Inevitably, some people are more predisposed to your firm than others. It
is this difference that allows us to detect an NPS amongst customers.
Similarly, the idea of an Influencer Promoter Score depends on the spread
of disposition across a market’s influencers. It begs the question: if we
have detractors how do we turn them into promoters for (or at least
neutral towards) the firm?
Some firms we know label influencers as detractors or sceptics: influencers
that are fixed in their hostility towards their firm. Nonsense.
Influencers start out neutral. Always. They don’t care whether you are
better or worse than your rivals. This is because influencers don’t buy from
you. Even those influencers that have commercial relationships with you
(e.g. systems integrators, resellers) only do so because it serves their selfinterest.
If you fail to deliver suitable margin they’ll drop you without a
second thought. It is further supported by the efficacy of the Delphi
approach to forecasting.
Delphi uses a panel of experts to reach a consensus
forecast, proven to be a reliable indicator of future outcomes
The first step is to determine whether your perception of detractors is
accurate. Some influencers appear sceptical in an interview situation, then
actively promote you once they’ve digested your news and discussed it
with others. For those influencers that publish their thoughts it’s fairly easy
to determine their favourability, but for other types of influencer it’s much
harder. You have to dig deeper into the DME to find out more.
So why would an influencer become a detractor? Are they naturally
sceptical about any new initiative? Have you given them cause to doubt
your sincerity? Have you offended (or, worse, ignored) them in the past?
The biggest reason for an influencer becoming a detractor is that they
haven’t been marketed to appropriately. This means that they’ve probably
been sent press releases (about you) rather than been consulted on
relevant issues (about them).
Occasionally, an influencer will have an allegiance to, or be, a competitor.
In fact, it’s rare for a competitor to be an active and outspoken
detractor these days, but it does happen. It’s always worthwhile marketing
to a competitor or a channel partner: if they have to insult someone let it
not be your firm. And channel players are notoriously promiscuous,
frequently changing their allegiances. With independent influencers you
will sometime encounter an intellectual disagreement, where they just
don’t agree with your strategy or viewpoint. These can be the most
difficult situations to deal with because influencers can be intransigent
in their views. And then there are the petty reasons such as professional
jealousy and envy.
There are three strategies for dealing with detractors. You can convert
them, surround them with other influencers, thereby neutralising them, or
you can ignore them.
Converting influencers is all about practising influencer marketing. If
you follow the steps that we have outlined throughout this book we’re
confident thatmost detractors will come around. They want some TLC, and
influencermarketing is an idealway to deliver it. Aswe said, themost likely
reason for thembeing detractors in the first place is that youweremarketing
to them badly or not at all. Change this, and you’ll change the influencer.
You’ll remember that influencers cluster together and that they get a lot
of their influence from each other.
Influencers love to influence, and they’ll try to influence each other. Surrounding detractors with neutral
and positive influencers means that some of the positive influence should
rub off onto the detractors. So creating environments (forums, influencer
meetings, even blogs) in which influencers can interact are very effective.
This only works if you have more promoters than detractors, otherwise the
opposite effect may occur. You also have to make sure that you follow up
any group interaction with 1-to-1 marketing, to reinforce the positive
messages relayed from the promoting influencers.
Ignoring influencers is a risky strategy, but it can be effective in some
cases. What we’re actually recommending is that you pretend to ignore the
influencer, by excluding them from your overt attention. But you keep
very close to the influencer to assess their actions and responses. Again,
what you’re trying to do is to create opportunities for influencers to meet
each other, and if your detractor is excluded from these occasions it can
soften their stance towards you.
It could, of course, have the opposite effect, which is why we say it’s a risky approach. This technique works best with influencers further down the order of priority – don’t try it with
your top 20 influencers. Once you detect some movement in their attitude,
swiftly welcome them into the community again. Influencers hate to be
isolated.
Wednesday, July 29, 2009
Why is influencer marketing different from WOM? :Business Strategy /Financial Advisors
WOM is an extraordinary mechanism that communicates marketing messages
throughout a community. To paraphrase a popular slogan from the
1970s, WOM reaches the parts other marketing tactics cannot reach.
There are few marketing approaches that can have had as much discussion
in the twenty-first century as WOM. The ideas that underpin word of
mouth are communicated best byWOM tactics, so that WOM is an instance
of itself. This has been aided by numerous books on the subject. The Tipping
Point features connectors, people that know a lot of other people and
communicate ideas.
Seth Godin’s Unleashing the Ideavirus explores how
and why ideas spread. The Anatomy of Buzz by Emanuel Rosen charted
the mechanics of how to create and sustain WOM. Justin Kirby and
Paul Marsden edited Connected Marketing, a collection of solutions and
approaches based on practitioner experience. And Naked Conversations by
Robert Scoble and Shel Israel noted the migration of WOM from the real
world to the internet through blogs. The definitive guide to implementing
WOM is Andy Sernovitz’s Word of Mouth Marketing.1
WOMis immensely powerful. Arguably it has created the most powerful
brands of today, that of Google. Starbucks, Ikea, Nokia, Prada, Skype and
Tamagotchi were all built predominantly or exclusively on WOM. In many
ways it sits next door to, but is different from, influencer marketing.
Some problems with WOM
Much of the common perception of WOM is that it is spread evenly. The
question that marketers usually ask is, how to get their ideas or messages to
spread to their targetmarket. Emphasis in the answer focuses on the substance
of the message. The perceived wisdom is: create a viral message and watch it
spread.Themajority of activity, therefore, inWOMis inthecreation ofmessages
that are intentionally viral in nature. The big problem here is that it is difficult to
predict which messages eventually do become viral.Whowould have thought
that Linerider would spread like wildfire? Or a yeti clubbing a penguin across a
snowy landscape? (If you have to ask, you should be more connected . . . .)
