Why I Fired
My Broker
by Jeffrey
Goldberg
For most of our adult lives, my wife and I have behaved in the way responsible
cogs of capitalism are supposed to behave—we invested in a carefully
calibrated mix of equities and bonds; we bought and held; we didn’t
overextend on real estate; we put the maximum in our 401(k) accounts; we
gave to charity; and we saved, but we also spent: mainly on gasoline, food,
and magazines. In retrospect, we didn’t have the proper appreciation
for risk, but who did? We were children of the bull market. Even at its
top, my investment portfolio was never anything to write home about. Its
saving grace was that it was mine. And I imagined that when we did cash
out, at 60 or 65, I would pass my time buying my wife semi-substantial pieces
of jewelry and going bass fishing like the men in Flomax commercials.
Well, goodbye
to all that. I took a random walk down Wall Street and got hit by a bus.
How am I sure
it’s goodbye? The signs are rampant, but one has become stuck in my
mind: a video of Richard Bernstein, the chief investment strategist for
Merrill Lynch (sorry, I mean the Merrill Lynch division of Bank of America,
which, by the time you read this, may be the Bank of America division of
the United States Government), advising Merrill clients such as myself that
one of the best financial strategies to adopt now would be to extend my
“investment time horizon.”
“If one
were to trade the S&P 500 for one day, the probability of losing money
is about 46 percent,” Bernstein states. “However, as one extends
that time horizon from one day to one month to one quarter to one year to
10 years, the probability of losing money decreases as the time horizon
lengthens.”
To which I
would add this observation from Keynes: “In the long run, we are all
dead.”
This is what
I heard Bernstein say: give up. You’re not going to make money on your
investments in the next 10 years, or 15, or 20, so you should stop worrying
about your portfolio and go to the movies like everyone else.
I called Bernstein
and asked him if he was, in fact, advocating a form of Stoicism. He said
I was misinterpreting his views. “This is not some sort of psychological
compensation device. What I’m saying is that in looking for investment
ideas, we should be looking over a five-, six-, seven-year time period.
You have to give an investment strategy time to reach gestation.”
But my investment
strategy gestated for 15 years. And then it died.
As I write
this, the markets are back down to 1997 levels. In Japan, they’ve sunk
to 1983 levels. I pointed out to Bernstein that 1983 was 26 years ago. The
investor who bought Japanese equities in 1983 and held on to them has stayed
absolutely flat. “That’s not correct,” Bernstein said. “That
doesn’t take into account dividend payments.”
Even with
all those munificent dividend payments, my net worth has dropped by a third,
and new vistas of worry open up for me each day.
I’m not
complaining, by the way, and not only because I have no right to complain.
I make more money than most Americans. I will ungrudgingly pay more taxes
if it means keeping people in their homes — even the schmucks in overleveraged
McMansions. My wife and I are lucky. We have substantial equity in a small
but perfectly nice house in Washington, D.C., a city that is now, among
other things, America’s financial-services capital, which should help
keep real-estate prices steady. I have a late-model minivan. Most important,
I have a job (and in the thriving magazine industry, no less!). If I lose
my job, then I’ll complain (at which point, of course, I’ll no
longer have a public venue for my complaints). But for now, no whining:
just confusion and bemusement and fear, along with an uncharacteristic sense
of paralysis. In the past six months, I’ve bought and sold virtually
no equities. And I rarely take the pulse of my 401(k).
I called a
psychologist to find out what could explain this weird passivity. Daniel
Kahneman is a Nobel Prize–winning innovator in the field of behavioral
economics. He explained that my feelings of paralysis were to be expected.
“You
no longer know the world you live in,” he said. “You played by
the rules, the rules benefited you. The world functioned according to some
regularities. Right now, it’s unclear what rules apply. There is a
new regime. What seemed prudent earlier has disappeared. I’m surprised
Americans aren’t more panicked. Americans seem to accept a level of
insecurity in their lives that Europeans wouldn’t tolerate. Paralysis
is one response to this level of insecurity.”
