MY ENCOUNTER WITH GERALD LOEB -

This blog is dedicated to my daughter.

It's been said that the Harvard Business School teaches you a lot of things, but not how to read people. The following vignette concerns a particular part of my history, which I hope by sharing, will help young people as they negotiate their way through life.

It all started back in 1960. I was laying in a muddy trench on the machine gun range, luckily in Fort Dix, New Jersey. The mud was six inches deep. I did not expect a jeep to ride up and down the firing line yelling out my name.

When they finally found me I was told to report to the Captain's office, relieved of my firing, and was given a jeep ride to the barracks. Reporting to the Captain I was handed a telegram. I opened it and it said I should call a number at EF Hutton and Company and ask for Gerald M. Loeb, the senior partner of Hutton. I called and he said he wanted to see me about a potential job offer as I had exceled at my finance studies at CCNY.

A month or so later I was interviewed in the marble clad offices of Hutton's executive towers, in total awe of the presence of a Wall Street Legend, Gerald Loeb the writer of the Wall Street epic, "The Battle for Investment Survival".

A few months later, after being released from the service, I went to work as Assistant to Gerald Loeb. What I did is not worth commenting on since it wasn't much, but in essence, in the days before computers, I posted all the customer trades to a ledger book. Loeb would carry this book with him at all times. I posted thousands and thousands and thousands of trades.

After a while I began to notice, that in many cases, the customers would make 1/2 a point or a point, we would get over a point commission, and invariably the stocks would go up substantially higher after we sold them. Being naive, I thought it was my duty to point out to Mr. Loeb, that if we kept these stocks the customers would make alot more money.

I was told that I didn't understand the brokerage business, that it was our job to make commission income and as long as the customers made profits, all was well and good. I should go back to work and keep posting. When I tried to explain to my boss that we would have a lot more money to generate commissions if the customers made more money, I was given more or less a warning to mind my business.

A month later, we had a parting of the ways. You might say I was fired, I would say I quit. I had no negotiating leverage, either when I took the job or when I left it. I never should have taken the job, I didnt even think that I had any right or power to look into the character and personality of the person who was going to employ me.

Even at the beginning of your career you must start to develop strong negotiating skills no matter whom you are negotiating with. Never give up on your thoughts and ideas, no matter who you are up against. My concept of holding investments in order to make the clients a bigger profit, vs. their desire to make commissions for the firm the priority, eventually succeeded in my upcoming business ventures.

SLOW CHANGE

There has been a lot of focus on taxing Internet sales that in certain cases are not taxed today but are taxed if the same products are purchased in a brick and mortar store.

One thing for sure, the Internet is potentially the "ultimate weapon" against the oil cartel. The potential for reducing miles driven without reducing economic activity lies therein.

"MADNESS"

When a company named S & P is responsible for rating government debt, the crazies are loose. What an inept company - throw out their junk.

THE ROGER HERTOG ROAST

I just received the latest issue of Commentary magazine. On page 1 they had photos of the Commentary second annual roast honoring Roger Hertog.

Congratulations Roger. My invitation must have been lost in the mail. Don't worry though, I have prepared a few words to honor you on your achievements.

A December 12, 2003 Washington post article titled “Alliance Struggles to Settle With Regulators” was summarized on the Motley Fool’s website as follows:

