One should fall in love with ideas, with people, or with idealism based on the possibilities that exist in this adventuresome world. The last thing to fall in love with is a particular security. It is, after all, just a sheet of paper indicating a part ownership in a corporation. Its use is purely mercenary. I learned early in my career to be skeptical and flexible, not stubborn, about a stock. I also learned to take quick, small losses rather than to get emotionally involved in a stock that was dragging me down. Some people have been extremely fortunate in the past by falling in love with something that went their way. That is not necessarily proof it will always be that way. In other words, it’s alright to be in love with a security- until it gets overvalued. Then let somebody else fall in love.
Topics of the week
What first led me to Wall Street was a desire to make money so I could buy great art and support artists. What I didn’t know when I started is that working on Wall Street can be a fascinating art in itself and one for which I was almost immediately suited.
— Roy Neuberger
Frederik Gieschen talks about So Far, So Good — The First 94 Years, the autobiography of Roy Neuberger (co-founder of asset manager Neuberger Berman). Neuberger wrote the book in 1997, at 94 years old, while he was still working. He’d arrived on Wall Street on the eve of the crash in 1929 and was one of very few people to experience the market’s full arc from 1929 to 2008. He passed away in 2010, at age 107.
Frederik Gieschen:
Honestly, more than investment advice I was hoping for his formula for longevity. Aside from genes, what jumped out at me was his daily exercise, doing work he enjoyed, a passion that led to a rich social life, a lasting marriage, an emphasis on family, and a daily morning walk with friends.
The book is an autobiography and not an investment how-to manual. It features Neuberger’s passion for art just as prominently as his interest in the market. That said, it contains some enduring ideas about markets and life. And it’s worth pondering what someone with 68 years of experience in markets considers important: Neuberger wanted to pass on a collection of core principles, not formulas. He wanted to teach us how to think, not what specifically to do.
Neuberger came from a wealthy family and lost both his parents at a young age. He spent some time working at a department store and traveled to Europe where he discovered his love for art. He was enrolled at NYU but dropped out to work without ever getting a degree.
The book illustrates how different Wall Street was at the time. Neuberger showed up at a brokerage firm and immediately got a job as a runner delivering trade orders. He climbed the ranks and became a broker. He also had a head start by managing the accounts of wealthy relatives. Neuberger was very successful (Neuberger Berman today manages some $460bn) but it’s not a rags to riches story.
“I chose Wall Street because in the 1920s, that’s where the money was.”
Neuberger was devoted to the game of markets but he placed his work in service of his true love: art.
Some people waste their lives in the constant pursuit of great wealth. As a commodity, let’s face it, money doesn’t rate as high as good health and it certainly isn’t up there with great art.
Money in and of itself has never really interested me. The driving passions of my career and my life have been the art of trading and the support of art. Money, of course, has been the by-product of trading that enabled me to purchase great art and support culture.
After reading a biography of van Gogh, who struggled to make a living during his lifetime, Neuberger dedicated himself to collecting the work of living artists. He never sold but rather donated countless works over the course of his life.
Neuberger was always clear about the higher purpose of his work on Wall Street. Accumulating wealth was never an end in itself.
I wanted to be able to buy the works of living artists, to support their work financially. … In February 1929, after returning to Paris from Berlin and Vienna, I began to make arrangements to come home to New York, determined to enter an arena about which I knew absolutely nothing: Wall Street.
Everyone knows the reply by the celebrated safecracker Willie Sutton to the question: Why do you rob banks? “Because,” he said, “that’s where the money is.” I chose Wall Street because in the 1920s, that’s where the money was.
1929 and Radio Corporation of America
It’s funny how our first experiences with the market can shape our entire careers. Neuberger arrived on the street in 1929, during the final mad days of the bubble. One of his first big trades was to short the market darling, Radio Corporation of America or RCA. The stock was already weakening, as was the entire market, and the valuation made no sense to him.
