High-Flying Adventures in the Stock Marketby Molly Baker
"A wonderful read-Baker takes you through a year in the life of a fund manager-it's so well conceived and written that you'll think you were there too. Individual investors who manage their own money should put this book in their 'portfolio.' Informative, educational, great fun."-Larry Waterhouse Jr., Chairman,
PRAISE FOR HIGH-FLYING ADVENTURES IN THE STOCK MARKET
"A wonderful read-Baker takes you through a year in the life of a fund manager-it's so well conceived and written that you'll think you were there too. Individual investors who manage their own money should put this book in their 'portfolio.' Informative, educational, great fun."-Larry Waterhouse Jr., Chairman, TD Waterhouse Investor Services, Inc.
"Most Americans know mutual funds only by their performance numbers. In High-Flying Adventures in the Stock Market, Molly Baker takes us inside the fund industry to give us a compelling and intimate look at the human drama of running a fund."-Douglas K. Sease, Editor, Wall Street Journal Books
"Baker uses the eye for detail she acquired as a reporter for the Wall Street Journal to explain the high-pressure world of the money manager in laymen's terms. For those seeking a readable, inside account of the '90s historic stock market boom, this is a book to add to the portfolio."-Dana Milbank, staff writer, The Washington Post
"Baker has provided an unusual perspective into the world of mutual fund management. She is a real reporter who is skilled in her understanding of what she describes and lively in her choice of episodes. The book is fun as well as informative."-Peter L. Bernstein, President, Peter L. Bernstein, Inc. author of Against the Gods: The Remarkable Story of Risk
"A fantastic voyage through the mutual fund universe. Every investor should read this book."-Andrew Metrick, Assistant Professor of FinanceThe Wharton School, University of Pennsylvania
- Publication date:
- Product dimensions:
- 5.53(w) x 8.74(h) x 0.74(d)
Read an Excerpt
DON'T YOU JUST LOVE IT?
Just before 8:30, Jerry Frey walks into his office building and heads toward the Au Bon Pain bakery in a corner of the foyer. He is one of hundreds of professionals who walk through the lobby's heavy glass doors every morning. At a little under six feet tall, with neatly trimmed brown hair, and clad in a navy suit, Jerry does not exactly stand out in a major metropolitan corporate tower. Like thousands of other office plazas across the country, this is a building of anonymous dark suits, law and accounting firm doors littered with a mosaic of surnames, and the requisite coffee-and-bagel franchise.
Jerry walks alongside the elevator bank that services floors ten through sixteen. To his left stands a sixteen-foot-high copper-coated disk, pieced with hundreds of small hexagons that make the circle look like a monochromatic jigsaw puzzle. The disk, the stack of bronze books hanging on the wall above it, and the charred-wood globe next to it are half of a sculpture that graces the lobby at One Commerce Square, the tower Jerry has worked in since moving to Philadelphia two years ago. The other half of the sculpture backs up against the elevator bank to floors two through nine. There, suspended from the ceiling, is a green hoop of oxidized copper. The green ring matches the disk in size and color, and if placed on top of one another, the disk would fill the blank space in the ring, and the two would form a complete and solid circle. Separated, as they are, the pieces form "The Diaxiom," which, according to its creators, represents theknown and the unknown. The tangible and the intangible. Light and dark. Knowledge and ignorance.
Every day, Jerry enters the building by way of the known, passing the puzzle pieces that are in place and interlocked to form a circle. He stands between the two halves of the sculpture while he waits for the elevator that will carry him to his office. The known is to his right, the unknown is to his left, and the stock market is waiting to open on his computer screen nearly forty stories above. At the end of the day, Jerry leaves his building by way of the north side, passing the empty green ring. He finishes every day with the certainty of the unknown following him. It is a fitting, if not entirely obvious, reminder to a professional investor in the stock market: at the end of the day, there is often more that is unknown than known. To Jerry, the suspended ring issues a silent taunt or challenge every day, as if to say, "Let's see if you can jump through this hoop."
On this morning, and nearly every weekday morning, the known for Jerry is that he will order a cup of coffee, a small fresh-squeezed orange juice, and a corn muffin. Or, if the weekend's run-to-the-end-of-the-driveway race with his nine-year-old son had a closer-than-usual finish, he will order a blueberry muffin. "I figure it's better for me," he says. He stands quietly in line behind other businessmen, maintenance men already taking their first break, and women wearing tennis shoes and toting their pumps in plastic grocery-store bags. One would never guess that he is a man who, after eating his muffin and drinking his coffee and juice, will oversee more than $2 billion of stock market investments.