NY ATTORNEY GENERAL WANTS ALLIANCE TO ACCEPT A SETTLEMENT: A LARGE FINE, CHANGES IN MANAGEMENT PRACTICES, AND LOWER FEES CHARGED TO MUTUAL FUND INVESTORS. ALLIANCE HAS THE HIGHEST AVERAGE FEE FOR EQUITY FUNDS, 2.09 PERCENT, AND THE SECOND HIGHEST FEE FOR FUNDS OVERALL, 1.63 PERCENT. ALLIANCE HAS SET ASIDE $190M TO COVER FINES, LAWSUITS, AND INVESTOR RESTITUTION. LAST WEEK ALLIANCE TRIED TO SETTLE THE CHARGES. ALLIANCE, THE SEC, AND NY ATTORNEY GENERALS OFFICE DECLINED TO COMMENT. SOURCES SAID REGULATORS “WANT MORE HIGH-LEVEL HEADS TO ROLL”.THE FORMER HEAD OF MUTUAL FUND SALES AT ALLIANCE CAPITAL MANAGEMENT LP, SENT AN E-MAIL TO FORMER PRESIDENT JOHN CARIFA AND ROGER HERTOG, CURRENTLY VICE CHAIRMAN OF ALLIANCE'S BOARD, AND OTHER TOP MANAGERS IN JAN 2002 INDICATING THAT ALLIANCE WOULD ALLOW DANIEL CALUGAR, A LAS VEGAS INVESTOR, TO MAKE TRADES IN ITS MUTUAL FUNDS, OF A TYPE THE COMPANY NORMALLY PROHIBITED, IN EXCHANGE FOR PUTTING $51M IN 3 ALLIANCE HEDGE FUNDS. THE E-MAIL SAID CHAIRMAN BRUCE CALVERT IS OKAY WITH THIS.

I still find it absolutely amazing your involvement in this alleged super fraud being in the Vice Chairman position at the time.

The $600 million settlement entered into by Alliance, potentially to avoid any criminal or civil complaints against the company executives, was one of the largest settlements ever.

Did anyone bring this up at the Roast?

HEAR YEA! HEAR YEA! COMING FORTH THE ATALANTA SOSNOFF STORY

Hear Yea! Hear Yea! Coming forth the Atalanta Sosnoff Story.

A tale of hubris, greed, mistaken priorities and the near destruction of a good firm.

Stay tuned for the intriguing true story...

LEGENDARY INVESTOR - PART TWO

If you input a search for "Lewis Sanders Capital investment performance record" the first website Google refers to is a blog that I wrote about my version of the early years of my business experience.

I wish I could report otherwise but when I looked at the Vanguard Windsor Fund's performance record for 2010, it was ranked in the 87th percentile. According to public documents, Sander's firm, where he is CEO and Chief Investment Officer, began managing money for the Windsor fund in January 2010. (Historically the Windsor Fund seems to have ranked in the top half of money managers prior to the year in which Sanders joined its roster of managers.)

It would be interesting to see the individual performance of Mr. Sander's firm for the past year considering the lackluster performance by the Windsor Fund for 2010.

Needless to say, I am still having trouble with where Sander's "Legendary Investor" status emanates from.

BLOG OF THE DAY

Obviously the significant change in the price of oil affects all sorts of economic variables. Adjustment to meaningful price changes requires all sorts of variable economic changes. But our economy makes them and we go on.

Unfortunately the real issue is not so much the price changes. Imagine sitting down to negotiate with an opposing force that has all the power, whether it be military, contractual or any other form of overwhelming power, versus the party they are negotiating with.

Because of our inability to make significant adjustments to our oil usage we cannot negotiate with the oil suppliers from a position of equality, let alone a position of strength.

We cannot continue to delude ourself into thinking that they need to sell their oil more than we need to buy it. But imagine if the likes of Chavez, Kadhafi, Iraq, Iran or Russia decided to curtail shipments to us (somehow), there would be no Nash Equilibrium or literally any possible response short of catastrophe.

It is absolutely urgent that a great nation not stay in the position of ultra-vulnerability to the fluke of nature that placed oil in very unequal distribution around the world.

It's kind of like smoking, it will get you often enough to force most intelligent people to stop.

The situation with oil can't keep up whether the price is $75 or $175, the underlying weakening of our independence is overriding.

THE OPPORTUNITIES ARE ENORMOUS...BUT THE GAME IS COMPLEX

PART ONE:
Back in the day brokerage firms were owned by partners. If the firm lost money, the partners were personally liable. Commission charges to buy and sell stocks and bonds were extremely high but no one forced anyone to buy and sell stocks and pay those fees. When I was originally a broker at E.F. Hutton and Company and I wanted to get a quote on a stock, I walked up to the front of the room, stood in a long line, picked up the phone and was able to request one quote and only one. I then had to find my way back to the desk through the throngs of other brokers, I would give my customer the quote which really wasn't current anymore, I would write out the order on what was called a trade ticket, I would put it in a vacuum tube, it would travel a long distance and about an hour later I would know if we bought the stock or not. Times have changed.