There is another aspect toWOMthat is regarded universally as a positive
attribute – that it’s good for messages to spread. Spread like what? Oil
spreads on water until the layer of oil is a molecule thick (given enough
space). WD40 spreads everywhere, into every nook and cranny, but that
includes places you don’t want it. Why do you want your message everywhere?
This is traditional marketing mindset. Surely it’s better to target
your WOM efforts at an appropriate audience.
It strikes us that today’s marketers want to useWOMin the next 50 years
like traditional marketers used advertising in the previous 50.WOM, they
think, hits the mass market and is the ideal replacement medium to combat
the diminishing impact of TV and print ads. Those that think this way have
missed the point of WOM.
Consider spam e-mail – you receive something irrelevant from someone
you don’t know. Whoosh – it’s deleted without you even reading it.
We even use automated tools to filter the spam out before we see it.
Much of the generated WOM is the same as spam. It goes from the wrong
people to the wrong people. Most marketers don’t mind this, because
WOMis free at the point of distribution, just like spam and advertising. So
just keep sending it out and some of it will stick.
What most marketers actually want is a message that spreads like
crunchy peanut butter – it spreads, just, but it stays within a defined
boundary (the slice of bread). You don’t want it running down your arm.
Importantly, there are small areas with more impact (the crunchy bits) that
influence the surrounding larger smooth parts. It’s the crunchy bits that
give the whole experience texture and flavour. Smooth peanut butter is
bland, suitable only for the youngest of kids.
It matters whose mouth the words come from
This chapter is all about the inter-relationship between WOM and influencer
marketing. It is influenced by a single idea that appeared in Seth Godin’s
Purple Cow. Seth’s idea was that it is useless to advertise to anyone except
interested sneezers (connectors) with influence. As we say in Chapter 2,
advertising doesn’t work anymore. Actually, that’s not quite true: it does
work on interested people, those that happen to be (a) interested in what
you’re selling, and (b) likely to spread your message to others in their WOM
community. Unfortunately, the likelihood that you find someone with both of
these attributes is tiny, which is why advertising on the whole doesn’t work.
But imagine if you targeted only those people that were both listening
and interested. More, that they would sneeze the message to tell other
people, their friends or work colleagues or associates. This group doesn’t
listen to you, but they listen to the person that’s initially interested.
Most marketing messages are blocked by a wall of indifference
They receive too many messages, they all sound the same,
and even if they were heard and different, they wouldn’t be believed. People
rarely buy just because they are marketed to. The marketing message is
carried, corroborated, enhanced and personalised through influential WOM.
WOM needs sneezers with influence. WOM carried by people other than
influencers is just noise.
People that try to carry WOM inappropriately,
because they don’t have sufficient influence, end up shouting at or boring
their audience. In other words, it matters whose mouth the words come from.
Blogs are an archetype of this sort of WOM. Most blogs are just background
noise. Others try to gain attention by shouting, making controversial,
aggressive or offensive remarks just to get noticed. Only a few blogs carry
influence in any market, and in some markets there are zero influential blogs.
Influencer marketing takes Seth Godin’s idea of advertising to influential
sneezers, and extends it to all forms of marketing. Influencer marketing
is about changing a scatter-shot approach into a rifle-shot one. You
target specific influencers, not generic prospect customers.
WOM, by its nature is difficult to control. Once the message is out there,
there is no stopping it. It can die quickly, pervade the market or go where it
shouldn’t.
Dangers of WOM – the talker can get it wrong
Sometime WOM gets it wrong. Often these end up as harmless urban
myths. But not always, with serious consequences. 3Com is a case in point.
In 2000, suffering from fierce competition with Cisco, 3Com exited its
high-end router business, leaving many of its larger corporate customers
high and dry. Seven years later, 3Com is a different company. There are
new people in charge, the product set is strong and focused, and few
within the company remember the bad old days of 2000. Unfortunately,
negative WOM still exists. 3Com’s biggest sales objection today is: ‘You
screwed us in 2000 and we won’t let you do it again!’
The problem with WOM is that the combination of it being wrong and
out of control is explosive. You have a ton of clearing up to do, with the
prospect that you’ll never quite scrub the whole market clean. Unless you
use influencers. Because influencers have the inside track to decisionmakers
they can carry a corrective message. ‘It’s okay to buy 3Com’.
If you are using WOM as a marketing tactic you must identify the
relevant influencers. There are two main reasons for this:
& Influencers optimise the message. Influencers talk to decision-makers –
that’s what our definition of influencers means. So, again by definition,
influencers take messages to decision-makers. You therefore have an
optimised route to your target market.
& Influencers amplify the message. A message carried by an influencer is
reinforced just by the fact that it’s an influencer doing the communicating.
If the influencer says so, it must be true. So any WOM that
traces its origins back to an influencer carries more weight and impact
than one that can’t be traced (or is traced to someone with little
influence).
WOM is ideally suited to the world of influence. This is because WOM
is a primary mechanism for exerting influence. Recommendations,
experiences, gossip and stories from the field are all types of WOM,
and all related by various influencer types. Some of this communication
is formal and overt, published in books, analyst reports, journalistic
articles and blogs. But much of it, up to 80 per cent we estimate, happens
in closed circles. These can be private meetings, invitation-only events,
on the golf course, in lifts, over lunch and so on. Much of the influence of
consultants and third party advisors to decision-makers comes not in the
form of specific strategic or project recommendations, but by WOM,
whispered in the ear of the decision-maker. It is never published but
sways the decision totally. The WOM mantra ‘Nobody ever got fired for
buying IBM’ is the classic example of this, however out-of-date. It’s
informal, unprovable and possibly never even accurate. But it carried
enormous weight in the 1970s and 1980s.
throughout a community. To paraphrase a popular slogan from the
1970s, WOM reaches the parts other marketing tactics cannot reach.
There are few marketing approaches that can have had as much discussion
in the twenty-first century as WOM. The ideas that underpin word of
mouth are communicated best byWOM tactics, so that WOM is an instance
of itself. This has been aided by numerous books on the subject. The Tipping
Point features connectors, people that know a lot of other people and
communicate ideas.