He stands in line, wearing an off-the-rack suit and a tie and shoes his wife bought for him. They are all high quality and attractive, but they do not ostentatiously announce power or wealth. His beeper, cellular phone, and calculator are all zipped inside his black canvas briefcase, and he is minus a Wall Street Journal tucked under his armthe telltale sign of investors or those with an interest in their investments. But if you happened to be standing behind him on the random weekday morning when he says to one of the food servers staring blankly back at him, "You raised your prices, didn't you?"well, then you would know that Jerry is a man who takes note of a twelve- or fourteen-penny change in the economy. And it would not surprise you that he manages over $2 billion and moves millions of that lode around every day. On his way to the elevator, Jerry catches one last glimpse of the copper disk, the known. He will leave the known behind and ride the thirty-nine floors to his office, his spreadsheets, his research, his telephone, and his computer screenall reminding him of what is unknown.
On this July day, there is so much that is unknown.
The year is half over, and yet Jerry is no closer to knowing how 1998 will end for him than he was on the first day of January. Every January, with just a turn of the calendar page, the financial race begins anew. In some sense, all mutual funds and even many companies get to start over on January 1. Mutual fund managers, stock analysts, and company executives spend twelve months working toward one number: year-end performance. "Where did you end up on December 31?" You would never ask a manager, "Where did you end down?" Someone who ends down doesn't need someone else pointing it out. Asking might even jinx your own market performance in the next year. Besides, it's just plain rude.
At the start of January, everyone's year-to-date performance is exactly the same. Zero percent. That's how much you've made for your shareholders that year. And that's exactly how much the stock market is up or down for the year. Zero percent. Everyone is standing at the bottom of the mountain together. Anything is possible, nothing is predictable.
It is possible that all of the stocks Jerry owns will go up; that he will find the next Microsoft, the next Home Depot, and the next McDonald's before anyone else does; and that he will have the best performance of any mutual fund at the end of the year. Unfortunately, it is also possible that many of Jerry's stocks will go down and that he will misjudge the opportunity to buy into what everyone will later anoint as the next Dell Computer. It is possible that he will end up somewhere in the middle of the pack of the more than 7,000 mutual funds offered in 1998.
Sitting off to the side on Jerry's L-shaped desk is a forest-green canvas portfolio, zippered shut. In it, he keeps a collection of papers he deems important: his performance record at his previous job, the compensation agreement he worked out for himself and the people working under him, and a list of his annual accomplishments and goals. The three-sheet memo to the chairman of the company, describing Jerry's progress and his outlook for the new year, is his own sort of report card on what he has done and what remains to be done. It is simple, straightforward, and slightly modest. Like Jerry.
Looking ahead to 1998, he listed his top goals for the new year: "Finish building a quality investment shop ... " and "Continue to build on the investment performance and marketing skills necessary to sell."
So it would be a year of building. A year of creating something that would last. There was no mention of money, assets, or even cash in Jerry's goals. He simply wanted to help build. Build a reliable and talented team that would help him manage the funds; build strong portfolios of consistent, high-quality stocks; and ultimately, build wealth for his shareholders and employees by doing his job well.
These are terms with which Jerry is most comfortable. Words that deal with building. Words like concrete, I-beams, steel struts, and ISO drawings. Before embarking on a career as a Wall Street professional, Jerry helped build things. He worked for engineering firms and contracting firms and on construction crews. He can talk at length on the properties of various cement mixes and the difficulties in working with the compounds. One of his first summer jobs as a teenager was mixing mortar for the stone mason who lived across the street from his house. And, at his last job before moving to New York and the world of investments, he helped to oversee the building of a new 100,000-square-foot warehouse at a Procter & Gamble diaper and tissue plant.
And now, on a warm July morning in Philadelphia, Jerry is again thinking about building. He is busy structuring, rebalancing, and rethinking his portfolios. Jerry is strategizing about the precise mix of technology, health care, and retail stocks to hold in his mutual funds. Should he buy more restaurant stocks and sell computers? Pull back in financial services and load up on the Internet? Every day, with nearly every trade, he weighs his options and his choices, trying to find just the right mix. And, like the mixing of cement to build a foundation, every decision Jerry makes will affect future decisions. Certain choices will open more doors in the future; others will rule out particular options. With every move he makes, Jerry has to consider that future and what might be behind those closed doors and available options. He cannot see into the future, but he must try.
When Jerry contemplates the future, he is not seeing his retirement years or his three children going off to college. The future is more immediate.
The end of the year. December 31.
Jerry and a team of five stock analysts who work with him run three mutual funds for Delaware Investments. They shuffle stocks in and out of the Trend Fund, the DelCap Fund, and the Aggressive Growth Fund. The funds invest in some of the fastest growing, highest flying companies in the economy; thus, they are aptly dubbed the firm's "growth group." Most simply, the Trend Fund invests in small companies with hopes of growing bigger; the DelCap Fund invests in medium-size companies poised to grow bigger; and the Aggressive Growth Fund invests in companies of any size that are focused on growing. And growing very aggressively. These are usually the newest companies to enter corporate America. They offer the nimblest technologies or approaches to products and problems. They are also the companies that move the most and the quickest in the stock marketin both directions. Aggressive growth stocks and mutual funds are often those that can disappoint and please more swiftly than any others.