Somewheres along the line the powers that be decided that fixed and high commission rates were not the way to grow a hearty participation in American Capitalism among the people. Rates were then lowered, then lowered, then lowered, and then lowered. It also came to pass that "money management for a fee" began its monumental growth. We now can trade billions of shares a day explained by the cult of the necessity for a liquid market. The liquidity is well out of balance with the actual need and has turned stocks into the semblance of a gambling casino with all the rules and regulations of such activity very much in place within our markets. Research is superficial and shoddy at best, but thinking, fortunately, keeps evolving through higher and higher levels.

About the same time,Donaldson, Lufkin and Jenrette found a way to pierce the wall of the New York Stock Exchange prohibition requiring all member firms to be private. The cry became "the road to growth requires public capital and we as partners can no longer foresee having enough capital to sustain significant growth". The members of the exchange tried to maintain their historical rules of private companies but the opportunity for making the existing partners wealthy men controlled the outcome. So the door was opened and privately owned firms were able to create great wealth for their owners by selling shares in their privately owned companies. There is no question that I personally benefited from this "time in history". The combination of much lower commissions and the loss of the future money management asset growth, made the traditional brokerage business a heck of lot less profitable, even with the ancillary interest income.

PART TWO:
In order to understand where I'm going with this you will have to allow me to tell you a quick story. My wife Sally and I, during the Internet bubble, were invited to attend a presentation by one of the best asset management firms in the world. This firm had scrupulously avoided investing their clients money in the overpriced dot.com companies. Unfortunately, it's performance had lagged its peers that had invested in those companies and the firm lost thirty percent of its assets under management, solely because they were thought to be an old dowdy company. At the meeting we attended, we were immediately introduced to the new Internet guru of this wonderful asset management firm. We were told he had appreciated money at an annual rate of 500% in the last year and now was the time for all the money that had left their firm to return and they would do all they could to compete with their new investment guru. Only a few "special clients", like us, would be "invited" into this "fantastic investment opportunity". In other words, at the very peak, the rate of asset loss to this money management firm and the enormous emotional pressure they felt was so great, they could not stop themselves from attempting to participate in the craziness. The Internet boom went bust a few months after this presentation, the young money manager was fired, all the money was lost, over $200 million dollars, and quite successfully, this money management firm continues to deliver a steady investment product.

Now we return to the public nature of brokerage firms and banks. As I have said in prior blogs, the recent financial crisis was all started by the government when it decided that housing had to be made more easily available to more and more people. My parents bought their first house for $4,000, then they bought a second house for $11,000, several years later it sold for $42,000 and no one at that time, many years ago, foresaw housing prices going up and up and up. There was absolutely no clear cut series of reasons to forecast that one should not liquidate their home because the prices would keep going up and up and up, even though homes were the ultimate symbol of success and the savings and capital base of most of our people.

PART THREE:
Presidents Reagan, Eisenhower, Clinton, Bush, Nixon, Carter, let alone President Roosevelt, used the rhetoric of home ownership as a lever to attract votes. To try to explain what happened when the housing prices broke is as impossible as trying to determine what the true value is of almost anything.

Just to make this even a little clearer, if a bank received depository inflows from a poorer area and did not lend that money out to the people that wanted home loans in those areas it was called redlining or discrimination, it wasn't called determining if the potential homeowner was likely to pay the loan or not. It didn't matter to the mortgage lenders at that time because the new theory was the prices of the homes would go up anyhow, they always had. So wherever you went to get a mortgage loan, it had to be given to you at terms that were better than the terms up the block, because if my bank didn't give you the loan, then another would. Guess what would happen if I didn't give you the loan? The earnings of my bank, or institution or brokerage firm would slow down relative to my competitors, the shares of my company would not rise as much as my competitors and I would be criticized for not participating in what was obviously going to "go up forever". In other words, I had to get into the Internet boom or I would lose my assets under management and go out of business, and I had to give bank loans to virtually anyone or my shares would go down and I'd lose my job, since after all if the country allowed this, who was I (CEO of any Bank) to stand alone against the crowd. In so many respects corporate and investment decisions are nourished by a short term mentality.