Seth Godin’s Unleashing the Ideavirus explores how
and why ideas spread. The Anatomy of Buzz by Emanuel Rosen charted
the mechanics of how to create and sustain WOM. Justin Kirby and
Paul Marsden edited Connected Marketing, a collection of solutions and
approaches based on practitioner experience. And Naked Conversations by
Robert Scoble and Shel Israel noted the migration of WOM from the real
world to the internet through blogs. The definitive guide to implementing
WOM is Andy Sernovitz’s Word of Mouth Marketing.1
WOMis immensely powerful. Arguably it has created the most powerful
brands of today, that of Google. Starbucks, Ikea, Nokia, Prada, Skype and
Tamagotchi were all built predominantly or exclusively on WOM. In many
ways it sits next door to, but is different from, influencer marketing.
Some problems with WOM
Much of the common perception of WOM is that it is spread evenly. The
question that marketers usually ask is, how to get their ideas or messages to
spread to their targetmarket. Emphasis in the answer focuses on the substance
of the message. The perceived wisdom is: create a viral message and watch it
spread.Themajority of activity, therefore, inWOMis inthecreation ofmessages
that are intentionally viral in nature. The big problem here is that it is difficult to
predict which messages eventually do become viral.Whowould have thought
that Linerider would spread like wildfire? Or a yeti clubbing a penguin across a
snowy landscape? (If you have to ask, you should be more connected . . . .)
There is another aspect toWOMthat is regarded universally as a positive
attribute – that it’s good for messages to spread. Spread like what? Oil
spreads on water until the layer of oil is a molecule thick (given enough
space). WD40 spreads everywhere, into every nook and cranny, but that
includes places you don’t want it. Why do you want your message everywhere?
This is traditional marketing mindset. Surely it’s better to target
your WOM efforts at an appropriate audience.
It strikes us that today’s marketers want to useWOMin the next 50 years
like traditional marketers used advertising in the previous 50.WOM, they
think, hits the mass market and is the ideal replacement medium to combat
the diminishing impact of TV and print ads. Those that think this way have
missed the point of WOM.
Consider spam e-mail – you receive something irrelevant from someone
you don’t know. Whoosh – it’s deleted without you even reading it.
We even use automated tools to filter the spam out before we see it.
Much of the generated WOM is the same as spam. It goes from the wrong
people to the wrong people. Most marketers don’t mind this, because
WOMis free at the point of distribution, just like spam and advertising. So
just keep sending it out and some of it will stick.
What most marketers actually want is a message that spreads like
crunchy peanut butter – it spreads, just, but it stays within a defined
boundary (the slice of bread). You don’t want it running down your arm.
Importantly, there are small areas with more impact (the crunchy bits) that
influence the surrounding larger smooth parts. It’s the crunchy bits that
give the whole experience texture and flavour. Smooth peanut butter is
bland, suitable only for the youngest of kids.
It matters whose mouth the words come from
This chapter is all about the inter-relationship between WOM and influencer
marketing. It is influenced by a single idea that appeared in Seth Godin’s
Purple Cow. Seth’s idea was that it is useless to advertise to anyone except
interested sneezers (connectors) with influence. As we say in Chapter 2,
advertising doesn’t work anymore. Actually, that’s not quite true: it does
work on interested people, those that happen to be (a) interested in what
you’re selling, and (b) likely to spread your message to others in their WOM
community. Unfortunately, the likelihood that you find someone with both of
these attributes is tiny, which is why advertising on the whole doesn’t work.
But imagine if you targeted only those people that were both listening
and interested. More, that they would sneeze the message to tell other
people, their friends or work colleagues or associates. This group doesn’t
listen to you, but they listen to the person that’s initially interested.
Most marketing messages are blocked by a wall of indifference
They receive too many messages, they all sound the same,
and even if they were heard and different, they wouldn’t be believed. People
rarely buy just because they are marketed to. The marketing message is
carried, corroborated, enhanced and personalised through influential WOM.
WOM needs sneezers with influence. WOM carried by people other than
influencers is just noise.
People that try to carry WOM inappropriately,
because they don’t have sufficient influence, end up shouting at or boring
their audience. In other words, it matters whose mouth the words come from.
Blogs are an archetype of this sort of WOM. Most blogs are just background
noise. Others try to gain attention by shouting, making controversial,
aggressive or offensive remarks just to get noticed. Only a few blogs carry
influence in any market, and in some markets there are zero influential blogs.
Influencer marketing takes Seth Godin’s idea of advertising to influential
sneezers, and extends it to all forms of marketing. Influencer marketing
is about changing a scatter-shot approach into a rifle-shot one. You
target specific influencers, not generic prospect customers.
WOM, by its nature is difficult to control. Once the message is out there,
there is no stopping it. It can die quickly, pervade the market or go where it
shouldn’t.
Dangers of WOM – the talker can get it wrong
Sometime WOM gets it wrong. Often these end up as harmless urban
myths. But not always, with serious consequences. 3Com is a case in point.
In 2000, suffering from fierce competition with Cisco, 3Com exited its
high-end router business, leaving many of its larger corporate customers
high and dry. Seven years later, 3Com is a different company. There are
new people in charge, the product set is strong and focused, and few
within the company remember the bad old days of 2000. Unfortunately,
negative WOM still exists. 3Com’s biggest sales objection today is: ‘You
screwed us in 2000 and we won’t let you do it again!’
The problem with WOM is that the combination of it being wrong and
out of control is explosive. You have a ton of clearing up to do, with the
prospect that you’ll never quite scrub the whole market clean. Unless you
use influencers. Because influencers have the inside track to decisionmakers
they can carry a corrective message. ‘It’s okay to buy 3Com’.