This might
explain why my wife and I have taken no action to fix our finances. Although
it’s also the case that we haven’t heard from our Merrill broker
in nine months. The last time he called was well before the day in September
when the government encouraged the shotgun sale of Merrill to Bank of America,
to keep Merrill from collapsing.
I should have
seen the signs of dysfunction much earlier. It was more than a decade ago
that our first Merrill Lynch adviser put us in a company called Boston Chicken.
A Merrill analyst described it as “the restaurant concept of the ’90s.”
It went bankrupt in 1998. Only later did I learn that Merrill had underwritten
the initial public offering for Boston Chicken stock, and so had an interest
in selling the company to its customers. There were other brilliant pieces
of advice — long-term “buy and hold” recommendations that
emerged from the Merrill analysis factory: Qualcomm; Sun Microsystems; Nokia;
and Citibank, of course, which has recently dipped as low as a dollar a
share. The full-service trading fees at Merrill — $80, $100, $130,
for modest chunks of stock — were high, but we were told that we were
paying a premium for quality research.
In many cases,
we were. Bernstein, the chief strategist, has actually been bearish for
much of the past decade. Given his recent disposition toward market pessimism,
I asked him why he didn’t tell Merrill’s clients to dump their
equities seven months ago. “I said it as best as I could within reasonable
professional standards,” he said. “I’m not going to yell
‘Sell, sell, sell!’ I’m not going to go out and be irresponsible.”
I imagine
that many of Merrill’s clients are now wishing that Bernstein had been
more irresponsible. Of course, even if he had said something, my financial
adviser might not have relayed the message.
I haven’t
depended solely on Merrill Lynch for advice. I believed I could find investments
for myself. I stayed away from mutual funds because I couldn’t figure
out who ran them. And I applied Warren Buffett’s famous dictum —
Don’t buy something you don’t understand — to my trading,
so I bought, in our Merrill Lynch account, such companies as Johnson &
Johnson and Procter & Gamble and Illinois Tool Works and Caterpillar,
and these have been kind to us, until now. (I also bought the Internet company
Ariba, because I heard about it from a guy who heard about it from a guy.
It went up to about $1,000; I didn’t sell, of course, and now it’s
at $8.)
And every
so often, I would follow the recommendations of the financial magazines,
SmartMoney in particular, because for a long while I was an ardent
consumer of financial pornography. No more. In the harsh light of recession,
I find it hard to believe I listened to a magazine that, in August 2007,
recommended American Express at $63 a share (a “conservative way to
make hay from global credit-card growth”), which as I write this is
selling for $13 a share; Wynn Resorts, $94 then, $20 now; HSBC, $93 then,
$25 now; Washington Mutual, $36 at the time, seized by the government last
September — rendering the stock worthless.
It turns out
that my crucial mistake was believing that the brokers and wealth managers
and cable-television oracles who make up the financial-services industrial
complex actually had my best interests at heart. Or so say the extremely
smart — and wealthy — people I asked to help me figure a way out
of my paralysis. One of these people was Robert Soros, the deputy chairman
of the fund started by his father, George. I went to see him at his office,
where he spent two hours performing an autopsy on my assumptions.
“You
think a brokerage should be a place you go to pay commissions for fair and
unbiased advice, right?” he asked.
“Yes,”
I said.
“It’s
not. It never has been.” He then cited another saying of Buffett’s:
“‘Wall Street is a place where whatever can be sold will be
sold.’ You are the consumer of their dreck. What they can sell to you,
they will sell to you.”
“But
they told us—”
“They
lied.”
He went on:
“You should be disheartened and disappointed. But don’t kid yourself.
You’re a naive capitalist. They were never your advisers. Do not for
a moment think that a brokerage firm is your friend.”
“So who’s
my friend?”
“You
don’t have one. This is the market.”
“Okay,
that’s Merrill Lynch. What about the others?”
“They’re
not your friends,” Soros said patiently.
“What
about Chuck Schwab?”
