Investing lessons you can't refuse

January 29, 2003

What our fathers, grandfathers and even the Godfather can teach us is that investing is not about bad times or good: It's about flexibility, daring and a willingness to seize opportunities.

 

Maybe he could get to Corleone. He laughed wildly and his doctor and servants watched him with nervous anxiety. Another thought occurred to him. He would be the laughingstock of California merely because someone had contemptuously defied his power in such arrogant fashion.
-- Mario Puzo, "The Godfather"

Occasionally an investor wakes up with the horse’s head on the bed. The recent losses in the stock market have been that kind of a shock. The decline in the week ended Jan. 24 was the greatest weekly decline since October. The previous week’s decline had been the second-greatest since October. And finally came the decline this Monday of 3% in Europe and 2% in the United States. The market mistress will stop at nothing, as Victor's grandfather Martin said as he watched stocks and his own wealth plummet to zero in 1929.

 

Terror and a lust for revenge are the natural first reactions. Maniacal raving and uncontrolled threats are not out of the question, as was the case with Jack Woltz, the movie producer who defied Don Corleone.

One method of gaining perspective is to think back on other times when things looked very bad. Take 1933, when half the banks had been closed, unemployment was at 25%, the gold standard had been abolished and government policy was thoroughly anti-business. The market jumped 44% that year, at the time its greatest rise ever.

Or think back to 1975, which began with inflation at 11.8% and a deepening recession. People felt helpless after the 1973-1974 Arab oil embargo quadrupled crude prices. And to top everything off, terrorists bombed Wall Street’s historic Fraunces Tavern, where George Washington said farewell to his officers in 1783. Despite all this, the market rose 32%.

It's about the future, not the past
What must be realized is that the market does not move based on past events. It moves on changes in expectations. The question to ask now is whether those expectations are going to improve or suffer. There have been many times in the past when things looked much worse both for individual stocks and the market. There were real wars when victory was in real question. There were times when the economy looked much worse. On none of the occasions did we have potential reductions in the dividend tax staring us in the face.

The story of “The Godfather” puts things in perspective. Jack Woltz, the movie producer, quickly decided that the best thing to do was to forget the affront and carry on his business. That is sometimes the prudent action, especially when dealing with something as malevolent as the Corleone family or the stock market.

 

Normally, our approach is to provide numbers as perspective. This time, we’re going to follow in Mario Puzo’s footsteps. We’re going to share a few stories that might provide a rudder in times like these, reminding us that war, panic, despair and threats to civilization have happened before, that the greats have fallen before to the depths of despair, that there have been many times when popular stocks are down 80% or 90% just as JDS Uniphase (JDSU, news, msgs), EMC Corp. (EMC, news, msgs) and Texas Instruments (TXN, news, msgs) are today. Such stocks are always replaced by other leaders as other industries move to the fore. The market somehow goes on to returns in the neighborhood of 1.5 million percent a century, as it did in the 1900s despite war, panic, despair and threats to civilization. We see no evidence that times are any worse now than they were then.

Vic will start. Other voices will follow.

Victor Niederhoffer: ‘You Can’t Go Wrong With Western Union’
In the 1920s, my grandfather Martin liked to buy Radio -- more precisely, the Radio Corporation of America, or RCA. His first job after graduating from New York City College was treasurer at the old Irving Berlin music firm, Waterson, Berlin & Snyder Co., in the crash year of 1907. (There, he met his wife, Birdie, a pianist for silent movies, as well as the great ragtime composer Scott Joplin, who published a number of his rags through one of their companies.) Buying Radio made him feel like he was putting his musical background to use.

Speculation substituted for liquor during 1920s Prohibition. Brokerage houses were dark and atmospheric, with all the accoutrements of speakeasies. Girls in short skirts stood on stools to post the latest prices on a blackboard, pleasing the dozens of male spectators.

During 1928, Radio moved from 25 to 250 -- sort of like the Internet stocks of the 1990s. On 10 separate days, the stock rose more than 15 points. Working on 10% margin, that was quite a profit. Martin put his surplus to work by buying good corner properties in Brooklyn, now prime sites for multimillion-dollar yeshivas.

In October 1929, it all vanished. Radio fell to 100. The margin was called, the properties were sold, and my grandfather was ruined.

It was all the fault of Herbert Hoover, for publicly stating that stocks were overvalued and that speculation hurt the economy, my grandfather told me. And of the new president of the Federal Reserve Board, Adolph Miller, who set out to lower stock prices and tightened monetary policy.

By the time I developed an interest in Monopoly, Radio was at 48 -- still too high for Martin to buy. Benguet Gold, at 50 cents the cheapest stock on the New York Stock Exchange, was more in his range. He bought me 100 shares of it as my bar mitzvah present in 1956, and I was started on a career that would rival his own for ups and downs.

I sold Benguet after holding it 10 years or so, when it finally hit the round number of 1. Fifty dollars profit, less $25 in commissions, gave the market mistress an equal share. Of course, within a week after I sold it, Benguet moved to 10 on a buyout.

I once asked Grandpa Martin for the one stock that you could hold forever, one that would help me pay college expenses. “Why, Western Union,” he said. “Its monopoly on communication, its network of runners, its ability to provide the one thing people are going to want most -- cash money -- in the next 50 years, are impervious to competition. The chart looks good, too. In 1929, it was selling at 450, and the path of least resistance is back up there from 80."

After I bought Union, it never again had an up day. Finally, in 1973, trading at 4, it used up the last of its severely depleted cash to buy a company I was about to receive a finder’s fee for selling to Nielsen, thereby depriving me of my $500,000 fee before it went into bankruptcy. For my 50th birthday, my friends got together. They were going to buy me 100 shares of a stock, like Grandpa Martin did on my 13th. Yes, it was Western Union.