On the conference table in his office, a stack of papers had greeted Jerry when he came back from his Fourth of July holiday. On top of the stack was a single page with a bold heading in black ink: "Dateline Delaware. July 1, 1998." Under the headline was a photocopied cutout of a chart in The Wall Street Journal. The text above the chart read: "The Delaware Aggressive Growth Fund continues to hold first place in Lipper rankings with 60.62 percent total return for the 52-week period ending June 25." Of all 860 mutual funds that invest in growth stocks, Delaware's fund was number one over the past twelve months. Of all the men and women who do what Jerry and his team do, they had done it the very best. For twelve months running. Jerry hardly glanced at the chart.
It was the kind of inner-office rah-rah memo that marketing or public relations or corporate communications sent around when the firm was mentioned positively somewhere. To the professionals in these cheerleading departments, it was a sort of corporate pat on the back. To Jerry, it was an affront and a challenge. It meant that the other people at the firm hadn't been aware of his performance until The Wall Street Journal pointed it out. But more importantly, it reinforced his knowledge that this was not a business that got by on pats on the back in July. It was a business of "What have you done for me lately?" Late December, in particular.
On every piece of fund advertising and promotional material, Delaware, like every other investment firm, was required to print: "Past performance is no guarantee of future results." It was the industry's reminder to shareholders that great numbers in the past had no bearing on success in the future. This summer, Jerry needed no reminder.
It was a season of record-breaking temperatures across the country. Houston companies were declaring a dress-down summer to deal with the 100-plus degree days. New York City's hospital emergency rooms were filling up with heatstroke victims, and Philadelphia, where Jerry worked in an air-conditioned office on the thirty-ninth floor, had issued an extreme heat warning.
And it was no different in the stock market. The Dow was up, the S&P was up, and the Nasdaq was up. These indicators led people to make such pronouncements as "The market's on fire," "The bull marches on," and "Stocks are only going up." The statements are often made with more conviction than belies the shaky understanding behind them. When peoplefrom professional investors to the media to the general publicspeak about "the market," they are most often referring to one of the major indexes: the Dow Jones Industrial Average, the Standard & Poor's 500 Index, or the Nasdaq Composite Index.
At its simplest, the Dow, the longest standing "market" substitute, is a daily average of the prices of thirty stocks. The biggies. The strong and steady. The captains of corporate America across all industries. Names like Exxon, Coca-Cola, Boeing, McDonald's, General Electric, and Procter & Gamble. They are companies that have grown, adapted, and endured. With only thirty companies, the Dow is the most elite and exclusive of all the indexes used to stand for "the market." It is the revered Senate of the American stock market. The Dow stocks have the most pullup or downto affect the market.
The S&P 500, an average of 500 stocks, acts more like the House of Representativesa little broader constituency, with more room for days or weeks of ups and downs to average out. The 500 stocks that make up the index are some of the largest and most successful companies in the country, and they are chosen for their strength to endure and their depth to represent the American economyor at least the American stock market. The thinking goes that 500 strong companies, watched as one basket, should be a reasonable indication of the health of U.S. companies overall. These are the companies that are elected to stand in front of the markets and let investors and economists know how the rest of corporate America is doing. If the S&P 500 struggles, a tough battle must be going on out there on the assembly lines and in office-park cubicles. If the S&P 500 climbs, things are right with the world. Americans are earning it and spending it.
The Nasdaq is the most recent addition to the list of must-follow indexes of the stock market. The index is made up of all of the stocks that trade on the Nasdaq Stock Market, a trading market that companies can choose as an alternative to the New York Stock Exchange. The Nasdaq Stock Market has come to be known as the market for technology companies, so, despite the index's roster of over 5,000 stocks, it tends to move in the direction of tech companies.
During the summer of 1998, the three indexes were setting recordsseemingly daily. The Dow was up 15 percent, the S&P 500 was up 19 percent, and the Nasdaq had gained 22 percent for the yearand it was only the start of July. It seemed the bull market had been raging for over a decadesince the Crash of 1987and the past three years had been host to annual gains of more than 20 percent in all three indexes. The long accepted and admired investment goal of a 10 percent return per year was tossed out the window, along with such concepts as value investing, buy and hold, and understanding a company's business. Investors had gotten used to getting more out of the market, and now they were demanding it. And the challenge to Jerry's team, and every other mutual fund out there, was to try to be the ones who could meet those demands.
After his morning ritual of muffin and coffee, sports pages and silence, Jerry retreats to his desk to get his bearings on his stocks and their place in the world before the market opens at 9:30. Until trading begins, the numbers and letters that fill the computer screen sit immobile. The first column is filled with ticker symbols, the three- and four-letter shortcuts by which stocks are identified. These are followed by columns that show the latest price and whether, on that most recent trade, someone paid more or less for the stock. This pattern is repeated three times across and dozens of rows down, fitting hundreds of stocks and billions of dollars on the screen's 17-inch span. At 9:00 in the morning, the screen looks like an average spreadsheet, or any other computer-created data sheet waiting for someone to act upon it.