“All
brokers move products based on volume and commission,” he said.
I had a benevolent,
advertising-induced understanding of Schwab. It was the billboards: “I’ve
got a lot less money. And a lot more questions. Talk to Chuck.” And:
“It’s not just money. It’s my money. Talk to Chuck.”
I thought
that perhaps Schwab, a discount broker, might be able to answer the question
Soros could not: Why had my full-service financial adviser stopped calling
me?
I did what
I was told, and called Chuck. His spokesman intercepted the call. I explained
that I was trying to understand the role financial advisers play in the
life of the small investor, but the spokesman, Greg Gable, said that Chuck
would not, in fact, talk.
“We’re
not going to be able to help you out,” he said.
Finally, I
went to another highly successful financial adviser, named Larry Gellman,
who is an iconoclast and a critic of his industry. He came up with a plausible
reason why Merrill did not actually seem to care about my financial future,
or the financial future of my children.
“Throughout
the late 1990s, investors were firing their brokers and money managers because
they didn’t own enough tech and Internet stocks, so everybody got loaded
up at the tech party right before the cops came,” Gellman said. “Most
of them were busted and never even got a drink. Some of them got lawyers
and came after their brokers. So the brokerage firms all came away saying,
‘Never again.’
“If the
head of Merrill Lynch and every other investment firm had their way,”
he continued, “no individual broker would ever recommend an individual
stock or bond to a retail client again. They have essentially gotten out
of the brokering-and-advising business and gone all in on the ‘wealth
management’ business. The new model is to gather assets from wealthy
people and then place those assets with a whole bunch of managers who will
manage different pieces of it in diversified styles so you don’t
lose it all at once. And by the way, people with less than $10 million
need not apply.
“People
like you are in a sort of purgatory because no one would ever come out and
tell you that he doesn’t want your business anymore,” he said.
“You had to figure that out by yourself.”
There’s
quite a bit I have to figure out by myself now, which was one reason why,
on a cold night in February, I turned up at the apartment of my friend Boaz
Weinstein, who was hosting a gathering to talk about charity in a time of
financial cataclysm. Weinstein lives in a not-overly-luxurious-but-luxurious-enough
building on Fifth Avenue. It is not the sort of building I could ever afford,
but I tell myself I am not inclined to live on Fifth Avenue anyway; long-term
exposure to liveried elevator operators would eventually bring me to Marxism.
“Do you
like this job?” I asked the operator in Weinstein’s building.
He was a sagging man of 65 or 70; his eyes were rheumy and his nose spider-webbed
with disintegrating capillaries.
“It’s
a job,” he said. He paused. “I’m retired.”
“But
you’re working,” I said.
“Yeah.
I’m working.”
The coatrack
in the hallway outside Weinstein’s apartment was crowded with sensible
coats. The passed canapés inside were utilitarian, as passed canapés
go. These were my kind of rich people, I thought, not the piggy kind, no
John Thains or Stephen Schwarzmans in the bunch, certainly no Bernard Madoffs.
(I met Madoff once. He wasn’t very nice. I think he judged me too
poor to bother robbing.) We had gotten together to talk about charity,
but I was hoping to learn about my own economic future. These were people
who were calculating present values as 10-year-olds; people who had actual
Swiss bank accounts; people who short Treasuries on their BlackBerrys; and
one person, Weinstein himself, who won a Maserati in a poker tournament.
The writer
Jonathan Rosen has described New York now as having a posthumous feel, but
this was not entirely the case in Weinstein’s apartment, which was
vibrating with superficial good cheer. Economic disintegration provokes
in some people strange feelings of lightness. Of course, some of the people
gathered there — say, those who spent the past year short-selling bank
stocks — were experiencing the strange feeling of lightness that comes
from acquiring huge, stinking piles of money. But on the whole, anxiety
lurked beneath the bonhomie. Within 10 minutes of my arrival, two friends
separately and quietly suggested I buy gold, and right now.
