What's going on when you talk to your broker;
What's going on when you talk to your broker;
The phone rings, and it's your broker. Or maybe it's another broker, prospecting for clients, looking to replace the one you usually do business with. There is a conversation. A suggestion. Maybe a hot tip.
Ever wonder what's really going on at the other end of the line? Wonder no more. John Spooner, a senior vice-president in the Boston office of Shearson Lehman/American Express Inc., and author (under the pseudonym, Brutus) of the best-selling Confessions of a Stockbroker, has written a new book that answers the question in no uncertain terms. Entitled, subtly enough, Sex and Money, it lays bare the secret and not-so-secret lives of Spooner's colleagues, compatriots, and competitors in the stockbroking business. The characters, we hasten to add, are composites, not real people, and the office in the book bears only a passing resemblance to Spooner's own. But in this case, fiction is no stranger than truth.
To be published early next year by Houghton Mifflin Co., Sex and Money also explodes a few myths, offers a few suggestions, e ven reveals a hot tip or two, as in the excerpt below.
You think the investment business is stuffy? You think people sit around brokerage offices making important decisions involving millions of dollars with cold, rational judgment? I work in a carnival, a hurly-burly, and so does every other stockbroker and money manager in America. These days, of course, there are many new names for stockbrokers: Some firms call them registered representatives, some financial consultants, others investment executives. But it doesn't matter. Talk about tax shelters, annuities, mortgages, or insurance all you like. What really moves stockbrokers, regardless of what they're called, is the action on the Street. And that's a carnival. You don't believe it? Take Big Jimmy Minot. Every morning at 10 o'clock, Big limmy blows his whistle to signal the beginning of trading. He blows a regulation U.S. Army brass whistle that he wears around his neck to ward off potential muggers and to use as an exclamation point at the end of important sentences. Big Jimmy Minot has the office next to mine. He makes a good living as a trustee. A trustee usually watches or directs the investment of large pools of capital. In his case, Jimmy makes no decisions. He places the money with investment advisers who, when they buy and sell, put all the trades through Big Jimmy. Big Jimmy pockets the commissions.
After the whistle in the morning comes a cowbell, rung by Mad Mark the institutional salesman. Mad Mark keeps a cowbell on his desk because he is superstitious. One broker I know will never buy a stock beginning with the letter c; another will never buy a computer company; one friend of mine who left the business to make cheese in Vermont would never buy a company whose home office was in Dallas. These people all got burned by companies with the characteristics they will now forever avoid. Mad Mark the institutional salesman was given the cowbell by an oil exploration company he had invested in. "Every time we hit a gutbuster [a producing well]," he was told, "the news will be on the Dow Jones ticker. You ring that bell, Mr. Mark; you'll be getting rich." All the subsequent Dow Jones announcements reported dry holes, meaning extra payments and empty dreams for Mark. Mark rings the bell on every sad announcement, hoping reverse psychology will work. Big Jimmy tells him, "You can ring that bell till the cows come home before that outfit will find oil. That's why it's a cowbell." Jimmy's whistle drowns out Mark's bell; the market opens at 10 o'clock in the morning; the prices are off and running.
Our offices take an entire floor of a midtown bank building. There is a small reception area with a switchboard operator and various green plants. From this area, subdued and quiet, you enter the main boardroom, bustling with the clatter of the ticker, Teletype machines, newsprinters -- Dow Jones and Reuters -- telephones, and chatter. Private off run the length of the rear wall. The producers -- brokers generating more than a quarter million in gross comissions a year, of which they get roughly 40% before tax -- occupy the most space.
The office manager is tucked in the midst of these prima donnas, in a glass-walled office of his own with a couch, a quote machine, family pictures, and recruiting posters from the U.S. Marine Corps ("a few good men"). The manager is Elliott Smith, ex-Marine, ex-college jock. Elliott squeezes a squash ball most of the day, alternating hands. He also pushes against his desk drawers for isometric exercise. It s no fun shaking hands with Elliot. He has a three-word motto, done in needlepoint above his quote machine. "Up Your Gross" is his motto. This means that he is solely dedicated to improving all of his salesmen's gross commission figures. We call him "Up Your Gross" Smith, and he considers that a compliment. An ell off the main boardroom houses Mad Mark and the institutional section. The private offices along that wall house Big Jimmy Minot and, in the corner, myself, looking over the city.
You must know that under the tumult in brokerage offices lies the truth. And the truth is this: What are your numbers? How much business do you do? I have corner office and no delusions. I have bookshelves, an oriental rug on the floor, mementos of past victories on the walls, framed book jackets, the photos of the best-looking members of my family, a small ice chest, ficus trees, flowering plants. The day my numbers stop I know very well that out will go the bookshelves, into a box will go the photos. The ice chest will be sold at a discount to the new occupant. Stockbrokers lease their space from their employers. We create a commission dollar. The firm takes from this dollar roughly 60%. With the 60% they provide you with a desk quotation machines, phones, a secretary, and more sales help in terms of product and research than you ever thought possible.