The most actively traded stock on Wall Street at that time was Radio Corporation of America referred to as “Radio”), which evolved into RCA as we know it to-day. I studied that company more than any other. I really learned the ins and outs on a lot of different levels.
Radio Corporation of America reached a high of 574. Then it split 5 for 1. I set out to discover why the stock was so high and so active. Nothing seemed to justify the seemingly excessive price. I asked older, more experienced investors, but I received no definitive answers. People explained that we were entering the radio age-simple as that.
Neuberger shorted RCA stock worth 100% of his portfolio. It’s hard to overstate how lucky he got here. Others had shorted Radio during the bull market and been steamrolled. When the market crashed, RCA collapsed and protected Neuberger’s portfolio while those around him lost their fortunes.
This moment defined his career: Neuberger always considered himself a trader and kept hedging to protect himself — though he explicitly did not recommend shorting to his readers because one needs “a stubborn, perverse, and patient temperament.”
In many ways, the Panic shaped my current approach to the market: I am prematurely bearish when the market experiences a prolonged ascent, when everybody is pleased because they’re growing richer.
Margin leverage had been a key driver inflating the bubble and when investors around Neuberger refused to protect themselves, they could lose everything in the collapse. Neuberger drew his own conclusions:
In order to do well, you must be able to learn from the past. And you need to look at things objectively. I learned to be absolutely pragmatic and realistic during the prolonged bear market that ensued after the Panic.
I think one of the biggest problems of the 1920s was the systematic refusal by so many people to be realists. They wanted the boom to continue forever, so they failed to notice how much of it was fleeting.
Many businesses appeared to be in better shape than they actually were. Examples of failure were everywhere: The textile industry suffered a huge crash in 1924; Florida was the site of a major real estate panic in 1925 and did not recover for many years. But people refused to see the warning signs.
Simply surviving and persisting in the business proved important as well. As brokers around him left the business, Neuberger picked up their accounts.
Trader or investor?
Neuberger also reminded me of Irving Kahn, another survivor of the crash and Wall Street old-timer, who lived to be 109. They even graduated from the same high school. While Kahn was a Graham and Dodd value disciple, his style was eclectic.
“It’s impossible to reverse-engineer Irving’s investment process,” says Carl Schecter, the head of risk-arbitrage trading at Nomura Securities in New York and a long-time Kahn Brothers client. “It’s an idiosyncratic mix of top-down economic insight and bottom-up financial analysis.”
The same seems true of Neuberger who doesn’t quite fit one mold. On the one hand, he had a trader’s mindset. With his art he was happy to buy and hold forever. By contrast, “getting married to a stock can prove disastrous.”
He compared his trading style to his “youthful addiction to tennis.” You had to do your homework and be prepared to act with speed when the market presented opportunities.
You have to make fast decisions. You can’t wait to think about it overnight.
On the other hand, Neuberger discussed the importance of finding great companies that could do well over long periods of time. Unfortunately, he doesn’t offer much specific advice.
The criteria for purchase of any substantial amount of stock should remain on solid grounds that stand the test of time: (1) a good product; (2) a necessary product; (3) honest, effective management; and (4) honest reporting.
True, but not particularly helpful. Neuberger called missing Coca-Cola his ‘biggest mistake’.
Then came the biggest mistake I’ve ever made on Wall Street–a lost opportunity. I misdiagnosed the potential of a great corporation-Coca-Cola because I knew it had stiff competition from Pepsi and other soft drinks. I simply didn’t take seriously the proposition that this was a great growth company like AT&T. I am pointing out humbly that it is impossible to be right all the time on Wall Street. My perspectives on the potential of Coca-Cola were misguided, and I never should have sold it.
But he doesn’t elaborate on his analysis of Coca-Cola or other companies and business models. And holding a great company to let it compound is not consistent with one of his other principles, the stop-loss or “10%” rule:
You can’t always win on Wall Street, so you have to learn to cut losses quickly and move on gracefully. At one point, I was bullish on International Harvester.