“You
have to guard against the massive debasement of the dollar,” one said.
I explained to him my theory of market peaks — that the moment I buy
a stock or a commodity is the moment it peaks. In any case, I would need
substantially more of those soon-to-be-debased dollars to buy gold. But
his arguments seemed sound.
Then another
friend approached. “You don’t want to be long gold. The dollar
is the currency of last resort for the entire world. There’s little
chance of debasement.” His argument also seemed sound. Everyone
seemed to be in possession of sound arguments. Even people on CNBC sometimes
seem to be in possession of sound arguments.
Weinstein
stood up to make introductions. He was one of the early innovators in the
field of credit-default swaps, and he earned billions of dollars for his
former employer, Deutsche Bank — and tens of millions for himself —
until last year, when his trades cost the bank $1.8 billion (though some
of the bank’s positions rebounded by $600 million). I am in no position
to judge what happened; Weinstein’s attempts to explain to me the workings
of credit-default swaps have not borne the fruit of enlightenment.
Bill Ackman,
the founder of Pershing Square Capital, was to lead the discussion. Ackman
is tall, prematurely gray, and immoderately self-assured, the sort of winning
figure who could be elected to the Senate one day, if the country ever decides
to stop hating hedge-fund managers. Weinstein introduced Ackman as a perspicacious
investor, which he is, generally. Early in the current crisis, he suggested
publicly that the decision of the bond-insurance company MBIA to guarantee
billions of dollars of complicated mortgage investments would come to no
good. But, like Weinstein, Ackman was not having the best year; one of his
funds was betting solely on the resurgence of the Target corporation’s
stock, and Target’s performance was not covering Ackman in glory.
“I thought
this was a perfect time to talk about philanthropy and investing, because
they’ve merged; they’re both tax-deductible at this point,”
Ackman said, opening his talk. He spoke mainly of the psychic rewards of
charitable giving, and of specific projects he supported. He asked for questions,
which mainly concerned his prodigious charitable giving. Then someone asked
a question about Ackman’s reputation:
“It used
to be that in America, if you were a successful businessman, you were well-regarded.
Now it seems that you are an evildoer if you’re successful, particularly
in the financial world. Your profile is getting bigger. Do you think that’s
good, or do people say, ‘He should be spending more time in the office
and not so much out there’?”
Ackman responded:
“A lot of hedge-fund managers I know are incredibly charitable and
also fundamentally great people. But the press—first of all, you don’t
make that much money working for the press. Take The New York Times. The
New York Times doesn’t make that much money, and the people who work
there don’t make that much money. So you think about people who work
for the press — generally, they resent people who have financial success.
A combination of that, plus some bad actors in the business, is a negative.
Why did I go on Charlie Rose? Why have I been a little more public? Part
of that is to blunt some of the negative associations with our industry.”
Hmmm. Yes,
well.
It only seemed
right for me to stick up for my fellow ink-stained proles, so I decided
to make an intervention. But then I thought, This is Bill Ackman standing
before me. He’s a great investor. Maybe he can give me some advice.
So this is
what came out of my mouth: “What do you tell the ordinary mortal —
say, the person who works in the press that you talked about — what
do you say to the person who has $20,000, $50,000, $100,000, or $200,000,
maybe, parked somewhere doing nothing? What is your advice right now for
that person?”
I looked around.
The wizards in the room were having difficulty calculating figures of such
humble size. I had thought $200,000 sounded like a large and unembarrassing
number. But the room reacted as if I had asked, “Bill, I have 75 cents
in my pocket. Do you think I should buy Twizzlers or a big red gumball?”
Ackman answered:
“First, it depends on when you’re going to need the money. I’ve
always said that if you want to take risk — any risk — you have
to be prepared to put your money away for five years or more. If it’s
that kind of money, I would give someone a couple of alternatives. Do you
have enough money in the bank that if you were to lose your job, you’ve
got a good window to get reemployed? You’ve got to make sure you have
a safety net. Buy a house. I think it’s a great time to buy a house.