When the stock market's opening bell rings at 9:30, the screen jumps to life. The ceremonial opening happens when some executive from the New York Stock Exchange, or some celebrity, or a chairman of a new company going public that day, rings a brass bell, like a schoolteacher, from the balcony above the stock exchange floor. But, given the activity that explodes on Jerry's computer screen, it would be more apt if a gun was fired into the air from the balcony instead. Thousands of investors and traders have been pent up at the gates since early morning; their hooves are stomping and they want to get running. Immediately, the ticker symbols begin flashing red, green, and white, indicating if the most recent trade was up, down, or even, and the numbers alongside them jump up and jump down as fast as Jerry's eyes can scan from column to column. Jerry has been staring at letters and numbers just like these every working day for nearly twenty years.
In his office, Jerry takes a bottle of aspirin out of his desk drawer and shakes one tablet into his hand. "Only two things have been clinically proven to be good for your heart: regular exercise and taking an aspirin every day." Jerry often repeats this advice to himself with the same tone of authority as a proclamation from the Surgeon General. Of course, in addition to keeping the blood flowing smoothly into the atria and out the ventricles, that single white aspirin tablet can help prevent any headaches the stock market might serve up throughout the day. With the pill in his mouth, he gulps down the nine ounces of fresh-squeezed orange juice in one long draught. He snaps the plastic lid back on the cup and drops it into the nearest of his four trashbins. It is just the first deposit of the day. When the stock market closes, the bins will be bulging with the day's debris.
Every day, Lea, one of the assistants to the growth group, opens and sorts the incoming mail into six piles, one for each member. Many days, Jerry's stack measures as high as two feet. Often, it is divided into two piles, or bound with rubber bands, to keep from toppiing and littering his desk.
Most of the mail is research reports from Wall Street analysts who cover companies and industries, write out their opinions and predictions, and send them to Jerry and thousands of other investors across the country. There are also magazines and invitations to conferences and upcoming meetings with analysts, strategists, or company executives. In addition to the mail, there are the faxes. They add several more vertical inches of reading material to Jerry's stack. It seems the group's fax machine is rarely silent; new research, new numbers, and new ideas pour in from all over the country. The group goes through 600 reams of paper3,300 pounds a yearfor faxes alone. Jerry's mail for the year, if stacked, would rise fifty storieseleven floors higher than the entire distance from the tower's plaza fountain to Jerry's office on the thirty-ninth floor.
Jerry gets around to looking at his mail every two or three days. Even then, he does little more than glance at each piece. He lines up two or three trash bins behind his desk and stands above them holding a stack of mail. Sometimes he lets the stack rest in his arm while he peels each piece off and drops it into the bin; the rare exceptions flutter into a small pile on the floor. More often, Jerry uses his thumb to fan through an entire stack, treating several inches (and several weeks or months of someone else's work) as one piece of mail. After only thumbing through the stack once or twice, he lets the pile drop with a thud into one of the bins. He doesn't believe in keeping or filing reports, and he maintains that if something is known long enough to be written on a piece of paperespecially paper that was likely printed at least a week agothat information is already in the stock price. Don't take up space on my desk, don't clutter my mind, and don't waste my time.
Mail and faxes are only a part of the data, information, rumor, opinion, and prognostication that arrive in Jerry's office daily. This morning, his secretary, Geri, brings in a stack of printouts of voice-mails and e-mails he had received while he was away. She has typed out all of his messages, organized them according to date, and highlighted in yellow the important elements: appointments, meetings, names, and numbers.
"Don't you just love it?" he reads the five-word e-mail message silently to himself. The subject of the e-mail: Amazon.com. He lets out a laugh, leans back in his chair, and reads the message again, this time out loud. "Don't you just love it?"
Jerry is not prone to giving out stock tips, and he even shies away from talking about his job or the stock market with his family and friends. But this was one he did give away. Jerry knew that the woman who sent the e-mail would take the tip as exactly thatnot a sure thing, not an investment strategy, but merely a tip, an idea, a hint. He knew that the woman's bank account and her emotions could handle a loss in the stock market, and that she wouldn't take a big gain as a sign of her, or Jerry's, market genius. To those with the moneyand even many of those without itthe stock market can be a game, and she was looking for the next play. Perhaps most importantly, she simply caught Jerry on the right day. When she called last fall, Jerry had already spent a few months buying and selling shares of the Internet bookseller for his mutual funds. He knew the company, he'd met the executives, and he understood the business model. Most of all, he understood the hypehe knew the story around the stock, he listened to why people were buying it, he watched who was buying it, and he watched how the stock behaved.
So, this old friend listened to Jerry's advice and bought in when the shares were trading around $15. When it comes to story stocks like Amazon, Jerry never gets caught up in exact numbers or who bought what when. Instead, he says things like, "She bought a pile of the stuff," like it was half-price Halloween candy in the bargain bin. When Jerry received the e-mail, Amazon.com's shares had just hit $139.50 a share.