If you are using WOM as a marketing tactic you must identify the
relevant influencers. There are two main reasons for this:
& Influencers optimise the message. Influencers talk to decision-makers –
that’s what our definition of influencers means. So, again by definition,
influencers take messages to decision-makers. You therefore have an
optimised route to your target market.
& Influencers amplify the message. A message carried by an influencer is
reinforced just by the fact that it’s an influencer doing the communicating.
If the influencer says so, it must be true. So any WOM that
traces its origins back to an influencer carries more weight and impact
than one that can’t be traced (or is traced to someone with little
influence).
WOM is ideally suited to the world of influence. This is because WOM
is a primary mechanism for exerting influence. Recommendations,
experiences, gossip and stories from the field are all types of WOM,
and all related by various influencer types. Some of this communication
is formal and overt, published in books, analyst reports, journalistic
articles and blogs. But much of it, up to 80 per cent we estimate, happens
in closed circles. These can be private meetings, invitation-only events,
on the golf course, in lifts, over lunch and so on. Much of the influence of
consultants and third party advisors to decision-makers comes not in the
form of specific strategic or project recommendations, but by WOM,
whispered in the ear of the decision-maker. It is never published but
sways the decision totally. The WOM mantra ‘Nobody ever got fired for
buying IBM’ is the classic example of this, however out-of-date. It’s
informal, unprovable and possibly never even accurate. But it carried
enormous weight in the 1970s and 1980s.
Low-cost vertical industry marketing :Business Strategy /Financial Advisors
Adobe, a developer, distributor and seller of software for business and
creative use, hired California-based Rubicon Consulting to leverage a
vertical market through an influencer marketing programme designed to
select, recruit and develop an advisory group of influential users.
Adobe wanted to find low-cost ways to market one of its flagship
products, photoshop, to vertical markets. The company knew there was
a substantial revenue opportunity. Traditional vertical marketing is costly,
requiring an in-house marketing team of three to four (frequently more)
for each vertical. Influencer marketing leveraged enthusiastic customers
and electronic communications to get the benefits at a fraction of the cost.
Influencers were defined as early adopters who make purchase recommendations
and channel comments and ideas from a market to the vendor.
The desired goal was interaction at decisive moments of trust. By making
influencers into informal, extended members of the marketing team, the
firm would reach its target consumers as those moments occurred.
There were four phases to the resulting project:
Target determination: Rubicon documented goals and expectations.
An internal audit and data analysis were performed.
The market segment to be pursued was determined. The deliverable
was a written report recommending which vertical to pursue and
success metrics with 90-day, 6-month and 1-year benchmarks.
Pilot plan creation: Rubicon determined programme steps and
resources required. The programme was designed to educate
influencers about Adobe’s products and services, and to provide
tools for ease of information sharing with influencers. The project
would determine how, where and when opinions were being
shared in the market, identify targeted key influencers and then
create engagement programmes to leverage influencers.
Approaches included:
& Develop tools to make ‘telling a friend’ easier.
& Create forums, feedback tools and an influencer advisory group.
& Create blogs and other tools to share information.
& Participate openly on non-Adobe online blogs and discussions.
& Work with social networks. Host discussions/message boards about
products.
Support independent, grassroots groups that form around a product.
& Provide recognition and tools to active advocates.
& Track/respond to conversations by supporters, detractors and
neutrals.
& Metrics and ROI measures.
Pilot plan execution: Rubicon deployed the pilot (using proprietary
methods and tools), identified groups and individuals, then tested
the tools, programmes and resources for 3 months. Influencers
were recruited. A critical factor was selecting people likely to share
their opinions and create a multiplier effect.
Recommendations for next steps and documentation of best practices:
The firm received documentation on what worked, what
didn’t and recommendations for the future. A key employee was
debriefed, after which they took on programme management inhouse.
Rubicon concluded that influencer programmes must adapt to the
unique needs of the market and that communication must be calibrated
to methods preferred by the influencer group. Recruiting of influencers
should be performed in two phases to ensure the proper mix of
productive advisory group members. Insights gleaned from the first
round of recruiting should be leveraged during the second round to
achieve a mix of influencers that reflect all product subgroups. It is
important to ensure that influencer group members are active, not
silent.
It also found that influencers want companies to provide leadership in
setting standards. Firms employing influencer marketing techniques must
identify an in-house individual who will maintain relationships and
momentum, and to measure responses and effectiveness to make sure
that goals are achieved.
creative use, hired California-based Rubicon Consulting to leverage a
vertical market through an influencer marketing programme designed to
select, recruit and develop an advisory group of influential users.
Adobe wanted to find low-cost ways to market one of its flagship
products, photoshop, to vertical markets. The company knew there was
a substantial revenue opportunity. Traditional vertical marketing is costly,
requiring an in-house marketing team of three to four (frequently more)
for each vertical. Influencer marketing leveraged enthusiastic customers
and electronic communications to get the benefits at a fraction of the cost.
Influencers were defined as early adopters who make purchase recommendations
and channel comments and ideas from a market to the vendor.
The desired goal was interaction at decisive moments of trust. By making
influencers into informal, extended members of the marketing team, the
firm would reach its target consumers as those moments occurred.
There were four phases to the resulting project:
Target determination: Rubicon documented goals and expectations.
An internal audit and data analysis were performed.
The market segment to be pursued was determined. The deliverable
was a written report recommending which vertical to pursue and
success metrics with 90-day, 6-month and 1-year benchmarks.
Pilot plan creation: Rubicon determined programme steps and
resources required. The programme was designed to educate
influencers about Adobe’s products and services, and to provide
tools for ease of information sharing with influencers. The project
would determine how, where and when opinions were being
shared in the market, identify targeted key influencers and then
create engagement programmes to leverage influencers.
Approaches included:
& Develop tools to make ‘telling a friend’ easier.
& Create forums, feedback tools and an influencer advisory group.
& Create blogs and other tools to share information.
& Participate openly on non-Adobe online blogs and discussions.