But put a 20 percent down payment, get a good mortgage from Fannie and Freddie
… It’s one of the best investments you could make. The rest of
the money, either invest in a very broad index fund — a Wilshire 5000
type of index fund — or if you want to do a bit of homework, I’d
invest in a few great unlevered businesses that earn attractive returns.
In my opinion, McDonald’s, Visa, maybe Berkshire Hathaway.”
I think Ackman
might not have been accustomed to talking to people like me, which would
help explain why he sounded suspiciously like … a Merrill Lynch financial
adviser.
He was, however,
infinitely more compelling on the macro questions, and this was where the
evening took a dark turn. “One of the things that’s interesting
about the last year is that you realize how much of our capital system is
based on confidence — business confidence,” he said. “If
I’m confident I can refinance my debts when they come due, I’ll
spend money. If I’m not confident I can refinance my debts when they
come due, I’m not spending any more money. So if I can’t renew
my home-equity loan and I’m not sure I can keep my job, I can’t
spend. And you get into this death spiral.”
I asked
him, “What’s the chance we’re going into that death spiral?”
“We’re
in it!” he said. “Whether we’re going to die or not is another
question.”
“What’s
the percentage chance we’re going to move to a barter economy?”
I asked.
“I think
it’s small,” Ackman said.
“Small”?
I had been hoping for “Zero.” “Zero” would have been
a fine answer, and not because I have nothing to barter except for a stack
of old SmartMoney magazines, but “Zero” because, by the time my
12-year-old turns 18, I would like to be able to use my portfolio of stocks
and bonds as a flotation device, and not as kindling.
"THE
WAY I SEE IT, it’s all a con game,” Cody Lundin was saying.
“What I mean is that Wall Street has always been an illusion. Now it’s
an illusion that’s crumbling. Wall Street is like someone who’s
having heart trouble. It’s in constant need of resuscitation, but after
a while, it just doesn’t work anymore. People think that Bernard Madoff
was unique, that he was an illusion, but he’s just an extension of
the same illusion, the same con game. This is one of the reasons I don’t
like to have any debt. When you have debt, you become part of this illusion,
and sometimes you get trapped by it.”
We were standing
outside in a foot of snow in the mountains above Prescott, Arizona. Lundin
was arguing so cogently against the American culture of easy credit, in
tones far more thoughtful than one hears on cable television, that I forgot
for a moment that he wasn’t wearing shoes, or socks. He was standing
in the snow barefoot. Also, in shorts.
“It’s
all about regulating core body temperature.” For long hikes in the
snow, he wears three pairs of socks, without shoes. He suggested I try this.
Other things
Lundin asked me to try include making fire with sticks, eating mice —
“a free source of protein in survival scenarios” — and living
without electricity for a week to “see where it hurts.” Lundin
himself eats mice and rats he traps at his off-the-grid passive-solar house
in the wilderness, because “why waste free protein?”
Lundin is
a freak; twin blond braids fall from his bandanna-covered head, giving him
the appearance of a stoner Viking. But in the event that the economy crumbles,
and civilization with it, I would appoint him my financial adviser. He is
my favorite survivalist, the author of a book on getting by in the wilderness
and another on urban preparedness, and a teacher of primitive-living skills.
Survivalist, of course, has ugly political connotations. A long time ago,
I visited a place called Elohim City, on the Oklahoma-Arkansas border, that
was home to a group of white supremacists. Their racism was repulsive, and
their anti-Semitism wasn’t too pleasant, either. But I was impressed
with one aspect of their lifestyle. On a tour, they showed me a vast storeroom
filled with beans. Pinto beans, lima beans, all sorts of beans, vacuum-packed
in garbage-can-size vats. Three years of food, for when the revolution comes.
I knew, of course, that I didn’t need three years of beans in my house,
but I took the lesson: it’s not the worst thing in the world to have
a couple of weeks of food and water on hand, just in case a natural or man-made
emergency is more than FEMA can handle.