Just minutes later, Jerry is chatting on one of his regular calls with an institutional salesman. It sounds pretty formal, but institutional salespeople are really just brokers who call on professionals during the day, rather than baby boomers during the dinner hour. Jerry speaks with about half a dozen salespeople throughout the day, and receives calls, messages, and faxes from countless others who would like to bend his ear and open his wallet.
"AmazonI told you this thing was gonna work, didn't I? It's about time you guys got on board ... I don't know, it's up eight points again today. These things are basically being bought retailI don't know that a bunch of institutions are buying it up here."
Jerry has bought and sold shares of Amazon.com several times in the past, but this summer he has been mostly a spectator in a sport he thinks is being played mainly by individuals: "retail." Retail is for those baby boomers who get the broker calls during dinner, and for those retirees and Gen-X computer junkies who log onto their E*Trade or Charles Schwab Internet accounts and buy 50 or 100 shares at a time. He doesn't see many of his colleagues playing the gamesalespeople and others on Wall Street have told him so. This combinationJerry's theory that Amazon is a game being played by amateurs, and the company's record-setting stock priceis starting to pique his interest again.
He chides himself for selling out too early, the last time he owned Amazon shares. "I left a lot of money on the table." And now he's thinking of heading back to the table for another helping.
"If there's ever been a stock that fits into the Peter Lynch campyou know it, you use it, you like it, you buy itthis is it. These people buy a book, and then they go and buy the stock right behind the book." It is another in a long line of Wall Street maxims. Chalk one up to Fidelity Investments' legendary mutual fund manager, Peter Lynch, for telling all individuals they could Beat the Street and get One Up on Wall Street in his bestsellers of the same names.
The salesman on the phone moves on to the sale at hand.
"Are you guys taking this thing public?" Jerry asks. "Goldman is? And how much did you guys piss away in a day on this thing? ... Antique ink stands? Oh brother ... I have an Odyssey putter and it doesn't do me any good.... Yeah, we did the Inktomi deal. I paid up for more afterward. It was just recommended and the stock was up $40. It's up another $8 today."
Sure, the stock is up 90 percent in three days. But initial public offerings (IPOs) were like that. Weren't they? Such jumps had become so common this summer that Jerry and the salesman didn't even pause to gasp over the numbers. Instead, the salesman moved right into a pitch for his next Internet-IPO sure thing. He was calling to offer Jerry a spot on the dance card of eBay, an online auction company that was initially started as a way to locate collectible PEZ candy dispensers. Sure, any number of Donald Duck, Mickey Mouse, or Superman heads spitting lemon and cherry sugar pellets could be found in grocery stores today for $1.39. But, to find the classic oneswell, surely a Web site would help. An Internet site seemed to be the solution and cure-all for every corporate and personal ailment as the last decade of the twentieth century was coming to a close. And now, investors were going to be given a chance to own a small piece of this wonder Web site that offered customers the chance to bid on not only PEZ dispensers, but antique inkwells and used golf clubs. It was something Jerry would have to think about.
* * *
At eleven o'clock, Jerry gathers the members of the growth group in his office for their weekly meeting. The group has held such meetings since Jerry took over last year. Besides giving an opportunity to exchange ideas and information, the meetings give Jerry a chance to check in with the team, to take the pulse of his workers. Are they too optimistic? Are they down? Do they need to be bucked up? And like any tight-knit office group, the team enjoys the chance to exchange banter, tease one another, catch up with each other, and catch their breath.
The meetings begin with Jerry's discussing the overall market and the group's funds. It's like Jay Leno's opening monologueit puts everyone at ease and updates the team on what's gone on and where things stand as of today. Then the exchange startssometimes in such rapid-fire market lingo that the language sounds foreign to all but the participants. They speak in a string of stock symbols and precise decimals rather than company names and whole numbers. Their speech is peppered more with nicknames of Wall Street analysts and arcane industry data and lore than with simple pronouns and adjectives. After Jerry's warm-up stretch, the meetings build steadily to a high-speed sprint of information exchange. Eventually, there is a requisite cooldown of bashing the competition across or down the street in Philadelphia, or delivering a healthy ribbing of the guy in the next chair over.
They have all settled into the beat of the gatherings. Each of the group's members brings something unique to the table every week. Jerry brings with him a stack of research and charts and the hope that others will take these when they leave. Marshall brings color, energy, and enthusiasm to share, while Jeff brings an endless supply of technospeak, market data, and strategic opinions from far and wide. John brings a pronounced level of conservatism and skepticism that comes with the territory of following financial stocksthose that can swing most violently with the merest shifting of economic winds. Steve's contribution is a fresh combination of the eagerness and confidence found in newly minted Ivy League MBAs ready to make their mark and their millions on Wall Street. The only member missing today is Lori, who is out on maternity leave until after Labor Day.