& Work with social networks. Host discussions/message boards about
products.
Support independent, grassroots groups that form around a product.
& Provide recognition and tools to active advocates.
& Track/respond to conversations by supporters, detractors and
neutrals.
& Metrics and ROI measures.
Pilot plan execution: Rubicon deployed the pilot (using proprietary
methods and tools), identified groups and individuals, then tested
the tools, programmes and resources for 3 months. Influencers
were recruited. A critical factor was selecting people likely to share
their opinions and create a multiplier effect.
Recommendations for next steps and documentation of best practices:
The firm received documentation on what worked, what
didn’t and recommendations for the future. A key employee was
debriefed, after which they took on programme management inhouse.
Rubicon concluded that influencer programmes must adapt to the
unique needs of the market and that communication must be calibrated
to methods preferred by the influencer group. Recruiting of influencers
should be performed in two phases to ensure the proper mix of
productive advisory group members. Insights gleaned from the first
round of recruiting should be leveraged during the second round to
achieve a mix of influencers that reflect all product subgroups. It is
important to ensure that influencer group members are active, not
silent.
It also found that influencers want companies to provide leadership in
setting standards. Firms employing influencer marketing techniques must
identify an in-house individual who will maintain relationships and
momentum, and to measure responses and effectiveness to make sure
that goals are achieved.
DEEP ANALYSIS CAN GET YOU IN DEEP TROUBLE :Business Strategy /Financial Advisors
All our analysis was for naught. We misjudged demand, failed to anticipate
the intensity of the hurricane season and political developments,
and were less respectful than we should have been of market psychology
and its effect on price momentum.We first sold oil short in May at
around 40, and we squirmed as it promptly rallied to over 42.Then on
the last day of June, it fell to 36.That afternoon, we actually considered
covering some, but we didn’t. Our analysis indicated oil was still materially
overpriced.Why lose our position?
We were just plain wrong. Oil prices proceeded to climb and began
a virtually vertical ascent as terrorism and sabotage in Iraq, a tax dispute
in Russia, a strike in Nigeria, and a presidential recall vote in Venezuela
roiled the market for crude. Convinced that these were temporary disruptions,
and reassured by announcements of increases in OPEC production,
we increased the size of our short position. Our fundamental
analysis and our model continued to say that the equilibrium price of
oil was somewhere between 28 and 32 a barrel. Inventories were building,
OPEC was pumping, and the world economy was slowing.We reasoned
that if oil could overshoot its equilibrium price, it could also
undershoot.We still loved our short.
Furthermore,we were confident that the huge rise in the price that
had already occurred would eventually cause conservation and the substitution
of alternative sources of energy.
From the beginning, our practice had been to write a detailed
monthly letter to our investor partners to keep them fully informed of
our thinking and performance. Unfortunately, despite our pleas for confidentiality,
the letter got passed around via e-mail, so our performance
and positions became known. In our July letter, we stressed that we
were value, not momentum, investors. In our process, when the price of
an investment goes against bias by more than 15% in the case of a commodity,
it triggers an automatic review of the fundamentals. Following
that review we either have to add to the position or close it.As value investors,
if the fundamentals have not changed, our inclination is to add
to the position in question, not close it, because the price change has
actually made it more attractive, not less. Investing on the basis of value,
not price momentum, is our religion.
Warren Buffett articulated this philosophy best with his manicpartner
analogy. At a talk I attended, in one of his musings, he expressed
it something like this:
Suppose you are an equal partner in a good business with a manicdepressive
partner named Mr. Market. From time to time,Mr. Market
will only see the favorable factors affecting your business and will then
become so euphoric about the prospects of the business that he will come
to you and offer to buy your half at a ridiculously high price. So, of
course, you should sell it to him.
At other times, seeing only trouble ahead for your firm, he becomes
deeply depressed and in his despair offers to sell you his share
at an outrageous discount to its intrinsic value.Then, you should buy
it from him.
Buffett went on to say that it was irrational, the height of foolishness,
to sell an asset you were confident was undervalued just because its
price was falling. In other words, Mr. Market can be an old fool (or
maybe a young fool) who, from time to time, becomes hysterical.
Sometimes, in his madness, he sees ghosts. At others, he imagines the
good fairy touching him with her long golden fingers.
You are perfectly free to ignore Mr.Market or to take advantage of him,
but it will be disastrous if you fall under his influence. Suppose the
price you could sell your home at was quoted every day. For several
months the quotation steadily declined.Would you then sell your home,
the home you were comfortable in and satisfied with, just because its
price was declining? Of course not! In this sense, an attractive investment
is similar to a home you are happy to inhabit.
Mr. Buffett’s value philosophizing sounds eminently sensible, but it
doesn’t work when you are trafficking in commodities and you have
short-term-performance sensitive clients. On August 19, the price of
oil hit 48, equity markets were reeling, and we were down 7% for the
year.The next day the New York Times ran a story, complete with a picture
of me looking bedraggled, that reported Traxis was suffering substantial
losses from its oil short. Furthermore, the tone of the piece was
that I was a loser, which, because everybody I know reads the Times, did
not exactly lift my spirits.That weekend when I went out to dinner at
the country club, I sensed people watching me, but when I tried to
meet their eyes, they looked away.
the intensity of the hurricane season and political developments,
and were less respectful than we should have been of market psychology
and its effect on price momentum.We first sold oil short in May at
around 40, and we squirmed as it promptly rallied to over 42.Then on
the last day of June, it fell to 36.That afternoon, we actually considered
covering some, but we didn’t. Our analysis indicated oil was still materially
overpriced.Why lose our position?