Lundin is
not a racist; in fact, he’s an Obama supporter, and he resents the
racist associations attached to survivalism. Nor does he wish for the grid
to go down. He says he enjoys electricity and indoor plumbing. He tends
to think, though, that civilization is a thin film, and that in times of
economic distress, it’s smart to be prepared for the day when Safeway
runs out of milk. “This isn’t something I hope for. But what if
the illusion does really crumble, and we have to move as a society to something
else?”
I asked Cody
how he invests his money. “I don’t believe in the intangible economy;
I believe in the tangible economy. When I have extra money, I buy tools,
food, or land. I like to be able to see what I’m buying. And I really
don’t like debt, so I’d rather not have certain things than be
in debt to anyone. I just feel better knowing that I don’t owe money,
and I feel good knowing that I can take care of myself. That’s the
American way, to be able to be self-reliant.”
For the record,
I don’t think the grid is buckling under the weight of consumer debt
or the mistakes of AIG. But we’re in a strange moment in American
history when a mouse-eating barefoot survivalist in the mountains of Arizona
makes more sense than the chief investment strategist of Merrill Lynch.
“People
need a plan, they need skills, and they need supplies. What would happen
if the ATMs stopped working for a couple of days? People would panic. But
you won’t panic if you’re prepared to ride out a disturbance.”
Even out West,
he says, people in the cities are unequipped to go for more than a day or
two on their own. The Mormons, who are strongly encouraged by their church
to keep a year’s supply of food in their homes, are an exception. “I
know some people who say that if things go to hell, they’re just going
to go to some Mormon’s house and steal all his shit. But that’s
not right.”
“Also,
many Mormons keep guns.”
“Yeah,
there’s that.”
The curious
thing about listening to Cody Lundin is that in his ideas I heard echoes
of ideas I’ve been hearing from people very much dependent on the financial
grid. Bill Gross, the founder of Pimco, the world’s leading bond trader
(and, according to a September 2008 ranking by Forbes, America’s 227th-richest
person), suggested that thrift — not mouse-eating thrift, but more
moderate forms of thrift — is quickly becoming the norm, as a result
of society’s massive over-leveraging.
“Risk-taking
went over the edge,” he told me. “We are inventing something new.
We’re very afraid. We know from the Depression that people who lived
through it didn’t change their mentality for the rest of their lives.
They were sewing their socks. They refused to take a lot of chances. My
sense is that it will take 10 or 20 years to find that spark of risk-taking
in people again.”
When I told
Seth Klarman, one of the country’s leading value investors, about my
visit with Cody Lundin, he said, “It’s always smart to prepare
for disaster. In investing, that means holding disaster insurance. In your
personal life, it makes sense to have inexpensive disaster protection, so
come what may, you’re ready for any eventuality. I like to store
some extra bottled water in the basement, but my wife thinks it’s too
much clutter. I told her I’d share my water with her anyway.”
While I’d
choose Cody Lundin to serve as my off-the-grid adviser, I would choose Seth
Klarman as my on-the-grid adviser, if only he were taking clients.
Klarman was
hired out of Harvard Business School to manage a $27 million fund that,
as of early this year, had grown to $14 billion. He is also the author of
one of the more expensive books in the world, Margin of Safety.
An out-of-print guide to value investing, it sells for as much as $2,500
per copy on the Web.
Klarman is
an acolyte of Ben Graham, the original value investor. Value investors —
Warren Buffett is the most famous — seek out distressed, underappreciated
assets, buy them, and wait until the rest of the world realizes that they’re
worth something.
“The
overwhelming majority of people are comfortable with consensus, but successful
investors tend to have a contrarian bent,” Klarman said over lunch
one day in an empty Boston restaurant. “Successful investors like stocks
better when they’re going down. When you go to a department store or
a supermarket, you like to buy merchandise on sale, but it doesn’t
work that way in the stock market. In the stock market, people panic when
stocks are going down, so they like them less when they should like them
more. When prices go down, you shouldn’t panic, but it’s hard
to control your emotions when you’re overextended, when you see your
net worth drop in half and you worry that you won’t have enough money
to pay for your kids’ college.”