Jerry has put the group together in much the same way he builds portfolios. He looked for personalities that would complement each other, and he wanted strengths to compensate for weaknesses. Broken down most simply, Jerry and Jeff invest in technology, Marshall and Lori cover retail and consumer, and John and Steve do the financials and business service stocks.
Jerry starts today's meeting by pushing to the center of the table the chart ranking the Delaware Aggressive Growth Fund number one. "A little publicity, courtesy of The Wall Street Journal." The others sitting around the table lean in a bit to see the chart, but no one rests on the numbers for long. Jerry's group has moved on to a new day, a new week, a new month.
"As for performance, one place we got nicked was Advanced Fibre. We got run down by a truck there. We lost one to one-and-a-half percent on that one transaction." Jerry scans the printout that details the daily performance of the three mutual funds. "We'll figure out a way to get it back. We've got to see where we can push it and get it back."
To Jerry and the men sitting with him at the blond-wood conference table, that 1.5 percent comes out to just under $1.5 million in the Delaware Aggressive Growth Fund. They lost it last Tuesday, and now they've got to find it somewhere else. They lost it when Advanced Fibre, one of the 65 companies they held in the mutual fund, announced it might have some difficulty meeting expectations. When companies make such an announcementusually a few weeks before revealing their actual results, which would no doubt come as a disappointment to investorseveryone knows the expectations of which the companies speak. They are not the expectations of the company executives, whose projections may have been laid out in corporate strategy meetings. They are the expectations of Wall Street. They are the estimates and predictions proclaimed by the hundreds of Wall Street stock analysts on whom professional money managers have come to rely.
It's a bit like a parent sending out the family Christmas letter to let all the aunts and uncles and old neighbors know that little Johnny is getting straight As and will be going to Harvard next year. The problem is that the letter was written with exuberance in November, before final exam grades were tallied, and long before college acceptance letters were in the mail. Across the country, 175 holiday missives arrive, singing Johnny's praises in advance of his achievements. Like Johnny, corporate Americaand, very often, executives of companies that are newly public and have very little experience with Wall Street analysts, quarterly estimates, and an unforgiving investment communitymust sheepishly come forward. They are forced to admit that they won't be wearing Crimson Hs across their chests next fall, and no, the company won't be earning $148 million this quarter, like everyone has come to expect. Instead, it'll be a little closer to $75 millionbut please don't sell our stock. Sure; and community college is a fine substitute for the Ivy League.
"We haven't used any deals yet, so we've got a lot of dry powder," Jerry says.
The others nod.
"But, that doesn't mean you can run around and throw a bunch of deals that are working in the funds," he adds. Most mutual funds, especially those investing in small companies, like Jerry and his gang do, have the chance to buy into "deals," or IPOs. But often, the deal with "deals" is that some investment banker, or some stock analyst, or some stockbroker, or some institutional salesperson has got to owe you a favor. If you're owed a big favor, you get signed up for 10 percent of the deal. You get your sharesmaybe 100,000 of themwhen the deal is "priced" by the bankers on Thursday night. Then, on Friday morning, your trader takes those shares that you got for $12 last night and sells them for $14 to some Wall Street brokerage house that can resell them to someone else for $14.50. It's a quick $200,000 and a shot in the arm to the fund. If it's a popular IPOa really hot dealthe shares can jump from $12 to $60 or more in one day. That 400 percent increase could add nearly $5 million to a lucky mutual fund's bank account. In one day. Actually, in one trade.
"We're about 41 percent in technology right now, so the performance of the fund is going to be driven by where tech goes. But, that's where we want to be. We want to be in the more aggressively oriented names. We can own bigger namesif they're aggressive. Go where the growth is." Like a coach with a clipboard, kneeling on a locker room floor, Jerry looks around the table as he speaks these words and meets the eyes of the men who will help himwho must help himwin this game.
Marshall takes the pause as an opening to congratulate Jerry on his latest winner from the world of Internet stocks. "Inktomi. That one played even more than I thought the band would allow." Jerry bought into the IPO of the Internet software company just four weeks ago, and the stock has already tripled.
Marshall leans his chair against the sill under the windows that fill half a wall of Jerry's office. The smokestacks in the rail yard of Philadelphia's train station spew silently in the background, as they have for nearly 70 years. Marshall holds a fat-free pretzel rod between his middle and index fingers and wags it like a smokeless cigar.
The others nod in agreement over Inktomi's stunning performance and let out a few "Yeahs," as is customary when any new technology stock cruises in on some fiber-optic cable, spins your head on your hard drive, doubles your Internet caching abilities, or puts just under a million dollars in your walletor, in this case, your mutual fund.
Steve, the newest and most eager addition to the team, lets out a "Whew" in praise of the boss.
In hopes of putting a quick end to the glory moment, Jerry brings the conversation back to the numbers on the pagewhat Jerry calls "the scorecard." It's a weekly printout that compares the performance of each of the group's three funds to that of 99 of its peers. It ranks Jerry and his peersor, in this case, his competitionaccording to their performance for the latest week, month, and twelve months, and for the current year. The columns and rows are constant reminders that every move has an effect, and every dollar adds up to the only number that counts: where you stand at the end of the year.
