Supermoney, page 10
“How much Burroughs do I have now?” he asked.
“You don’t have any,” the broker said. “Burroughs is one ninety-one.”
It was lunchtime. We sent for sandwiches. The volume was setting records every minute. The lights on the phones flashed every thirty seconds. Poor Grenville’s Mohawk and Control Data were way over his bids, too.
“My God,” Poor Grenville said, “it’s twelve thirty, and I still have forty-two million in cash.” It was true; Poor Grenville had been chasing his favorites, but they had outrun him. He had yet to buy a share.
“This market has come too far, too fast,” Poor Grenville said. “We’ll pick some things up on the reaction. There’s bound to be some profit-taking.”
There was a reaction, about half past one. It lasted about three minutes. Poor Grenville missed it because he was eating his bacon, lettuce and tomato, and anyway, a three-minute sinking spell doesn’t do you much good when you have $42 million to spend. Now Poor Grenville was beginning to clutch.
“Every fund in the country is going to be up three percent today,” he said. “They’re going to be up eight percent for the week. Within two weeks they’ll be up fifteen percent, and I’ll still have this lousy damn forty-two million.” Poor Grenville wrote $42 million on a notepad and stared at it, hating it. “I’ve got it,” he said. “Let’s buy what the hedge funds are short.”
Hedge funds, as you may know, try both sides of the market. They increase their leverage by selling some stocks short while they buy others. In a big upswing, obviously they would have to buy back what they had sold. It took us about five phone calls to find out where there were some blocks short. Now we could make them suffer a bit by buying those stocks we knew they would have to be buying. We called up one hedge fund, just to chat.
The hedge fund was paranoid. It pulled up its drawbridge and poured boiling oil over the ramparts. It had troubles of its own. The volume was still setting new records.
“A friend of mine is buying a sheep farm,” Poor Grenville sighed. “That would be a much more peaceful and productive way to make a living.”
“With your timing,” I said, “you would sell all the sheep just as everybody was about to go long lambchops.”
“We have to buy something,” Poor Grenville said. “I can’t just sit here in cash. I’m going to look stupid. They’ll throw me out of the performance-fund union. Get on the phone and collect some stories. We’ll buy stories.”
It doesn’t take long to collect stories. A story goes, “I hear XYZ is going to earn four dollars, but the Street doesn’t realize it yet.” Never mind why. Tomorrow there will be no more stocks for sale.
So we bought, and we bought, and we bought. The phones rang and the hold buttons were pushed and there was general tumult. At the end of the day I was helping Poor Grenville go through some of the tickets in the snowstorm on the floor. There were tickets for stocks Poor Grenville had never thought of. The only ones missing were the ones he had been chasing, his friendly highfliers, Burroughs, Control Data and Mohawk.
“What the hell’s this?” he said. “Union Carbide? An old granddaddy company? Are you out of your mind? A hundred thousand shares of Union Carbide?”
A hundred thousand shares of Union Carbide is a nice block, about $4 million.
“I didn’t buy any Union Carbide,” I said. “I put that guy on the hold button. I thought you talked to him. There were four phones ringing.”
“I never bought any Carbide,” Poor Grenville said. “I would never buy a tired old mother like Carbide.”
“Well, I didn’t buy it either,” I said. We stared at each other, and then at a smudged, penciled slip.
“It followed us home,” Poor Grenville said. “What the hell. Just go out and get it some warm milk and a blanket.”
The next day a New York Times reporter called Poor Grenville to check on the block. Poor Grenville learns fast, and he was ready. “Our fund,” he said, “did not follow the mass panic into such highfliers as Burroughs and Control Data. In these times of turmoil, we are seeking value. Union Carbide, for example, whose additions to net plant make it attractive. We believe, after exhaustive research, that the chemicals are ready to turn.” Next thing you know, Newsweek was about to quote Poor Grenville on value in these troubled times. Four more funds bought Carbide. Grenville the Statesman.