One theme
of Margin of Safety is that people like me aren’t equipped
to be investors. “No one knows what he’s doing unless he’s
a full-time professional,” he said. “As in many professions, full-time
experts have an enormous advantage. Investing is highly sophisticated and
nuanced. The average person would have an incredibly hard time competing.”
I asked Klarman
if he wasn’t working against his own financial interest by arguing
that average people aren’t qualified to be investors.
“Most
people on Wall Street do well enough,” he said. “It’s
regrettable that anyone would want a client to take risks beyond what the
client could handle.”
He agreed
with Robert Soros that the financial-services industry treats the small
investor not as a client but as a source of ready cash. “The average
person can’t really trust anybody. They can’t trust a broker,
because the broker is interested in churning commissions. They can’t
trust a mutual fund, because the mutual fund is interested in gathering
a lot of assets and keeping them. And now it’s even worse because even
the most sophisticated people have no idea what’s going on.”
After 15 years
of pabulum, I was enjoying, in a perverse sort of way, receiving straight
talk from masters of finance.
“Everybody
these days is a just-in-time investor. People say, ‘I’m going
to leave my money in the market as long as possible, and then pull it out
of the market just before I have to write the tuition check.’ But I
think we’re seeing that the day you need to pull it out of the market,
the market might be down 50 percent. It’s critical not to be greedy.
Avoid leverage and don’t invest money that you can’t stand to
lose.”
“I haven’t
leveraged myself,” I said.
He asked me
if I had a mortgage. Yes. He then asked me if the amount of money I had
invested in the stock market was greater than the amount I owed on my mortgage
— could I liquidate what remained of my portfolio to pay off my mortgage?
I could.
“So you
are leveraged. Why are you keeping your money in the market?”
“Because—”
“It’s
because you think you’re going to make more money in the market than
you’re paying in interest on your mortgage.”
“Yup.”
“Well,
are you?”
“Uhh,
no. But I’m getting the mortgage-interest deduction.”
“Yes,
the interest is deductible. But if you had capital gains in the market,
you’d pay taxes on those. In the aftermath of this financial crisis,
I think everyone needs to look deep within themselves and ask how they want
to live their lives. Do they want to live close to the edge, or do they
want stability? In my view, people should have a year or two of living
expenses in cash if possible, and they shouldn’t use leverage anywhere
in their lives.”
“But
if I dump my portfolio now, I make my losses real.”
“How
are you going to feel if the market drops another 50 percent?”
Klarman went
on, “Here’s how to know if you have the makeup to be an investor.
How would you handle the following situation? Let’s say you own
a Procter & Gamble in your portfolio and the stock price goes down by
half. Do you like it better? If it falls in half, do you reinvest dividends?
Do you take cash out of savings to buy more? If you have the confidence
to do that, then you’re an investor. If you don’t, you’re
not an investor, you’re a speculator, and you shouldn’t be in
the stock market in the first place.”
Several years
ago, I went to a party at a hedge-fund manager’s loft in Lower Manhattan.
The elevator opened directly into the loft, which was as big as Mussolini’s
office. An Austin Powers bed was parked to one side.
I left the
party with a friend of mine, David Segal, who is now a business reporter
at The New York Times. As we walked to the subway, he said, “You know,
we should get one of those hedge funds.”
“Absolutely,”
I said. “Where do we get one?”
“I don’t
know. Maybe we can find one on the street. But we need one.”
“Yes,
we do.”
When I think
back on that conversation, I realize that it represents for me the apex
of hedge-fund mania. Which is to say, when two reporters realize they should
get into the hedge-fund business, it might be somewhat late to get into
the hedge-fund business.