I remember an investment manager yelling a the CEO of Fannie Mae, "you idiot, make more loans, I own your shares, you work for me".

This is what really happened, all else is sand on the beach.

Sorry for the length of this. Have a great weekend.

HUMAN RIGHTS

A quote from a very high ranking European Union politician: "How can we use our warships to stop the Somali pirates...Frankly we have to be concerned about their human rights."

Holy Moly.....

THE MAJORITY MAY NOT KNOW

As the protection of minorities from the majority was central to Madison's Republican formation of our constitutional government; it shall be asked "Is a majority strictly to be measured by counting people or can a majority of power, in any format, be the equivalent of kingship?"
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Obviously, ascending to power by the control of force or threat, short of or including armed conflict, is a form of power without votes.

It is very difficult to measure the inherent size of a mob protest, as most people won't come into the streets for fear of their person.

In America , the interactions of our society among and between and within groups, allows for the minimization of enduring conflict among persons. But Madison in the Federalist Papers, ascribed to humankind an innate propensity for conflict and aggression within almost any type of politically based organizations. Consequently, to know when accumulated duress will lead from active protests to an escalated road of violent protest, is always seen after the fact.

Such is the dilemma between any interest group and those not within its sphere of opinions.
As way of example, how can we ascribe, or even begin to understand, the hugeness of the mistake that would have been made by Israel if it would have allowed itself to be manipulated into appeasing neighboring countries, who are now being seen not to have had a propensity for binding agreements at any point.

There was a time when unions were an absolute necessity. But as we have said in earlier blogs, unionized industries have played a significant part in the weakening of our industrial base. It might have been better, from their own prospective, if they could have accepted an adjustment to their total compensation programs years ago so as the union movement would not have plunged into such a loss of membership in our industrial companies.

The challenge is clear, the long term answers may be simpler than many think. Stay tuned...

A BIG WORLD

An interesting event occurred. The announced merger between the German exchange company, Deutsche Borse and the New York Stock Exchange. Rightly so, there will be people who feel that merging a major symbol of the American economy with a foreign entity should not happen.

There is a another side to the equation, the implied innuendo that if you attack New York, you also attack Germany. Positive internationalism in defiant terms.

ENTITLEMENTS, SECURITY AND STANDARD OF LIVING?

President Roosevelt was arguably one of the top two or three Presidents in our country's history. I try to make a point in this blog, that's all.

When President Roosevelt proclaimed his consumer bill of rights he mentioned seven primary entitlements for the American people. The entitlements included the right to a useful job, the right to earn enough to provide basics including recreation, the right of the farmer to a decent living, the right to not have unfair competition, the right to a decent home, the right to medical care and health, and the right for economic assistance in old age.

Nowhere did he proclaim how these entitlements were to be paid for. He never said you have to earn it, he never said that people would get these things at different times, he never said certain people would not get them at all, he just said we were entitled. Possibly during the dark days of the depression, President Roosevelt's proclamations were necessary, but today is today.

Why may this be important? I lived most of my life in New York City. I traveled from the Bronx to City College and spent ten years in Harlem at the Fifth Avenue National Guard. I witnessed that the standard of living, in the most liberal city in the United States, didn't seem to rise significantly for most, for some time. I know there are some people that live a sheltered life in Manhattan proclaiming the merits of the intellectual capital and cultural base . They are mostly living behind security alarms, doormen, and have a huge police force to separate them from the reality that the standard of living in the city has gone nowhere for most people.

It's now seventy year later. We have to accept that we may be entitled to everything, but the world hasn't created a system that provides all these things to everyone in equal proportion and at the same time. That leaves us with only one thing to reflect on. How do we improve the standard of living?

