Forbes ® Greatest Investing Stories Forbes ® Greatest Investing Stories Richard Phalon John Wiley & Sons, Inc. New York • Chichester • Weinheim • Brisbane • Singapore • Toronto Copyright © 2001 by Forbes Inc. All rights reserved. Forbes is a registered trademark of Forbes Inc. Its use is pursuant to a license agreement with Forbes Inc. Published by John Wiley & Sons, Inc. No part of this publication may be reproduced, stored in a retrieval system or transmitted in any form or by any means, electronic, mechanical, photocopying, recording, scanning, or otherwise, except as permitted under Sections 107 or 108 of the 1976 United States Copyright Act, without either the prior written permis- sion of the Publisher, or authorization through payment of the appropriate per- copy fee to the Copyright Clearance Center, 222 Rosewood Drive, Danvers, MA 01923, (978) 750-8400, fax (978) 750-4744. 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Rowe Price, Baltimore, MD; Page 74: Courtesy Janus, Denver, CO; Page 96: ©Bettman/Corbis; Page 126: ©John Abbott; Page 148: Brown Brothers, Sterling, PA; Page 174: Courtesy Muriel Siebert & Co., Inc.; Page 190: Courtesy Baker Library, Harvard Business School, Boston, MA; Page 206: ©Jim Bush This title is also available in print as ISBN 0-471-35624-7. Some content that appears in the print version of this book may not be available in this electronic edition. For more information about Wiley products, visit our web site at www.Wiley.com. For Nancy Hoepli-Phalon CONTENTS Why Investors Should Know Their History ix by James W. Michaels 1. Value Avatar Benjamin Graham xiv 2. Value with a Difference Marty Whitman 26 3. Growth Avatar T. Rowe Price 50 4. Extending the Growth Culture Tom Bailey 72 5. Swindle of the Century Anthony DeAngelis 94 6. Investor Beware A Cautionary Tale 124 7. The Richest Woman in the World Hetty Green 146 8. Visit with a Billionairess Muriel Siebert 172 9. The Venture Capital’s Capitalist Georges Doriot 188 10. A Venture of Angels Paul Bandrowski 204 A Note on Sources 221 Acknowledgments 225 Index 227 VII WHY INVESTORS SHOULD KNOW THEIR HISTORY “History doesn’t repeat,” said Mark Twain, “but it sure does rhyme.” Sam Clemens wasn’t talking about Wall Street in particular but he could have been—after all, he was an active, if not very successful, investor. At any rate, Twain’s aphorism fits the stock market nicely. On Wall Street the dates, the industries, the personalities, and the names change, but the big themes remain constant. That’s what this book is about: the persistence in finance of certain patterns through changing times. The author of this book, Dick Phalon, has covered The Street for almost a half century for some of the nation’s leading periodicals. To create a sort of tableau vivant for the edification of investors, he has selected a rich cast of characters, some living, some dead. This is not a history of Wall Street in the twentieth century. It is an impressionistic and affectionate job of storytelling that instructs as it amuses. The sto- ries gain insight from the fact that Phalon burned shoe leather covering several of the stories back when they were breaking news. He has met many of the actors. He witnessed a good deal of the drama close up. As any such book must, this one includes Ben Graham, Warren Buffett’s respected teacher. Graham took a rather cynical view of Wall Street. Paraphrasing the famous put-down of the French Bourbon monarchs, Graham once said: “Wall Street people learn nothing and forget everything.” Graham died more than 30 years ago, but I remem- bered those words when the tech-heavy NASDAQ Index was pushing toward 5000. Many of The Street’s most respected houses were floating sales pitches for hot tech stocks, issues that were already levitating with- out visible support from profits and/or assets or much in the way of sales. How Bourbon that was! How right Graham was neither for the IX x FORBES GREATEST INVESTING STORIES first time nor the last. Alas, Wall Street served investors badly because it failed to remind them how disastrously such levitations always end. End this one did. The new millennium had scarcely begun when many of the brokerage community’s darlings shed 90 percent and more of their price, amidst margin calls and deflated reputations. The Street’s susceptibility to obtuse amnesia was demonstrated once more in what can only be