Right after I bought it, unfortunately, it began going down, down, down and I realized I had made a mistake. I sold it the same day, lucky to take a small, quick drop rather than a big, drawn-out loss.
Getting married to a stock can prove disastrous. The 10 percent rule is sensible: If your stock starts falling, take a loss of 10 percent and start again. I take this idea very seriously, and it’s worked quite well for me. The flip side of that rule is not to be greedy with profits. Never try to guess the top.
He may have picked up this 10% stop loss rule from Gerald Loeb’s The Battle for Investment Survival, a popular post-crash trading book. “I’m inclined to say that when a new investment has shrunk by 10%, it is time to stop, look and listen,” Loeb wrote. Buy and hold seemed dead in the painful bear market that followed 1929.
My sense was that Neuberger, like other market veterans, operated with multiple mental models. He could hold a compounder like AT&T for the long run but also be a nimble trader in many other securities.
He used the stop-loss rule to protect himself from behavioral biases. Neuberger had observed too many smart people in denial in 1929. The stop-loss was a way to protect himself from that fate.
Remember how Richard Whitney watched his stocks decline in 1929 until he was wiped out? He failed to follow the 10 percent rule: If the stock is on the way down, take your loss at the 10 percent level. This rule has helped me many times. Using the money elsewhere will usually be more fruitful than maintaining a mistaken position.
One of the enduring lessons of Neuberger’s life is that nobody is bigger than the market. Ego can be absolutely deadly.
I received a real education into seeing things as they are, not as one might wish they were. I learned that the market has a rhythm of its own, like the waves of the ocean. Every few months, there is a change. Sometimes a long-term investor can ride out the ups and downs. But I’m a trader. I have to be closely attuned to the changing waves. It’s often a choppy voyage.
What we can learn from someone who survived in markets for 68 years is to be flexible, to adapt, to not let ourselves get emotional.
One should fall in love with ideas, with people, or with idealism based on the possibilities that exist in this adventuresome world. The last thing to fall in love with is a particular security. It is, after all, just a sheet of paper indicating a part ownership in a corporation. Its use is purely mercenary.
I learned early in my career to be skeptical and flexible, not stubborn, about a stock. I also learned to take quick, small losses rather than to get emotionally involved in a stock that was dragging me down.
Some people have been extremely fortunate in the past by falling in love with something that went their way. That is not necessarily proof it will always be that way. In other words, it’s alright to be in love with a security- until it gets overvalued. Then let somebody else fall in love.
A work of art
Neuberger started one of the first “no-load” mutual funds (no upfront sales commission), a novel idea at the time. Just like he was early in his focus on contemporary artists, Neuberger liked the idea of breaking with convention:
As an idealist, I don’t generally like to accept what is called conventional wisdom. I had great respect for my elders, but I learned early that everything practiced by my contemporaries was not necessarily sound.
Unsurprisingly, he considered the fund his enduring contribution to the world (like Buffett with Berkshire as his canvas).
The book is not a must-read for investors but I enjoyed it, mainly because of Neuberger’s passion, character, and the sheer magnitude of perspective and life experience he brought to the table. Its enduring message is that to master the market, you must master yourself. And if your autobiography is about a lot more than markets, that’s an indication of a rich life.
Neuberger himself pointed out not to copy what worked for him on Wall Street, that “wonderful, exciting game.” “If you do, you will go crazy,” he warns. “You have to dig for yourself, just as I do.”
It is invigorating for me to use my brain to analyze what is going on. If I have taught you how to use your brain in a different way, then I will have fulfilled the first mission of a teacher — to make oneself expendable. And you will have learned the most important lesson — how to learn.