The inflation adjusted per capita standard of living hasn't increased for nearly two decades, despite the huge technology and housing booms, a huge entitlements boom, and the lowest interest rates practically ever. Simply stated; we are in an economic mess. Sure we are in recovery from a severe recession. Economic cycles are nothing new.

The entitlement society, I believe, is just another form of semi-false security if stripped to its roots. The entitlement list will grow; we will all be entitled to a cell phone, a refrigerator, an air conditioner, luxury food, blood pressure machines, air conditioned cars, the best mattresses, lights everywhere, computers and on and on the list goes.

The entitlement mentality knows no end. Those who use its rhetoric are usually elected for a short time as voters love to feel they are going to get more and more seemingly for free. Well it just won't work. It can't work and will ultimately contribute to another severe recession and less security as the number of people doing the paying for the entitlements, can't keep up with the demand. Think about it.

The people who finally put together our constitution understood varying views. The impact of the Internet and the speed with which information travels may take the constitutional ball game outside the box.

ARE VOTES WORTH IT? - PART TWO

In our blog dated January 11, 2011 we wrote about the unionization of public workers. I asked you to consider the question "Are unions likely to destroy the government?".


On the Bloomberg website today the following article was written "Public-Worker Unions Battle U.S. Governors Over Benefits in Change of Role". This article seems to support the questions I was asking. I thought you might find it of interest. The link to the story is:http://www.bloomberg.com/news/2011-01-20/public-worker-unions-battle-governors-on-benefits-in-role-shift.html

ARE VOTES WORTH IT?

On August 27, 2010, we said in a blog that "Almost every significant unionized industry in America has failed. Now the largest unionized segment in America is government."

In the January 8, 2011 issue of the Economist magazine the lead story is titled "The battle ahead - Confronting the public-sector unions."

If you accept the thesis that I'm even partially correct about the negative effect of unions and their inflexible total compensation costs being responsible for destroying the competitive condition of significant industries, you will be well advised to ask "Are unions likely to destroy the government?"

Isn't it only a matter of time before some union representing the fire department, police department or the post office, goes on strike? Obviously it will happen. It's tough to change people. Note carefully the behavior of certain union members during the recent New York City snowfall.

KNOW YOUR RISK LEVEL

We have been asked to say more about the investment rules we published on December 6th. Let's start with "KNOW YOUR RISK LEVEL."

If you define risk as what the overall market is going to do, you will never get it right over a period of years. No matter what you do most portfolios will be plus or minus 3% from the average over almost all periods.

The return of the market is what the average portfolio made or lost in the time period you are referring to. The only way to beat the market is to concentrate your investments or use leverage. If you significantly overweight any sector, industry or company you are concentrating your investments. If you pick the best performing sector and put all your money in it you will undoubtedly outperform the market. If it does worse, you will do worse. Let's say you picked the natural resource sector, "energy sector" and you picked the best performing stock and put all your money into it, you will do great. But if energy does well and you pick the wrong stock, even sector strength won't help you out.

If you pick a strong sector and the best stock and add leverage you will win big. Obviously the reverse is also true. This is one of the reason most professional money managers run diversified portfolios. Their objective is not to make you rich, at best it's to keep you from getting poor. You can add you own thoughts to the rest of this.

MERRY CHRISTMAS MR. PRESIDENT - YOU ARE A DESERVING MAN

Hardiest congratulations President Obama. You've put up with alot and have been facing alot. You've achieved changes in the tax code that no one else could accomplish. You have put best practices before politics and the results should work in your favor.

You took action in health care; whether its good, bad or indifferent, you did something. You took action in taxation policy; no matter whether its good, bad or indifferent, you did something. You took action in our wars; no matter whether its good, bad or indifferent, you did something.

Now I hope you will find the extra educational resources that the underprivileged need to bring their academic levels up to the levels of the most privileged students.

"IT'S TIME TO RETHINK" WHO WRITES FOR THE NEW YORK TIMES

According to an editorial in the New York Times titled "It's time to Rethink The Charity Deduction" Professor Thaler states "If someone in the 36 percent tax bracket gives $1,000 to charity and deducts if from his income tax, the donation costs him only $640. The government picks up the rest." Professor claims that's a subsidy, but it's not.