We were just plain wrong. Oil prices proceeded to climb and began
a virtually vertical ascent as terrorism and sabotage in Iraq, a tax dispute
in Russia, a strike in Nigeria, and a presidential recall vote in Venezuela
roiled the market for crude. Convinced that these were temporary disruptions,
and reassured by announcements of increases in OPEC production,
we increased the size of our short position. Our fundamental
analysis and our model continued to say that the equilibrium price of
oil was somewhere between 28 and 32 a barrel. Inventories were building,
OPEC was pumping, and the world economy was slowing.We reasoned
that if oil could overshoot its equilibrium price, it could also
undershoot.We still loved our short.
Furthermore,we were confident that the huge rise in the price that
had already occurred would eventually cause conservation and the substitution
of alternative sources of energy.
From the beginning, our practice had been to write a detailed
monthly letter to our investor partners to keep them fully informed of
our thinking and performance. Unfortunately, despite our pleas for confidentiality,
the letter got passed around via e-mail, so our performance
and positions became known. In our July letter, we stressed that we
were value, not momentum, investors. In our process, when the price of
an investment goes against bias by more than 15% in the case of a commodity,
it triggers an automatic review of the fundamentals. Following
that review we either have to add to the position or close it.As value investors,
if the fundamentals have not changed, our inclination is to add
to the position in question, not close it, because the price change has
actually made it more attractive, not less. Investing on the basis of value,
not price momentum, is our religion.
Warren Buffett articulated this philosophy best with his manicpartner
analogy. At a talk I attended, in one of his musings, he expressed
it something like this:
Suppose you are an equal partner in a good business with a manicdepressive
partner named Mr. Market. From time to time,Mr. Market
will only see the favorable factors affecting your business and will then
become so euphoric about the prospects of the business that he will come
to you and offer to buy your half at a ridiculously high price. So, of
course, you should sell it to him.
At other times, seeing only trouble ahead for your firm, he becomes
deeply depressed and in his despair offers to sell you his share
at an outrageous discount to its intrinsic value.Then, you should buy
it from him.
Buffett went on to say that it was irrational, the height of foolishness,
to sell an asset you were confident was undervalued just because its
price was falling. In other words, Mr. Market can be an old fool (or
maybe a young fool) who, from time to time, becomes hysterical.
Sometimes, in his madness, he sees ghosts. At others, he imagines the
good fairy touching him with her long golden fingers.
You are perfectly free to ignore Mr.Market or to take advantage of him,
but it will be disastrous if you fall under his influence. Suppose the
price you could sell your home at was quoted every day. For several
months the quotation steadily declined.Would you then sell your home,
the home you were comfortable in and satisfied with, just because its
price was declining? Of course not! In this sense, an attractive investment
is similar to a home you are happy to inhabit.
Mr. Buffett’s value philosophizing sounds eminently sensible, but it
doesn’t work when you are trafficking in commodities and you have
short-term-performance sensitive clients. On August 19, the price of
oil hit 48, equity markets were reeling, and we were down 7% for the
year.The next day the New York Times ran a story, complete with a picture
of me looking bedraggled, that reported Traxis was suffering substantial
losses from its oil short. Furthermore, the tone of the piece was
that I was a loser, which, because everybody I know reads the Times, did
not exactly lift my spirits.That weekend when I went out to dinner at
the country club, I sensed people watching me, but when I tried to
meet their eyes, they looked away.
WHAT I LEARNED FROM THE EARLY 1900S: THE MARKET HASN’T CHANGED THAT MUCH :Business Strategy /Financial Advisors
While we were being tortured by our crude short, various people attempted
to give me succor of one type or another. Guys I know who are
professional commodity traders effusively offered advice, most of which
was to buy strength and sell weakness, in other words to go with the
flow.They unabashedly told me their short-selling trading tactic invariably
was “Don’t fight a losing position. If it doesn’t show you a profit,
cover it.” Not very helpful, because we were and are value investors.
In my agony, I took out and reread passages from my trading bible,
Reminiscences of a Stock Operator by Edwin Lefevre. The book was first
published in 1923 and is long out of print, but it can be bought from
time to time on the Internet.There is little doubt that the stock operator
who is the narrator in the book was the legendary Jesse Livermore.
The late Gerald Loeb, who wrote The Battle for Investment Survival (“Put
all your eggs in one basket and then watch the basket”), and who often
acted as Livermore’s broker, told me that Livermore had used Lefevre as
his scribe for Reminiscences. Regardless of who actually wrote it, the
book is the distilled trading wisdom and market anecdotes of a professional
trader operating in the frantic milieu of pools, tips, manipulation,
and tape reading of the first third of the past century. Markets haven’t
changed that much a century later. It is, by far, the best trading book
ever written.
Livermore was a fascinating character. He was a boardroom tape
watcher and trader in the style of the times, but he was also very sensitive
to market sentiment and value. He stressed how crucial was a deep
understanding of human psychology and the interplay of greed and
fear. Trading was much more about human nature than tips and
hunches. In the early 1900s, he came out of nowhere to make his first
big killing trading grain from a Chicago bucket shop. He sidestepped
the panic of 1907 and came to Wall Street in 1908 with $3 million,
which was a decent fortune in those days. Handsome, dapper, and articulate,
Livermore bought a seat on the New York Stock Exchange and
proceeded to challenge the Wall Street tycoon establishment.The great
financiers like J.P. Morgan disdained stock-market operators, but a man
like Livermore could rattle their cages.
Livermore was a bear by disposition, and in 1915 he went short
stocks and suffered heavy losses. However, realizing he was wrong, he
reversed his position and made big gains in the 1916 to 1919 bull market,
but so did a lot of other people. However, he really distinguished
himself by anticipating the sudden and brutal postwar depression and
crash that wiped out so many businessmen and speculators. In 1919, he
sold everything, went short, and although he was early, eventually made
a fortune in the bust that followed. In 1922, Livermore had a big hit in
grain, and in the early 1920s he managed the infamous Piggly-Wiggly
pool that ignited speculation and ignited the bull market. However, his
inherent bearish bias and his sense that greed was in total ascendancy
kept him from fully participating in the madness of the late 1920s. Loeb
once told me that Livermore was a great admirer of Walter Bagehot, the
first editor of The Economist, and often cited this stupid-money paragraph
from Bagehot’s essay on Edward Gibbon:
Much has been written about panics and manias,much more than with
the most outstretched intellect we are able to follow or conceive, but one
thing is certain, that at particular times a great deal of stupid people
have a great deal of stupid money. . . . At intervals, from causes which
are not to the present purpose, the money of these people—the blind
capital, as we call it, of the country—is particularly large and craving; it
seeks for someone to devour it, and there is a “plethora”; it finds someone,
and there is “speculation”; it is devoured, and there is a “panic.”