You know the story of the stockbroker showing off his new yacht to a friend and the friend says, "Yes, but where are the customers' yachts?" A man I play squash with said to me last week, "You must have made enough in the last three months to retire." I always nod in agreement or smile slightly when anyone says this to me. The truth is that no broker I know or have heard of has made enough to retire in the last three months. Or indeed in any three months.
Since 1982, the stock market, measured by the Dow Jones averages, has advanced some 400 points. The trading volume has broken virtually all records. But the truth is that relatively few customers of brokers have participated in this record advance. Why is this? Fear dominated the financial markets for almost 14 months from March 1981 until the summer of 1982. Since then, the explosion upwards has been fed by investors fighting to break even. But the public -- fearful until very recently to participate at all -- has never really been in the game. Most of the record volume has been created by institutions moving in and out of large positions, hundreds of thousands of shares at awhack.
Stockbrokers themselves generally own very little stock. Ask your broker. what they own, if they put their own money into what they recommend to you. Clients never ask this question and yet it seems obvious. Why should you own what your adviser doesn't touch himself? Most stockbrokers have not participated in this historic rally in prices. For a long time, no one in the industry trusted the advance to last. Now at 1,200 on the Dow, there is a universal feeling that it's too late to jump in. If my squash-playing friend meant that commissions for the last three months have been enough upon which to retire, well, no one has ever earned enough commission in three months to take a walk. Even salesmen of jet aircraft to Middle Eastern oil sheiks. And it's all ordinary income anyway, taxed at the highest rates. Forget the myth of the brokers' yachts. In bear markets they all get repossessed anyway; no stockbroker worth his salt pays cash for anything.
This is a business of brain-picking. We are always on the hunt for the magical "they" who know all, see all. The phones are constantly in use. The brokers cannot create commissions without making the clients hungry for the product. There is "Up Your Gross" Smith, the manager, peering out from his glass-enclosed office making sure the phones are not being used for personal reasons. And he can tell. When the brokers' expressions are relaxed," he says, "I know they're not talking to customers. They're talking to travel agents. We want a high level of intensity in this office, production-wise."
The private offices hold people with specialties and with relatively big production numbers. The people who hold down desks in the main boardroom are either old-timers playing the game out of years of habit, or the young bloods, brokers on their way up, itching to push the current private-office occupants out into the cold. The young bloods also push the clients, and they push themselves. Jane Kaplan is a young blood. She pushed one husband out into the cold and was lucky enough, as she puts it, "not to be stuck with a kid." Jane was trained by Merrill Lynch. Merrill has one of the best training programs in the industry, and most other investment houses can't wait for each of Merrill's trainees to graduate. They know that many of these young brokers are ripe for the plucking, ripe to lie stolen away, with the cost of their training absorbed by the people who are bullish on America.
When Jane Kaplan first came into our office, she came around to introduce herself. "John," she said, "I won't beat around the bush. What does it take to do a million [in commissions] a year? Frankly," she said, "you don't look so hot to me. What's the gimmick?" Everyone knows people like Jane. They are known as room clearers. The room clearers always have a comment to offend everyone, and they do it in tones that do not allow compromise. Jane Kaplan prospects the way most young bloods in the securities industry prospect for new business. She cold-calls. This means using the Yellow Pages listings for doctors and lawyers. It also means using special mailing lists of professionals or residents of wealthy suburbs. Jane worries her prospects like a terrier. I overheard her conversation. "Dr. Peters," she said, "you don't know me, but this is Jane Kaplan, and this could be one of the lucky days of your life."
Jane is allowed to plow ahead because she makes people curious. Seldom do cold-called prospects want to talk with, much less see, the calling brokers. Almost everyone wants to see Jane Kaplan. She is coy on the phone; she teases. "It's so tough to make people greedy for my merchandise over the phone," she says. "So I'm going to make them greedy for me." Jane Kaplan is skinny and nervous and wears tailored suits to the office. The male brokers, particularly the young bloods, dislike her "pushiness." But they are pushy, too. What they really dislike is her success with cold-calling. Last year, Jane did $150,000 in gross commissions, netting her around $60,000. She wants a private office. "Hey, Jane," one of the young bloods called to her. "You see The Journal today? You see that a lady Hutton broker posed nude for Playboy? That's a better door opener than you got."
Jane is on the phone, waiting, and puts her hand over the mouthpiece. "Up yours, Marvin," she says. And then into the phone, "What is the nature of my call? It's about the doctor's emotional future." She gets through to the doctor immediately and launches into her pitch. The young bloods make faces and know that she'll probably get an order. They call her "Jane the Impaler," only partially because she has an old-fashioned spike inverted on her desk, upon which she slaps her successful leads.
One of the things you must understand early about the investment business is that there are a lot of nicknames for the people in the game. This is because almost everyone in the industry believes they are individual entrepreneurs; that they carry their business in their hip pockets. In an industry given to large egos, the participants think of themselves as knights errant, killing the dragons of high interest rates, fighting the black knights of lousy research, saving the endangered maidens: the widow at the mercy of the evil lawyers and inflation.