The government is giving us an incentive, not a subsidy, in order to make a charitable donation. The person that makes no donation has more money after taxes than the person who makes a donation.

The 2011 tax bill is meant to be an incentive to help people buy, hire and expand. It's been government practice to achieve public policy goals through the use of tax changes. That's what I call incentive.

THEY ARE AT IT AGAIN

The New York Times is at it again. In an editorial written by Paul Krugman titled "Wall Street Whitewash" Mr. Krugman criticizes Spencer Bachus, the incoming G.O.P. chairman of the White House Financial Services Committee for saying that "Washington and the regulators are there to serve the banks."

I'm sure Mr. Bachus meant that there are millions of people employed at banks and in effect meant they are there to serve the working people of America, in this case the ones that work at banks.

His comments didn't suggest anything immoral, illegal, or nefarious. It certainly didn't mean there should be no regulation. It just plain old means the New York Times should stop letting it's editorial writers interpret things in such a way that they are trouble-making, out of context and not the underlying meaning of what the Chairman meant to say.

Senator Bachus should be applauded and hopefully he will respond and put these statements into meaningful context.

THE GOVERNMENT DOES IT AGAIN

Yesterday, without naming the people, their political affiliations or their educational background, the government released a report concerning the electronic payment companies.

The immediate result was a $15 Billion dollar reduction in the value of the major companies in that business. Those major companies are a part of the critical infrastructure of the entire business payment system.

To top it all off, they are American companies, not Chinese or made somewhere else. $15 Billion dollars was taken out of the value of the institutional funds, pensions funds and other similar fund values.

Why are the people of the government not held accountable for, at the very least, their atrocious mishandling of the public relation aspects of their suggestions?

The whole idea that this is a release from the Federal Reserve is just plain wrong. This is a release written by some people who probably didn't think about the impact of their process on America's savings.

In theory, someone will be responsible to make up for the $15 Billion dollars, especially in the pension funds.

There's something wrong somewhere.

IS THE ESTATE TAX REALLY AN ATTACK ON SUCCESS?

The New York Times is at it again. They published an editorial titled "Give Up On The Estate Tax" written by Ray Madoff. I thought it was worthy of funny commentary, critical review, etc. It starts off with the words congressional democrats but there are no names mentioned. Ms. Madoff then offers the brilliant insight to drop the estate tax and then just tax it as income to the recipient.

Ms. Madoff quotes Justice Brandeis as saying concentrated wealth and democracy can't go hand in hand. I believe there is no such thing as concentration of wealth. For the third time in my blogs I repeat that wealth is either spent or invested, it goes round and round in the system. The only problem with this country is that there isn't enough wealth. Think about that and analyze it.

She makes the statement that our greater dispersal of wealth was responsible for a strong middle class with absolutely no backup for that claim. It just doesn't matter how much wealth anyone owns, as long as they keep it flowing through the economy. Asking the question, what level of taxes is appropriate for heirs is like asking the question how much is a professor at Boston College Law School worth? (Ray D. Mafoff is a professor at Boston College Law School). There is a heck of alot of lawyers in this country. Maybe there are too many people being taught law and not enough people being taught how to make things. Why do people like Ms. Madoff talk about nothing but tax, tax, tax?

Here's a new idea. How about imposing an education tax. For example, someone like Ms. Madoff has all this education, that means she has an advantage over other people. Therefore, for every upgrade you get in education, your tax rate should go up, despite your income level. We can call it the "EDUCATION TAX" which can serve to even the playing field.

How about the person who spends all their money and has no estate and the other saves all their money and has an estate - get the point? The estate tax is no significant percentage of total government tax receipts. What motivates so many people to be so concerned about collecting that money? A lot of people write a lot of things about what should happen to other people's money. From my experience, most of these people aren't too charitable.

By the way, I decided to watch Michael Moore's film on Capitalism. It's just plain wrong throughout almost it's entire length and is out of context to what really has happened to this country.