Strangely, my first speculations were in gold stocks, and my latest have been in technology -- just the opposite of Grandpa Martin. But the gods of the market should not be distressed. Like him, I have made and lost fortunes, with nothing but commissions and the bid-asked spread constant throughout.

James Altucher, founder of a software company, Vaultus, and currently partner in Subway Capital: ‘You’re on to a Good Thing’
My grandfather worked as a clerk on the floor of the NYSE in 1929. When the market crashed, volume was so great he and the other clerks had to work all night completing all the transactions. “The boss told us not to walk too close to the buildings when we walked outside,” my grandfather told me. "Too many people falling out of windows.”

The stock exchange put them all up in the Hotel Chelsea on 23rd Street to finish the job that night. My grandfather told me they had a “huge pillow fight” and apparently wrecked a couple of rooms. Sixty years later, when I was moving into the Chelsea for an extended stay, my grandmother warned me not to remind them about the pillow fight.
My grandfather wouldn't let something like a crash and a 25-year lull in the markets dissuade him from stocks, though. In the ‘70s he bought me 25 shares of Computer Sciences (CSC, news, msgs). “Computers are the future,” he said. Every few months he would bring me a folded check for $6 and change. "You can live off that dividend when you're older.”

At the age of 92, he would watch Maria Bartiromo on CNBC every day with his old work location in the background. “You're onto a good thing,” he said to me. “Computers are amazing, what they can do these days.” He passed away in February 2000 -- ever the market timer.

Tom Ryan, geologist and trader: Ad astra per aspera*
My uncle, “Jumpin’ Jack,” so nicknamed because he loved the dance floor, retired from the Street in 1984 after 46 highly successful years. Bought a farm in Vermont and retired to the country gentleman life with much worldwide travel every year until his passing in his 80s.

Jack met my father during pilot lessons in the 1930s. The two became close friends and spent much time flying together on weekends, while during the week clerking for two different firms on the Street. In 1939, they hatched a plan to start up an air-delivery service for packages that would make a milk run down the eastern seaboard from New York to Miami and back up with stops in between. They secured some funding and put everything they had into buying a plane. After six months, they were in the black, making two trips per week and looking for another plane. On some weeks, the loads from customers were too heavy.

Alas, on Oct. 18, 1940 (it’s always October, isn’t it?), Jack crashed on landing. Fortunately, he and the co-pilot both survived. But both suffered many broken bones, and Jack lost his left eye to a glass shard. The plane was not insured, quite the tactical error on the boys’ part. (They figured they wouldn't survive a crash anyway, so why insure? Oh the follies of boys in their early 20s). Jack couldn't fly anymore, and it was back to the day job for the dreamers. But little did they know of the events to come.

My dad refused to give up flying, but he was broke, so he enlisted in the Army Air Corps. The army sent him to Britain to study British bomber tactics. Then came Pearl Harbor and the mobilization. Because of his one eye, Jack got a pass and stayed to work on the Street. My dad flew B-24s, then got a desk job planning raids. Because he enlisted early, before the war, he saw much advancement. And because so many men had left the Street to enlist, the war years brought tremendous opportunity for a guy like Jack.

Meanwhile, in East Anglia, my mother met my father, a Scots gal down from Aberdeen to do her part. In 1945, they married.

Now, you may have noticed that my uncle was a friend of my father, not a brother. So there’s more. After the war, Dad and Mom went back to Scotland to visit relatives, and they took Jack with them. It turns out that Margaret Anne MacGowen had a sister. Jack married her in 1949. As the guy says, now you know the rest of the story.

The point Jack always drilled into me was that some of the most important things in our life come from what we initially perceive as disasters. If it wasn't for one lousy crosswind on one afternoon, none of these events was likely to have happened and I probably wouldn't be penning this. Jack used to say they would probably have gone bust after the war anyway, with all the competition in airmail. And there would have been fierce competition for jobs on the Street and he probably would never have gotten to where he did in life, and neither of them would ever have met the loves of their lives. We all have our difficulties. It’s what we make of them that counts.

*A rough road leads to the stars.

Laurel Kenner: Doors
I had dinner on 55th Street one recent night and was sitting by a window when I willy-nilly became a witness to an unplanned demonstration of human psychology. In the next building, three doors opened into a hallway going through to 56th Street. The middle door was locked, but the side doors were open.

A sign was painted on the glass: “Access open to public 8 a.m.-7 p.m.”

From 7 p.m. to 7:45 p.m. I observed 20 attempts on these doors. Just about everybody tried the locked middle door first. Only a few went on to try another door. I’ll never know why some people persisted and others didn’t, but certain facts were evident:

In 1997, my father told me to buy Qualcomm (QCOM, news, msgs) because the parking lot of the company’s complex near his home was full. I was Bloomberg's U.S. stock market editor, but I never bought stocks. Seeing my father lose his savings when his stocks crashed in the 1970s had made me averse to risk. I confidently told him that buying Qualcomm was a bad idea. The stock was overvalued, I said, and the company’s plan to make money in China was a pipe dream.

Qualcomm rose 3,500% from the end of 1996 through 1999. Even now, after the Naughties telecom collapse, the stock is still up 650% from year-end 1996, vs. 25% for the S&P 500 ($INX).

My father died in 1999 without having bought Qualcomm. But I'm chalking it up as his comeback, because he wanted me to try another door.

Final note
Do you have a family story about the market? E-mail it to us and we’ll reward the best with an official Old Speculators’ Association cane.