Seth Klarman
is right. I’m not an investor. Very few people in America actually
are. I never had the knowledge or the time to master the stock market. I
thought I knew how to manage the danger, which is why I invested to a disproportionate
degree in the Dow 30. I’ve learned, however, that it’s quite possible
to ride the Dow 30 a far way along the risk curve. And I’ve learned
another thing: I once believed that a buy-and-hold strategy would make me
rich. This was a mistaken belief. “The economy comes in cycles,”
Robert Soros said. “If you believe that the economy is not cyclical,
then buy-and-hold is for you.” He taught me a Wall Street expression:
“An investment is a trade gone bad.”
Though the
past six months of my financial life have been marked mainly by paralysis,
I have, in fact, made a couple of decisions. I’ve decided to deplete
the world’s supply of gold by two ounces. (Attention all Atlantic-reading
burglars: it’s not in my house.) You’ll be pleased to know that
the price of gold fell $70 the week after I bought.
And my wife
and I have decided to fire our Merrill Lynch financial adviser. We’re
not firing him because we realized that his company couldn’t manage
its own money, much less ours, and we’re not firing him for his bad
advice. I was the one, after all, who pulled the trigger on the purchase
of 100 shares of AIG. (It would have been good of him to warn us about what
was coming, but that would have necessitated him knowing what was coming.)
We’re also not firing him because his research chief wants us to elongate
our already too-long time horizon. And we’re not firing him because
John Thain, his former CEO, spent the fees we paid his company on a $35,000
commode. We’re firing him mainly because he fired us. He never said
he was firing us. He just stopped calling. Eventually, I stopped calling
him. I got the message.
Our main job
now is finding someone to advise us. This is a very difficult task.
I asked Bill
Gross what he thought I should do. He was somewhat dyspeptic. “The
system is rigged,” he said. “It’s difficult for the average
investor to even conceptualize what we’re talking about. For this reason,
I think financial advisers are still worthwhile, but the average investor
can no longer pay them what they felt they were worth. You should find someone
who isn’t overpromising or overcharging.”
This search
is made more difficult because we don’t have enough money to make ourselves
interesting to most of the best advisers, and the typical adviser is not
sufficiently independent-minded to be effective.
“There’s
enormous pressure to provide conventional advice,” Klarman explained,
“and tremendous pressure against providing unconventional advice. Advisers
only recommend what’s conventionally palatable. They tend to say 60
percent stocks, 40 percent bonds, and they’re not likely to move away
from that, no matter how extreme valuations are. They’re not likely
to move away from it when the market is really high, or really low. A big
part of the problem is that there isn’t a perfect answer to any of
this. No one can tell you how to allocate your assets 100 percent of the
time. The average investor is not getting Warren Buffett to look at his
portfolio; he’s getting a printout from a computer model.”
Unconventionality
makes me nervous, but less so than conformity. I’m finished with conformity.
In picking an adviser, I’m also looking for someone who is unleveraged;
someone who is putting his own money into the investments he’s recommending;
and someone who can explain to me in a few sentences, in language easily
understood by earthlings, his philosophy of investing.
Despite everything,
I’m not overly pessimistic. I’m long on America, as my friends
on Wall Street might say. I believe that equities will grow in value. I
expect the Dow to return to 9,000, or 10,000, if not sooner, then later.
And when it does, if I’m not already out, I might just get out. I’m
not enjoying this particular ride.
I no longer
expect to get rich. It makes me happy to realize this. It also makes it
easier to give more money to charity. In retrospect, I can’t imagine
what led all of us to believe that we could regularly expect double-digit
annual returns on our money, for doing no work. Maybe this attitude will
cause me to miss the next great run-up. No matter. I’ll take 3 or 4
percent gains a year, or 1 or 2, if necessary. I’ll keep more cash
on hand. I’ll keep a two-week supply of meals-ready-to-eat, bottled
water, and lanterns in my basement. If things get bad, I’ll take my
family and drive west, to find Cody Lundin. And if the bottom truly falls
out, I’ll find a Mormon and ask him, politely, if he’ll share.
The URL for
this article is http://www.theatlantic.com/doc/200905/goldberg-economy
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