Links to consider
- Using ETFs to Conceal Insider Trading
- Raghav Kapoor of Smartkarma on what he learnt investing in biotech
- George Soros’ Theory of Reflexivity
- The Great Gatsby of Gold Took Their Millions—and Vanished
- Geometric vs Arithmetic Mean In The Wild
- HSBC Head of Asia FX research Joey Chew on flows into Asia (16 mins)
- Segra’s Adam Rodman on the global uranium market (52 mins)
- The Best Tax System on Earth
- Europe’s unicorn investors
- Daniel Crosby talks with Tom Howard about behavioral finance vs. behavioral investing
- Peter Lazaroff talks with Dasarte Yarnway about the importance of diversity in financial services and how to increase it
Infographic
Quotes
Books that caught our attention this week
The Making of the Modern Philippines: Pieces of a Jigsaw State
by Phillip Bowring
With a fractured geography and complex identity, The Philippines is an eclectic and unique mix of culture, environment, people and politics. Known mostly for natural disasters, migrant labour and dictatorial presidents, in this book Philip Bowing shows how it is much, much more. Deftly navigating the history of this populous island republic, The Making of the Modern Philippines traces its history to define and explain its position in the modern world. Looking past the headlines of volcanoes, earthquakes and violence, it asks why has the Filipino economy lagged behind its neighbours, explores the importance of its location in geopolitics, and investigates how its deep-rooted Catholicism clashes with the Islamic consciousness of the region in which it sits. Taking the history of the Philippines from its pre-colonial era, through its Spanish and American occupations and up to the modern day, it unravels the complex politics, culture, peoples and economy of this rich and unique nation. Engaging with challenges the Filipino people face today such as federalism, revolution, Mindanao, the diaspora, capitalism and relations with China, it rediscovers the struggles, culture and history of its past to understand the present.
Small Isn’t Beautiful
by Trevor Latimer
“Eat local” has become a popular marketing slogan in recent years, based on the idea that food grown or raised nearby is better for you and friendlier to the environment than similar products shipped in from many miles away. That slogan reflects a broader worldview suggesting that everything local, including government and knowledge, is better than what originates somewhere else. Small Isn’t Beautiful acknowledges that some things that are local are good, but denies that what’s local is always or even often better than what’s far away. “Localism” is based on an “undeserved aura of respectability, virtue, and good sense” and can produce results that are misguided or even dangerous. Particularly when it comes to public policies, decisions made at the local level are rarely superior and are sometimes unjust. Small Isn’t Beautiful exposes the supposed “virtue” of localism as a hodgepodge of weak arguments and misleading hunches. Trevor Latimer’s engagingly written and provocative book will appeal to all readers who want to understand localism beyond slogans and marketing.
How Big Things Get Done: The Surprising Factors That Determine the Fate of Every Project, from Home Renovations to Space Exploration and Everything In Between
by Bent Flyvbjerg, Dan Gardner
Nothing is more inspiring than a big vision that becomes a triumphant, new reality. Think of how the Empire State Building went from a sketch to the jewel of New York’s skyline in twenty-one months, or how Apple’s iPod went from a project with a single employee to a product launch in eleven months. These are wonderful stories. But most of the time big visions turn into nightmares. Remember Boston’s “Big Dig”? Almost every sizeable city in the world has such a fiasco in its backyard. In fact, no less than 92% of megaprojects come in over budget or over schedule, or both. The cost of California’s high-speed rail project soared from $33 billion to $100 billon—and won’t even go where promised. More modest endeavors, whether launching a small business, organizing a conference, or just finishing a work project on time, also commonly fail. Why? Understanding what distinguishes the triumphs from the failures has been the life’s work of Oxford professor Bent Flyvbjerg, dubbed “the world’s leading megaproject expert.” In How Big Things Get Done, he identifies the errors in judgment and decision-making that lead projects, both big and small, to fail, and the research-based principles that will make you succeed with yours.
Video of the week
Vanguard – The 8 Trillion Dollar Financial Empire | 2023 Documentary
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Getting Rich Is Super Easy | Jeff Bezos
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The Fake Chip Scourge
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The Netherlands is Controlling China, And Trying To Takeover The World Economy…