The headlines make causal relationships: market spurred by peace hopes, market rises on booming economy. But the real impulse behind the buying panic was not in the headlines. It was in a statistic. On March 22, eight days before the beginning of the Great Buying Panic, the mutual funds had Grenvilled themselves into $3.4 billion in cash, just because things looked so gloomy. That’s $1 billion more than “normal,” and the $3.4 billion didn’t count all the pension funds and colleges and foundations that were beginning to play the aggressive performance game. The object of the aggressive performance game is to be first, to have the stocks that go up the most; to buy stocks at the bottom, you have to sell them first, so you have the cash when you want to buy. Naturally, not everybody gets to be first back in, and when you have dramatic moves in war and politics, the swings can be of panic proportions, either way. Only the triggers are missing.
“Performance” is a new word among the funds, but a taste for quick gains is not new. In 1935 Our Lord Keynes wrote:The social object of skilled investment should be to defeat the dark forces of time and ignorance which envelop our future. The actual, private object of the most skilled investment today is ‘to beat the gun,’ as the Americans so well express it, to outwit the crowd, to pass the bad, or depreciating, half-crown to the other fellow.
This battle of wits to anticipate the basis of conventional valuation a few months hence . . . does not even require gulls amongst the public to feed the maws of the professional; it can be played by the professionals amongst themselves. Nor is it necessary that anyone should keep his simple faith in the conventional basis of valuation having any genuine long-term validity. For it is, so to speak, a game of Snap, of Old Maid, of Musical Chairs—a pastime in which he is victor who says Snap neither too soon nor too late, who passes the Old Maid to his neighbor before the game is over, who secures a chair for himself when the music stops. The game can be played with zest and enjoyment, though all the players know that it is the Old Maid which is circulating, or that when the music stops some of the players will find themselves unseated.
Sometimes I wonder whether those paragraphs from The General Theory of Employment, Interest and Money will ever lose their validity. The games were—and are—indeed played with zest and enjoyment; the swings get shorter and more violent. It is not news but atmosphere, climate and psychology that set this up. Some market Copernicus might say that the news does not change; it is our perception of it that moves.
2:
AN UNSUCCESSFUL GROUP THERAPY SESSION FOR FIFTEEN HUNDRED INVESTMENT PROFESSIONALS STARRING THE AVENGING ANGEL
THE swings did get bigger, and the living was easy for seven or eight months after President Johnson’s speech. Brokerage firms that dealt with the general public opened new branch offices and scoured the countryside for salesmen. All kinds of stocks went from five to fifty. Flocks of them had the word “computer” in the title, or had names that suggested data processing. Still others franchised some sort of fast food, hamburgers or chicken. There were chains of nursing homes, for we had suddenly discovered geriatrics as a boom industry. Sideburned young men in Meladandri shirts were running five thousand into half a million by talking to other sideburned young men. Age was a great handicap. No one over thirty could understand the market. And everyone knew it would come to an end.
A mass-circulation magazine asked me to explain to its readers what was going on. I had this Fellini scene: We are all at a wonderful ball where the champagne sparkles in every glass and soft laughter falls upon the summer air. We know, by the rules, that at some moment the Black Horsemen will come shattering through the great terrace doors, wreaking vengeance and scattering the survivors. Those who leave early are saved, but the ball is so splendid no one wants to leave while there is still time, so that everyone keeps asking “What time is it? What time is it?” but none of the clocks have any hands.
