Syracuse University.
After I secured my PhD I moved to Houston and worked for a large energy industrial gas company and began to analyze and understand the vast application of derivative theory in business decisions and in setting strategy. I decided I wanted to learn more, but rather than taking more classes, I decided to teach and do research. I became a professor of finance at Kansas State University. I used this time to become an even stronger expert on derivatives and the depth of their application. Teaching students about derivatives, how to recognize them, and how to use them to make complex decisions was a way to focus my knowledge and learn to convey it to those not completely immersed in the topic.
I helped some start-ups get going from the university and realized I needed to get back into the “real world.” I joined the Deloite & Touche Energy practice in Houston, working with clients to help them analyze the many derivatives involved in that business. Quite a few of these companies were dependant on Enron and when that failed, due largely to very poor use of and control over derivatives, many of them failed as well. I joined Ernst & Young’s Valuation practice where I applied option models to complex securities and structures. I then received the unique opportunity to join my mentor Lenos Trigeorgis in the Real Options Group where I met Michael Brennan, Myron Scholes, Robert Pindyck, Mark Rubinstein, Alexander Triantis, Tom Copeland, Vladimir Antikarov, and Valery Kholodnyi which was very exciting, then to Charles Rivers Associates and finally to UHY Advisors to run the Derivatives group here.
As briefly as possible, when we say you are an expert in derivatives, what do we mean? What is a “derivative” and what do you do with them?
In the simplest of terms, a derivative is anything that derives its value from something else, or a bundle of other things. Derivatives include options, futures, financial structures, equity, contracts having flexible terms and conditions, or tangible assets like oil refineries, electrical power generation, twin fuel boilers, etc. As inputs and outputs face risk and uncertainty, these assets have flexibility to switch. Occasionally, of course, extreme events such as 9/11 occur and even these have to be factored into derivatives.
Flexibility is the key to derivatives. Derivatives affect the valuation and optimal strategy of everything we do in virtually any industry, from the obvious such as the finance and insurance industries to the less obvious such as IP, energy, construction, industrial processes, markets and the like. I identify the derivatives, create models to quantify as many variables as possible, and then help clients understand how to work with them to create forward-looking strategies based on high quality information.
You have a passion in the area of derivatives. How did that happen?
I can identify a lot with what Jeffrey Harfenist said last week. Finding your passion is something that happens with both a bit of happenstance and from the dogged pursuit of those things about which we are extremely interested. As we explore, we become more exposed to the intricacies and opportunities within an area of interest, and eventually we may find that area that lights that light, and the rest is history.
That happened to me as I was trying to figure out what I would write my PhD dissertation on. I was searching through abstracts of other dissertations and ran across Lenos Trigeorgis’ abstract on real options. After I read this, I literally ran to my professor and exclaimed that this was the area I wanted to work in. My professor was stunned and perhaps a bit disappointed. He cut me off and suggested that I was crazy. “Real options?” he asked. “Why would you want to do this?” I told him that as an engineer I could see how this worked in real life situations. The concept tied all of my experiences together, from being an engineer with DuPont, through accounting, intellectual property, and the law. My dissertation was on the intellectual property portfolios and R&D projects in the pharmaceutical industry. This was when I found my true love of complex financial modeling and derivatives.
After that “Ah-hah” moment, how did you then go about becoming a World Class expert in derivatives?
First let me say that I appreciate you referring to me as a world class expert in derivatives, and I suppose I am, but it is critical to remain humble because one is never truly the Best in the World at anything and as soon as you believe you are, someone will pass you by like you are standing still.
I absolutely love complex financial models. Experts are those, like me, who are never satisfied with what they know and are focused on an area they love deeply and others need. I never give up. I pursue the field with dedication. The deeper I got into it the more I found it to be fascinating and ever-changing.
I obviously pursued my dreams through education and academia. I read extensively, purchasing and studying at least three hard texts on various relevant issues a month. I found those recognized as the best and listened to them at conferences. I have written on the concepts. I have developed first impression models of areas never before addressed. I speak whenever I can and have presented around the world from Hong Kong to London to Miami. My doctorate, my professorship, my presence as a speaker and writer, and I suppose my gumption, has allowed me to meet Nobel Prize winners and the creators of some of the tools used by experts. I took what I learned and applied it to a client’s problem and then extended beyond that. In consulting I was allowed to take all the best from academia and apply it and build upon it in real life projects. This is more than what a professor gets to see.
To me an “expert” is one who has found something about which he or she is deeply passionate and then relentlessly pursues its study and application. Under that definition, I am an expert.
Many experts are merely academics. What are your thoughts on business development? How did you build your business and grow it?
Business development and growing a practice is the essence of what I do. At DuPont I was exposed to exciting real life projects. When I moved into academia I loved the extended study of theory, but I truly missed the complex problems of the real world. It is only through working with clients in their complicated problems that I find new ways to use quantitative modeling.
When did you land your first client?
I was in graduate school when “SWORD” securities were developed. The Pharmaceutical company, Centocor, had several parts of their R&D portfolio that they knew would take years to go from Phase 1 research through Phase 3 testing and then through the rigors of FDA approval and ultimately the true test of commercial viability. Modeling that process was fascinating.
As I was finishing my Ph.D., the energy industry began to be de-regulated. This opened up huge area for analysis. As energy companies began to compete with each other, prices fluctuated based on myriad variables. I became quite involved in the derivatives in the energy industry. If derivatives are used in the right way, they can help companies make wise decisions about strategies that shape the company’s future. As a result, I tend to have clients for a very long period of time.
Complex models are a common theme throughout my career.
Most people are not passionate about derivatives. How would you advise young professionals on finding THEIR unique passions?
As a professor, students would talk to me about career decisions. I would tell them to think about all the things that they have done and which ones they enjoyed the most. A lot of leading edge work happens at the boundaries of disciplines. Passions are not based upon what’s popular at the moment, but rather on fundamental skills and abilities that can be applied to solve a variety of problems. In my case this is has spanned energy, financials, commodities, risk, and strategy.
Do not think in terms of a mono-line career. Instead relentlessly pursue what you love. Explore the edges. Follow divergent paths until you find, through a combination of intent and fortuity, that path you are passionate about.
Bottom line: find those things you love to do; and identify those things that you are naturally very good at. These combinations will lead you to the right path. Push it to its limits and explore all the edges.
The world changes. The things that stay the same are our ability to do what we do best, to answer certain types of questions, and analyze things in a certain way. Learn those skills you love and can be great at and apply them to every new scenario.
Be relentless in pursuit of your passion. You will discover the way to make money doing what you love most in the world and can be best in the world at. Practice, practice, and practice some more. Read, explore, try, do. Keep working at it. When you can feel it, go for it.
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