Livermore wanted to be there, short of stocks, when the “stupid
money” was “devoured,” as he was convinced it always would be—
eventually. I am fascinated with his credo of being an investor/trader. In
the book, the protagonist for Livermore, the Old Turkey, sounds like
Buffett’s spiritual father as he repeatedly preaches “sitting tight” with a
position you really believe in.“Don’t over-think it and don’t over-trade.
Men who can be both right and sit tight are uncommon,” says the Old
Turkey. “I found it [this principle] one of the hardest things to learn.
But it is only after a stock operator has grasped this that he can make
the big money.”
The Old Turkey, like Livermore, is essentially a professional trader in
commodities and stocks. However, again like Livermore and unlike the
plungers and the peacocks of that speculative era that was coming to an
end, he understood that, without the cover of a pool or inside information,
trading was essentially a zero-sum game but that investing could be
a winner’s game.
Without faith in his own judgment no man can go very far in this
game.That is about all I have learned—to study general conditions, to
take a position and stick to it. I can wait without a twinge of impatience.
I can see a setback without being shaken, knowing that it is only
temporary. I have been short one hundred thousand shares and I have
seen a big rally coming. I knew it would make a difference of one million
dollars in my paper profits. And I nevertheless have stood pat and
seen half my profit wiped out without once considering the advisability
of covering my shorts to put them out again in the rally. I knew that if
I did I might lose my position and with it the certainty of a big killing.
It is the big swings that make the big money for you.
Of course none of this “sitting tight” means that if the fundamentals
of your investment deteriorate, you don’t sell your long or cover your
short. As John Maynard Keynes famously said, “If the facts change, I
change my mind, sir.What would you do, sir?”
We have an investor who has been a commodity trader all his business
life. I read him the Old Turkey’s quotation. “Yeah,” he said, “and
you know how Jesse Livermore ended up?” I said no. He told me.“After
being bearish in the late 1920s, Livermore finally capitulated in mid-
1929, went heavily long, and was virtually wiped out in the Crash.
Some years later he committed suicide in the men’s room of The Biltmore.”
I don’t know if that is true or not.
Meanwhile oil continued to work higher.
to give me succor of one type or another. Guys I know who are
professional commodity traders effusively offered advice, most of which
was to buy strength and sell weakness, in other words to go with the
flow.They unabashedly told me their short-selling trading tactic invariably
was “Don’t fight a losing position. If it doesn’t show you a profit,
cover it.” Not very helpful, because we were and are value investors.
In my agony, I took out and reread passages from my trading bible,
Reminiscences of a Stock Operator by Edwin Lefevre. The book was first
published in 1923 and is long out of print, but it can be bought from
time to time on the Internet.There is little doubt that the stock operator
who is the narrator in the book was the legendary Jesse Livermore.
The late Gerald Loeb, who wrote The Battle for Investment Survival (“Put
all your eggs in one basket and then watch the basket”), and who often
acted as Livermore’s broker, told me that Livermore had used Lefevre as
his scribe for Reminiscences. Regardless of who actually wrote it, the
book is the distilled trading wisdom and market anecdotes of a professional
trader operating in the frantic milieu of pools, tips, manipulation,
and tape reading of the first third of the past century. Markets haven’t
changed that much a century later. It is, by far, the best trading book
ever written.
Livermore was a fascinating character. He was a boardroom tape
watcher and trader in the style of the times, but he was also very sensitive
to market sentiment and value. He stressed how crucial was a deep
understanding of human psychology and the interplay of greed and
fear. Trading was much more about human nature than tips and
hunches. In the early 1900s, he came out of nowhere to make his first
big killing trading grain from a Chicago bucket shop. He sidestepped
the panic of 1907 and came to Wall Street in 1908 with $3 million,
which was a decent fortune in those days. Handsome, dapper, and articulate,
Livermore bought a seat on the New York Stock Exchange and
proceeded to challenge the Wall Street tycoon establishment.The great
financiers like J.P. Morgan disdained stock-market operators, but a man
like Livermore could rattle their cages.
Livermore was a bear by disposition, and in 1915 he went short
stocks and suffered heavy losses. However, realizing he was wrong, he
reversed his position and made big gains in the 1916 to 1919 bull market,
but so did a lot of other people. However, he really distinguished
himself by anticipating the sudden and brutal postwar depression and
crash that wiped out so many businessmen and speculators. In 1919, he
sold everything, went short, and although he was early, eventually made
a fortune in the bust that followed. In 1922, Livermore had a big hit in
grain, and in the early 1920s he managed the infamous Piggly-Wiggly
pool that ignited speculation and ignited the bull market. However, his
inherent bearish bias and his sense that greed was in total ascendancy
kept him from fully participating in the madness of the late 1920s. Loeb
once told me that Livermore was a great admirer of Walter Bagehot, the
first editor of The Economist, and often cited this stupid-money paragraph
from Bagehot’s essay on Edward Gibbon:
Much has been written about panics and manias,much more than with
the most outstretched intellect we are able to follow or conceive, but one
thing is certain, that at particular times a great deal of stupid people
have a great deal of stupid money. . . . At intervals, from causes which
are not to the present purpose, the money of these people—the blind
capital, as we call it, of the country—is particularly large and craving; it
seeks for someone to devour it, and there is a “plethora”; it finds someone,
and there is “speculation”; it is devoured, and there is a “panic.”