For Jerry's groupand for much of Wall Streetthe numbers that appear on their annual bonus checks are closely tied to the numbers on those six sheets of paper. This year, the six members of the growth team are working toward a pot totaling about $3.3 million in salary and bonus. If the group performs better than 75 percent of its peers in all three of its funds, Delaware will pay them the whole package. As performance slips below that line of achievement in any of the funds, the company keeps more of the pot, and Jerry and his team get less and less. Every Monday morning, the printouts stare back at the group, from their desks and conference table, like a $3 million carrot. In those weeks when the carrot dangles within reach, it seems to be yanked up just as their arms stretch out to grab it. The numbers on the page sit silently in black ink, and the $3 million carrot swings slowly, alluringly, hypnotically taunting, "It's not December 31, and you can't have it."
"The month-to-date numbers, it's probably as much my fault as it is anyone else's," Jerry says. Indeed, it's been a rough few days, thanks to Advanced Fibre, and the group has plummeted in the rankings.
Jeff, the only player who missed out on the last round of praise, offers, "I'll step up to the bar on that one."
With his hopes of shouldering the blame dashed again, Jerry tries, "Well, don't take it as the end of the world. Ninety-seventh, month-to-date. We've been there before."
"And it's only three trading days in," Jeff pushes his round glasses back on the bridge of his nose and runs his hand through his dark brown hairnever disturbing his perfect side part. "And yesterday we smoked 'em."
Finished with old business, Jerry opens the meeting up to anything the rest of the players have planned for the coming weeks.
"Earnings begin Thursday. But the onslaught won't really start till next week," Jeff says. "Earnings" occurs just after the end of every quarter. It's the roughly two-week period when companies announce to Wall Street, their investors, and the public how business was during the previous three months. If business hasn't been so great, a company will often preannounce the quarter, as was the case with Advanced Fibre. Letting investors know before the actual results come out is an effort to soften the blowto the stock price and possibly to the company's reputationby giving investors advance warning. Most often, the effort fails. Investors, an unforgiving lot, are quick to move from one stock into any of 11,000 others that maybe haven't announced that they're going to miss the quarter. The stock price usually craters when institutional investors who care nothing about advance warnings sell millions of shares, and it will take the company at least several quarters of very good news to earn back most investors' trust.
If a company's quarterly business has been good, on the other hand, it announces its results a week or two after the close of the quarter. Then companies watch their stock prices to see just how good investors thought the quarter was. In most cases, if a quarter has been very good, and if Wall Street research analysts are confident that their expectations and estimates will be met and exceeded, a "whisper number" will start to be heard through the investment world before actual results are announced. It's like an unpublished, updated earnings estimate by analysts: "Well, we're telling all of our clients the company is going to make 60 cents a share this quarter, but I'm telling you I actually think they're going to do much better and make 66 cents." It's the inside track in a community that is made up of people already on the inside. But, just like anything else that has been around long enough, "whisper numbers" are easy enough to come by now that there's a Whispernumber.com Web site for dispensing just such information. Of course, actually logging on to Whispernumber.com is an admission that you didn't get the word first, so you're not really on the inside. Insidersprofessionals, that isdo not log on to Whispernumber.com.
Never wanting the conversation to get mired in work or the intricate details of earnings season when it doesn't have to, Marshall lobs from across the conference table, "I'm gonna be on holiday."
The word whips Jerry's head to the right to face Marshall. "Where you from, London? That's what they say over there." He says this as if the group may not know. As if most people still save the trip to Europe for retirement. He can't accept that most of the people in his industry are the kind who spent high school summers in Europe, or arranged semesters abroad in Madrid, Paris, or Beijing. Jerry spent his summers in high school mixing cement and playing baseball.
"I'm from the South. It's practically the same language down there," says Marshall. Indeed, Marshall's Kentucky lilt and the collection of colorful phrases he exported with him when he moved north are the most distinct and recognizable of the group. He inquires after your "kinfolk," and if he's busy, he'll be with you in "two shakes." The picnic-blanket casualness that echoes through the halls when Marshall says, "I reckon so," is countered in formality and gentility when required. Although he may call someone Jim a dozen times a day, Marshall won't send out a correspondence until he tracks down a middle initial and can address the envelope to a "Mr. James T._____." "There is a proper way to do things," he says.
Then it is Jeff's turn to log in his own plans with the group. "Robbie has a semi conference the last week of July. Then there's an Internet conference the first two days of the next week. And the networking industry has something the last three days of that week." Jeff uses more technology, investment banking, and business school ("tech," "I-banking," and "b-school") lingo than anyone else in the office. He calls Robertson Stephens, the San Francisco investment bank, "Robbie," and the semiconductor stocks are "semis." Microsoft is "Microsofty," and, if Jeff is standing, he will often genuflect as he says it. He talks about having kids as "going long," as in "you have to keep them."