Last January there was an item in The Wall Street Journal that will teach you one of the most important lessons of all about the stock market. Here it is. "Purcell Graham and Company, a New York stock exchange member firm, sends clients a report updating the Super Bowl stock market predictor theory. The bottom line: It will be bearish if the Dolphins win Sunday, bullish if the Redskins win." The Redskins won 27 to 17. Superstitions abound in stock market analysis. This is natural since this is a business of fear and greed, of emotion. The market is an Alice in Wonderland business. It really has nothing at all to do with housing starts, the money supply, auto sales, or interest rates. It has to do with emotions.
The people who are the most successful investors are the people who are good at predicting human behavior patterns. Remember this when you wonder why the market is rising when everyone in your industry says that business is terrible. Remember this when your company cuts a dividend and the stock goes up. Remember this when you buy the stock market on wonderful news like the end of a war, or the end of a long strike, and you wonder why prices suddenly head down. The stock market is a state of mind. Resisting your natural impulses to be euphoric or full of panic when the media demand these reactions will be your first step toward profit.
Jane the Impaler had asked me what my gimmick was. Anyone who is a successful investor has developed formulas that have worked well over the years. Some investors or money managers buy emerging technologies and concentrate on high-growth areas -- companies like Digital Equipment, Wang, or Apple Computer. Others use fundamental analysis approaching companies by combing their balance sheets and income statements looking for signs of impending advance in basic business and profits. There are technical analysts, also, who plot price history and trading-volume history for companies and markets, and claim to see patterns in their graphs and charts. If you play golf or tennis and find success with unorthodox swings, it doesn't matter if you have classic form. The payoff is a drive down the middle or a passing shot that wins a point. The same is true in the investment world. If you deal with a broker who has a run-down office over a candy store and the candy store owner has to call him to the phone and he makes you money, that's all that counts. Chic stands for nothing in the investment business.
There is a sure way to make money in the stock market . . . if you are patient enough to handle it. Most huge profits in the market in the past 10 years have been in companies that most people of substance have never heard of, or in a company that seems so boring that no one would buy it even if you called them and twisted their arms. I call this phenomenon the Tampax Gambit. The Tampax Gambit is too boring for ordinary market players. You have to seriously want to make money to follow it. It takes time.
The average person in the stock market wants satisfaction in a maximum of nine months. I have done a study over the past 20 years with hundreds of clients. The limit of patience of the investor's ability to wait in a stock, seems to be nine months -- perhaps it's a biological clock, the gestation period. Then something small explodes in the psyche that whispers to the investor, "You've got better things to do with your money. Roll it over into something new. It's too expensive to get a divorce or even a new car. Feel better. Get a new stock." Of course, the investment community helps this procedure along. The average stockbroker also is sick of watching the same stock go down or sideways for nine months. We hate to make mistakes. But for some of us, a commission eases the pain of being wrong.
Here's the Tampax Gambit at work. Tampax stock is recommended to the typical client in, say, December 1979.
Broker: I've got something for you to accumulate, Harry, a stock under 30. This is a stock with a fine dividend, a sensational balance sheet, and a product with almost universal acceptance.
Harry: I'm already nervous when you don't give me a name.
Broker: It's actually better than a 9% yield, no long-term debt, a product every woman needs.
Harry: You're not making me very greedy. Long-term in the shoe business is one season. Will I have to hold this longer than a season? Give me a name.
Broker: It's Tampax. Right near the lows at 29.
Harry: I got troubles with inventory already. And you're giving me Tampax?
Broker: Do you want to make money or do you want to screw around?
(The following response is typical of most players in the stock market.)
Harry: To tell the truth, I already made my money. When I come to the stock market, I come to screw around. When it comes to conservative, I put cuffs on my trousers.
Most people would rather play around than make money in the stock market Tampax (now renamed Tambrands) was a cheap asset when I bought it in December 1979. It had more than $90 million in cash on its books and zero long-term debt. It had an asset-to-liability ratio of better than 4:1 and a dividend of almost 10%. The stock was stagnant between 28 and 32 for many months. When the toxicshock scare hit some time later, Tampax again dropped under 30. But the dividend and the financial condition remained the same. The stock was boring, but it was never a disaster, and it always looked to me like a bargain. During this period, virtually every female client of mine and all the office secretaries responded to my inquiries that they did indeed use the Tampax product and would continue to do so. I continued to buy the stock because common sense, not the Wall Street mavens, indicated that I should do so.
I began selling the stock at 49 3/4 in January 1983. During several horrendous market periods, Tampax held its price paid me a decent return while I waited and ended up rewarding me far better than most investments in any area could have done over the same time frame.
The Tampax Gambit will continue to make value-oriented investors rich during the 1980s. Patience and the ability to accumulate, even in small amounts, shares in companies that are cash-rich and make common sense to the investor will reward the holder until he can afford to join the Harrys of the world, people who are only in the game to screw around. I'm old fashioned. Give me Tampax at 29. Give me profits any time.