The Black Horsemen did come, of course, and most of the guests were still at the ball. In the same article, I suggested that the market did not make any sense to anybody with a sense of history. The way to participate, therefore, was to hire A Kid. A Kid would buy these stocks going up tenfold, where anyone else would be scared to death, and A Kid could be rented for $1.50 an hour plus room and board, and would mow the lawns on weekends. The satire was ineffective, to say the least, and the price was far too low. Just after the 1968 buying panic, I made my annual visit to the investment course at the Harvard Business School. While there, I asked the class how many were going to Wall Street. There was a forest of hands; usually numbers of them wanted to go to Procter and Gamble or General Motors, but the action was no longer that way. None of them, however, had in mind working for $1.50 plus weekend lawnmowing. They thought maybe $20,000 a year to start would be fair; the more venturesome wanted to run a hedge fund and get 20 percent of the action. After all, they had been running paper portfolios in class all year, and they had done extremely well all term, and they had analyzed complicated prospectuses, and some of them had been in the market on their own for two or three years. By the third section of the class I got a bit testy, and it was clear that the curmudgeon was out of his time and a thorough has-been. Some of the students did work with hedge funds—that must have lasted about a year—and some got quite handsome starting salaries. That doesn’t happen so much any more, but then the institutions were in an expansive and hiring mood.
At the institutions—the mutual funds, investment counselors and endowment funds—a new generation had taken over. The old generation had concentrated on the preservation of capital, and inflation had taken its toll. McGeorge Bundy at the Ford Foundation, the biggest of all the foundations, delivered himself of a memorable blast.
We recognize the risks of unconventional investing, but the true test of performance in the handling of money is the record of achievement, not the opinion of the respectable. We have the preliminary impression that over the long run caution has cost our colleges and universities much more than imprudence or excessive risk-taking.
The Ford Foundation gives out a lot of money to colleges and universities, and the Bundy statement was read religiously. It was true that respectability rather than performance had been the goal of most endowments, but now the implications were clear. Nobody had better get caught with caution. So the colleges and universities sold some of their bonds and increased their positions in the equity markets. They told their investment counselors to hunt for small growth companies like the ones that had brought the University of Rochester from nowhere to the fifth richest in the land in the previous ten years. The mutual funds were out on their own derby, because the salesmen could sell only the previous year’s record. The bank trust departments were a bit frustrated, because the trust laws did bid them be prudent, but the definition of prudence had loosened up, and some of them started special equity funds to seek out performance.
So it was not merely greedy individuals who fueled the boomlet, picking up tips on the train or at the barbershop or what have you. You can’t have a market fever any more without some institutional help.
Just to take one example, National Student Marketing was bought by Bankers Trust and Morgan Guaranty, the General Electric pension fund, the Northern Trust Company, the endowment funds of the University of Chicago, Harvard and Cornell, and the Continental Illinois Bank. That is by no means a complete list. The original symbol of go-go performance, Gerry Tsai, held 122,000 shares in his Manhattan Fund. The stock was recommended by the old-line firms of Kidder, Peabody and Eastman, Dillon, as well as by Roberts, Scott & Company, W. C. Langley & Company, Loewi & Company, and others. W. Cortes Randell, the thirty-four-year-old mastermind who put National Student Marketing together, had a net worth in his own stock of $50 million, a six-passenger Lear jet, a fifty-five-foot yacht that slept twelve, an apartment at the Waldorf, three cars, a snowmobile, and the rapt attention of both security analysts and deal-makers. In the “story” market, Randell had a concept that eager analysts could chew on.
National Student Marketing signed up students on the campuses to take market surveys, hand out samples, and put up posters. This was to be the franchise to tap into the “youth market,” forty million Americans between fourteen and twenty-five, who had $45 billion a year to spend. With Wall Street underwriters and “deal men” leading the scouting, National Student Marketing acquired twenty-three companies in fiscal 1968 and 1969, including a travel agency, a youth-oriented insurance company, a maker of college rings and a collegiate beer-mug manufacturer, using its own stock selling at 150 times earnings, true Supercurrency. Even at that price, brokers were recommending it as “an attractive long-term speculation”: Dynamic changes have occurred in society, at least in part due to the growing force and influence of the current sophisticated campus groups . . . student economic power . . . overlooked by marketing experts. National Student Marketing is a pioneer in closing the generation gap between the corporate client with a product or service for sale and the youth market with its purchasing power.
Preaching his company’s gospel around the country, Cortes Randell reported net earnings of $3.2 million, with higher to come.