Marshall withdraws his pretzel rod, "I'm gonna blow out my CDNOW at some point. My target is 30."
"I'd lower your target on that. Let's try 29 5/8." Jerry is in mentor mode, with his forearms framing the performance sheets in front of him. His back is straight when he surveys the faces of his team looking for an opening. Finding somewhere he might impart a little knowledge or experience. Trying to pass something on from the past to an industry that worships the future. "I've told you not to think in round numbers. You don't all want to get to the door at the same time as everyone else." It's a lesson he repeats oftentrying to get Marshall and the others in his group to think a little differently than the rest of Wall Streetbut then again, not too differently. If $30 seems like a reasonable price for Marshall to sell the shares of the Internet music retailer CDNOW, which he bought for $16 a share, who's to say that a hundred other mutual fund managers haven't also said to themselves, "I'll sell when it hits $30." On the other side of those trades, there may not be a hundred buyers willing to pay $30 for a share of CDNOW. So, how about giving up a few pennies a share and getting in position at the head of the line rather than the end?
"Tandy had good comps today," Jeff offers.
"Circuit City had very good numbers."
"You may be the only living analyst that still follows Tandy."
The computer world and the world of investing have changed drastically in the nearly twenty years since Tandy's TRS-80 line of computers made it the number one personal computer company in the world, followed by Apple and then by Commodore, with its PET and Commodore 64 machines. The early models plugged into television sets instead of monitors and didn't have hard drives. When hard drives were invented, they sold for $1,700 and stored five megabytes of data. Average home computers today cost about that for the entire system, and they come with hard drives that can store 8,000 megabytes of data.
Jeff was studying computers and their components long before Tandy topped the charts in sales. He remembers "the day I saw my first D-RAM," when he was twelve years old, like others might recall seeing their first Playboy. Jeff did his seventh-grade science project in 1975 on microelectronics and brought a chip to show the class. Now, almost 25 years later, he has hanging on his wall a faded poster from a 1990 Museum of Modern Art exhibit titled "Information ArtDiagramming Microchips." Jeff can look at the print and confidently declare it to be the architecture of an Intel 386 chip. It is exactly this all-consuming enthusiasm for his job and his industry that a colleague says is both Jeff's best and worst quality.
The meeting continues to tour technologies and products and prices and performance and people: "DVD ... it's been dribbing and drabbing for a while ... Palm Pilot ... all of a sudden you turn around and it's a million dollars ... early adapters ... price points ... Legato ... servers ... saving the analysts' asses this quarter ... storage is absolutely exploding."
The utility of this information has waned for Jerry. He shuffles the papers in front of him into a neat stack and taps the edge lightly against the table. "Lori's gonna stop by Friday to say hello."
Lori has been out of the office since having her second child two months ago. She still checks in almost daily with Marshall, getting and giving updates on stocks and companies. After a summer excursion to the shopping mall, she called in to tell Marshall to sell out of one of the group's retail stocks. "There's way too much merchandise on the sale tables. The quarter can't be going well," she warned him. Marshall put the sell order in, and, before long, Lori's assessment proved correct. The company preannounced a weaker-than-expected quarter.
"Yeah, she's gonna bring the baby with her when she comes," Marshall says.
"You think we should get together and have Geri get her a gift?" Jerry asks as he looks around.
"We already got her a gift. Or at least we all gave you money to get her a giftbut if you haven't, then can I have my forty dollars back?" John asks, and tosses into the air the baseball he's been holding.
The group feels very comfortable with its boss. They ride and tease Jerry as much as they do one another, and they take advantage of his open door to relay the latest joke from the Internet or the trading desk just as often as they stop in to run an investment idea by him. Even though the group's hierarchy positions Jerry with the final say on trades, to him they are a team. In presentations, he lists all six members as both portfolio managers and analysts. They share the top rung as well as the bottom. Jerry is quick to point out that there would be no rungs for any of the six to stand on if it weren't for Geri and Lea, the two assistants holding the whole ladder up for the group.
Jerry is on his way back to his desk, a de facto adjournment of today's meeting. The numbers and letters on his screen continue blinking red, green, and white, like the minilights on a Christmas tree. The market has taken no note of Jerry's weekly meeting, and now it is nearly an hour ahead of him and he has to catch up. From 9:30 in the morning to 4:00 in the afternoon, the Dow, the S&P 500, the Nasdaq, and all of Jerry's stocks are constantly moving up or down. Like an amorphous giant inhaling and exhaling billions of dollars. Up and down, up and down.
Meet the Author
MOLLY BAKER is a freelance journalist and has worked as a reporter with the Wall Street Journal, NBC News, and the Rocky Mountain News. In addition, Ms. Baker was a financial analyst on Wall Street for CS First Boston. She lives outside Philadelphia with her husband and two children
Most Helpful Customer Reviews
See all customer reviews