described as a classic crash that took the tech-heavy NAS- DAQ Index down 50 percent. Classical scholar, womanizer, arbitrageur, and investment philoso- pher, Ben Graham comes to life in these pages as we realize how rele- vant his old ideas are in today’s “New Economy.” In a subsequent chapter, Phalon introduces us to Marty Whitman, who applies with great skill Ben Graham’s principles to investing in the twenty-first century. Had The Street, collectively, been less like the Bourbon Kings, it would have remembered what one of the inventors of growth stock investing, T. Rowe Price, said about growth stocks: “Buy them at an early stage of growth, stick with them as long as earnings are demon- strably on the rise, sell when the growth cycle begins to mature.” Somehow all those tech stock fanatics forgot the “sell” side of T. Rowe Price’s advice. That’s why they were blindsided when PC sales “sud- denly” slowed and Lucent revealed that it had been—if not cooking the books, at least heating them up quite a bit. Price certainly wouldn’t have been blindsided by the tech stock disaster. The turn-of-the-twenty-first century tech favorites had their match in the Nifty Fifty growth stocks of the late 1960s and early 1970s. Price correctly identified many of these as true growth stocks but by the time the Nifties collapsed in 1974—some losing 90 percent and more—Price was well out of them. He saw correctly that the kind of stocks he liked to own had become too expensive. The time to sow was past. It was time to reap. A few years before the end came, Price was predicting “a bear market of indetermi- nate extent and duration.” Was he ever right. That bear market didn’t end until the Dow Industrials were down 45 percent from their former highs. The bull market didn’t resume for a full decade. In yet another chapter, Phalon visits the Janus Mutual Fund people. For a long time, Tom Bailey and his sidekicks at Janus were careful not to overpay for growth. They were finicky about assuring themselves that the growth was going to continue. But they overplayed their hand WHY INVESTORS SHOULD KNOW THEIR HISTORY xi amidst a flood of new money attracted by their great success in the ear- lier stages of the tech bull market. Cendant sort of rhymes with Lucent. And well it might. Lucent fell through the floor in 2000, shedding nearly 85 percent of its price, a thoroughbred that became a dog. Out went its CEO and down, down, down went its stock after it became apparent that the company had seriously overstated its earnings. The Street was pretty much taken by surprise. This was a great company. And so was Cendant, The Street once thought. In chronicling that onetime Wall Street darling’s fall from grace, Phalon reminds us how easy it is, CPAs and the SEC notwith- standing, for unscrupulous or frightened managers to bend the num- bers to their wills. The book abounds in such useful lessons. Should you always sell stocks on bad news? Those who believe in momentum investing would usually say “yes.” But history shows that bad news often creates terrific buying opportunities. Just ask Warren Buffett. He made one of his ear- liest coups by taking a big position at American Express at a time when many professionals feared the company was heading for Chapter XI. Phalon tells that story in intriguing detail. Hetty Green, “the Witch of Wall Street,” was generally loathed in her time as Warren Buffett is esteemed in our time, but in some ways they thought alike. Hetty prided herself on dressing and living frugally and her contempt for fashion extended to stocks. The less fashionable the better. “When I see a thing going cheap because no one wants it,” she told an interviewer, “I buy a lot of it and tuck it away. Then when the time comes, they have to hunt me up and pay me a good price for my holdings.” However, like Buffett, Green was only interested in unfashionable merchandise of good quality. She simply understood that “price” and “value” aren’t the same thing in the short run. How do you tell the difference between price and value? “Before deciding on an investment I seek out every kind of information about it,” Hetty Green liked to say. If that sounds trite, ask yourself: How carefully did I research all the stocks I own? Talking about doing your homework, Georges Doriot dealt in com- panies where there wasn’t any of the kind of value that Green and Graham sought out.