Wednesday, May 24, 2006

The Rising Dividend Story -- Call # 3 -- Billy T. -- Part I

Introduction: The third important call I received on Black Monday came near midnight. It was from an important and influential client whom I had not spoken to during the day. He was very troubled. In the years since Black Monday, I have told very few people the nature of that call. It was an intensely personal call to a person I cared a lot about. I have changed the circumstances of the person completely for matters of privacy. I am sharing the essence of the call because in my inability to calm my client with rational arguments, a new way of thinking about business and investments was born for me. A way that I may have believed all along but had never put into words. But in those critical moments, when my client had lost his ability to think clearly, and I had exhausted every way I knew of reaching him, a story came to my mind. A story that was like a rope of truth handed down to us that pulled both of us out of the dark place where we had fallen. Due to the length of the description of the third call, I have broken it into two parts. Part II will follow shortly. The Third Call, Part I Billy T was in his own words “large and loud.” He had one of the keenest minds of anyone I have ever known. He was a voracious reader, a student of history, and a computer wizard. Billy T advised me regularly that he did not need a money manager because he had done well on his own for years. Indeed, the million dollar account I managed for him was only a third of the assets that I knew he had. But while he regularly told me he did not need me, I continued to manage a large portfolio for him for over 20 years. Billy T was a mystery to me. He’d be my best friend one day and interrogate me the next. He always seemed to delight in telling me that the portfolios he managed were outperforming the one I managed. The odd thing was that every time I asked him why he still did business with me, he would say only that he needed me because I managed his conservative money. On Black Monday, I traded calls with Billy T all day. It was the pre-cell phones days, and he was on the road trying to reach me as he hop-scotched across the country from pay phone to pay phone. He knew that I was not selling into the crash, and he informed my assistant that he agreed with that strategy. As Black Monday closed, Billy T was one of the few clients I had not spoken with directly. So, just before I left the office, I called his home telephone and left a message saying that I would be working at home all evening and that he could call me anytime up until midnight. At 11:00 PM, my phone rang, and I heard a voice on the other end that I did not recognize. It was very faint and almost sounded like a child’s voice. “Gregor,” the voice said. “Glad I caught you. I just got in, and I’m shell-shocked at my losses.” Each word was labored, and spoken as if it was being read from a piece of paper. I knew it was Billy T, but he was anything but large and loud. “Gregor, how much is my account with you down?” he asked. I told him somewhere between 15%-20%. He said that he was down much more than that in his other accounts because they were fully margined. He explained that he was sure he would have margin calls in the morning, and he wanted to know what I thought was going to happen in the next few weeks. I told him my best guess was that the market would continue its volatility and that I would be surprised if it did not go at least 10% lower before finding its footing. I added that big sell-offs are usually followed by a rally, then a retesting of the bottom. He said he was so stunned by the day’s events that he was having trouble comprehending it. He said he thought he might have lost a million dollars. He asked me to remind him why I had decided not to sell into the crash. I repeated to him what I had been telling everyone, that I did not think it was prudent to throw good companies at bad prices, and that it was becoming increasingly clear that Black Monday’s bad prices were the result of a structural malfunction in the market that had caused the system to crash. I told him the news was full of stories of computerized trading that had careened out of control, and that there was talk that the New York Stock Exchange was going to suspend computerized trading. He said that one of the gurus on his stock hotline was calling for a bottom in the Dow Jones 30 of 400 points. That was over thirteen hundred points lower than Black Monday’s close of 1738 for the Dow. . I asked who was making the prediction. He told me the advisor’s name, and I responded to Billy that the guy had never seen a sunny day in his life. I told him that the advisor in question had been predicting the sky would fall, for one reason or another, for the past decade with little to show for it. I asked Billy why he continued listening to the guy when he had been so wrong for so long. Billy T then informed me that the advisor had been predicting a crash for a long time and that he should have listened earlier. The way Billy said it, it was clear he had not heard me. Billy T said that if the market fell to 400, he would be wiped out, and he just couldn’t take the chance of staying in the market. Somehow talking about the advisor’s doomsday prediction had sent him into a downward spiral. He repeated several times that if the Dow fell to 400 he would be wiped out. Again I countered with the Black Monday talking points I had been using all day and again realized he wasn’t listening. Losing everything had become a certainty to him, and my arguments were like bubbles against the hard steel of his state of mind. It was now clear to me why I worked for Billy. The morbidity with which he now saw the market was not the Billy T of living loud and large. Indeed, in the course of this short conversation, the terror in Billy’s voice caught me by surprise, and I did not know what I was dealing with for several minutes. A dark state of mind had engulfed him; a darkness that, perhaps, he had never confessed to anyone; a darkness that he had just learned to live with. But, in the grip of this dark mood, Billy T told me to sell everything at the opening of trading tomorrow. It was now 11:30 PM. After a hard day of dealing with everyone’s emotions, including my own, and speaking with clients for going on 17 hours, there was little left of my voice, or my energy. Billy T’s irrational and dark mood had found a crevice in my own psyche, and the slow-motion clarity and confidence that I had felt all day were being eclipsed by his sense of dread and loss. Billy had lost hope, and witnessing the despair of such a bright and seemingly well-adjusted man now shook my own confidence. For a moment, I forgot my responsibility to do the right thing for Billy, and like him, started to run. I realized that Black Monday was the first of many long days and nights for me. If I was to save the relationships with my clientele for our small firm, I would have to come up with a post-crash strategy and work it night and day. I could not exhaust myself on any one person, because there would be nothing left for everyone else. I remember muttering, “If that’s what you want, Billy, I’ll do my best. . . .” But as I said the word “want,” I remember realizing that in Billy’s state of mind I was doing him no favor to do what he wanted. I was the captain of one of his financial ships, and I knew better than he did how to navigate this storm. I knew in the current stock market that there was a complete disconnect between prices and values. I did not know what the correct price for the Dow Jones 30 was, but I was sure that bailing out now was wrong. I also knew that trying to have an intelligent discussion with Billy in his present state of mind was useless. Billy had been there for me when I needed him, it was time for me to be there for him, no matter the cost. I stopped in mid-sentence and said, “Billy, you realize in giving me these instructions to sell everything, you are firing me. We will never work together again.” He tried to protest, but I interrupted him and said, “I think what you are doing is dead wrong, and you will soon be sorry.” Billy did not respond and I continued, “As we have been talking, something keeps coming into my head. I’m not sure you will agree with it, and it might even offend you, but I cannot let our relationship end without telling you what is on my mind. Would you allow me to tell you a story?”