Barron’s skeptical columnist, Alan Abelson, did his usual perceptive job. National Student Marketing’s fiscal 1969 profits included three companies with which deals had been made, but which actually hadn’t been part of the operation during that year, and five companies that hadn’t even agreed to merge yet. Abelson subtracted the new companies from the operating results, a simple enough operation, and came up with a loss of $600,000 instead of a profit of $3.2 million.
The stock kept right on going. At corporate headquarters there was a whole middle management—some sixty to seventy strong, flush with the power of a new idea and, apparently, with rather lavish expense accounts. Only out there on the broad green lawns of the academy, not all the campus representatives were putting up their posters as they promised. Some of them out there must have gone to the basketball game or taken up dealing in grass, not an approved NSM line. The whole operation became expensive to maintain. Some of the on-campus stuff flopped totally, and a direct mail campaign was a disaster. Instead of glorious profits, the company was into a million-and-a-half-dollar loss for the first quarter alone of fiscal 1970. National Student Marketing went from 36 to 1½
I did not check to see what the Morgan Bank did with its stock, nor the Northern Trust, the Continental Illinois, the Bankers Trust, the Manhattan Fund, and the University of Chicago, Harvard and Cornell. No longer could the last three be accused by McGeorge Bundy and the Ford Foundation of excessive caution. Not to single out those three—virtually every investing institution had something like that; the University of Vermont and Syracuse University had Four Seasons Nursing Homes, which made it from 91 to busted in a remarkably short time. The market value of the equity portion of Oberlin’s endowment dropped 25 percent in 1970; Temple University moved its equity portion of the portfolio from 35 to 85 percent in 1967-68, and when asked how that had fared, the investment adviser at the Girard Trust in Philadelphia said, “Horribly.”
Euphoric at the ball, few of the professionals really left early. And, though it was not their money they had lost, they did not feel good. They are competitive fellows, most of them, and they like to do a good job. So I thought that at one of the industry meetings we could dwell on what went wrong.
One of my functions within the investment community, and one which I enjoy, has been to be a moderator at seminars and conventions. There is one in particular, an annual meeting that attracts the largest number of bank trust officers and mutual fund managers. We assemble the investment types with the best records, and they tell what insights led them to their triumphs, what stocks they have just bought and therefore would like the audience to buy, and what they see ahead. Of course, it is not always genius that earns an investment type a slot on this panel. He may have taken undue risks; he may be down 90 percent in the next year; he may have done the equivalent of flipping heads fifty-one times in a row. No matter; the figures are in, and up to the dais he comes. I have never found one who was inarticulate, and in fact most are willing to comment on the investment significance of foreign policy, economic policy, sociological changes and other subjects usually reserved for Eric Sevareid. It has become a minor tradition that I needle the panelists gently, reminding them perhaps of a sour stock they had confided to me some other time—rather like the slave in the Roman chariot assigned to whisper into the garlanded conqueror’s ear that glory is fleeting.
I thought it would be a nice psychological purge, after the worst year of the Big Bear, if some of the previous winners would get up and confess their sins. Every one of the professionals in the audience, after all, harbored some dark secret, his own block of National Student Marketing which he had dropped behind the paper-towel bin in the men’s room, hoping no one would notice. There they were, these professionals, walking around harboring these unconfessed misdeeds. Who could tell the damage being done to the collective unconscious of the investment community?
So I think I had in mind a group therapy session for fifteen hundred investment professionals. Previous winners would get up, face the audience and say that not only had they bought National Student Marketing, they still owned it—in case anybody would like to buy it—and furthermore they had put it into their children’s accounts. In Alcoholics Anonymous, you are supposed to be on the road to cure if you can face your peers and say, “My name is John Jones and I am an alcoholic.” Not only would my session benefit the confessors, but the audience would identify and go through something of the same process. Some of them might feel the spirit and rise from their chairs, crying, “I bought Four Seasons Nursing Homes!” The audience would respond with the business school equivalent of “Glory!” Everybody would leave feeling cleansed and free.