Livermore wanted to be there, short of stocks, when the “stupid
money” was “devoured,” as he was convinced it always would be—
eventually. I am fascinated with his credo of being an investor/trader. In
the book, the protagonist for Livermore, the Old Turkey, sounds like
Buffett’s spiritual father as he repeatedly preaches “sitting tight” with a
position you really believe in.“Don’t over-think it and don’t over-trade.
Men who can be both right and sit tight are uncommon,” says the Old
Turkey. “I found it [this principle] one of the hardest things to learn.
But it is only after a stock operator has grasped this that he can make
the big money.”
The Old Turkey, like Livermore, is essentially a professional trader in
commodities and stocks. However, again like Livermore and unlike the
plungers and the peacocks of that speculative era that was coming to an
end, he understood that, without the cover of a pool or inside information,
trading was essentially a zero-sum game but that investing could be
a winner’s game.
Without faith in his own judgment no man can go very far in this
game.That is about all I have learned—to study general conditions, to
take a position and stick to it. I can wait without a twinge of impatience.
I can see a setback without being shaken, knowing that it is only
temporary. I have been short one hundred thousand shares and I have
seen a big rally coming. I knew it would make a difference of one million
dollars in my paper profits. And I nevertheless have stood pat and
seen half my profit wiped out without once considering the advisability
of covering my shorts to put them out again in the rally. I knew that if
I did I might lose my position and with it the certainty of a big killing.
It is the big swings that make the big money for you.
Of course none of this “sitting tight” means that if the fundamentals
of your investment deteriorate, you don’t sell your long or cover your
short. As John Maynard Keynes famously said, “If the facts change, I
change my mind, sir.What would you do, sir?”
We have an investor who has been a commodity trader all his business
life. I read him the Old Turkey’s quotation. “Yeah,” he said, “and
you know how Jesse Livermore ended up?” I said no. He told me.“After
being bearish in the late 1920s, Livermore finally capitulated in mid-
1929, went heavily long, and was virtually wiped out in the Crash.
Some years later he committed suicide in the men’s room of The Biltmore.”
I don’t know if that is true or not.
Meanwhile oil continued to work higher.
BIG-TIME MONEY RAISING AT THE BREAKERS :Business Strategy /Financial Advisors
the odyssey of raising money begins. Madhav, my
partner in illusion, and I flew to Palm Beach for Morgan Stanley’s fabled
hedge-fund conference at The Breakers.This conference is widely
considered the prime event at which to raise money because it attracts
the biggest, richest collection of hedge-fund buyers in the world. I had
never attended before. It is an amazing event.There must have been at
least 500 people in attendance, overflowing the richly appointed meeting
rooms and lawns of the great hotel by the ocean.
After an elaborate opening dinner and a couple of investor panels
with various hedge-fund managers trying to talk smart and appear brilliant,
there were two long days of nonstop group presentations and oneon-
one pitches with another fancy dinner the second night. The
intensity and the hustle level were incredibly high. Everybody was on
the make.The conference is organized and paid for by Morgan Stanley’s
Prime Brokerage division, and its sole purpose is to bring together
prospective investors in hedge funds with the funds that either clear
through or (like us) are going to clear through Morgan Stanley. Morgan
Stanley’s prime brokerage guys made a big deal of my being on an investment
panel and of our being given a major slot to present at the
conference.
Morgan Stanley is the biggest factor in the very lucrative prime
brokerage business.The firm’s prime brokerage business is an extremely
well managed, big fat gold mine.Why is it so attractive? Because it is a
direct beneficiary of the growth of the hedge-fund industry, which has
been, by far, the most dynamic segment of the asset management space.
The money managed by hedge funds has grown from $36 billion in
1990 to more than $1 trillion by the end of 2004, and no business that
the world’s investment banks are involved with has anywhere near those
growth and profitability characteristics. However, there are so many
new entrants trying to buy their way into the business by poaching
people that the bloom is beginning to come off the rose. Some large
hedge funds, in an effort to spread the wealth around, have more than
one prime broker.
What do prime brokers do? They provide securities to cover short
sales, make margin loans, clear trades, provide reporting services and
custody assets, provide research, and help with money raising. A fund’s
prime broker executes roughly 25% to 30% of its hedge-fund clients’
transactions, and most provide a daily net asset value (NAV) and a rudimentary
risk management system. The prime broker will find a new
hedge-fund office space, an operations officer, and traders, and it will
also provide basic accounting systems. How do prime brokers make
money? First, they earn from commissions and order flow, and hedge
funds now account for about one-third of total trading volume. Second
and most important, hedge funds are a captive source of demand for the
lucrative securities and margin lending activities from which a prime
broker locks in a fat spread. Morgan Stanley has the biggest prime brokerage
book, and its volume and profits have been growing at around
20% per annum. It’s now a major and cherished profit contributor to
the firm, with revenues currently well over $1 billion.
The competition for clients among the prime brokers is about service
and back-office infrastructure, but it is also about so-called capital
introductions. Prime brokers legally can only introduce hedge funds to
prospective investors; they can’t actually make pitches or solicit clients.
Only the hedge funds themselves can do that. Morgan Stanley has been
helpful in critiquing our presentation and advising us on office infrastructure.
In the months to come, the prime brokerage will organize
lunches or dinners for us with prospective investors across the United
States and in London, Geneva, and Hong Kong. At these functions, we
will tell our story. After that, about all Morgan Stanley can do is call the
prospective investor and ask if they would like to hear more. In addition
to the Breakers conference, Morgan Stanley and the other prime bro-
kers have various conferences for new managers throughout the year in
the United States, Europe, and Asia, but the meeting at The Breakers is
the big one!
I viewed the conference with trepidation.While at Morgan Stanley,
I had certainly peddled to plenty of blasé, semiskeptical audiences, but I
had also accumulated my allocation of hubris, and I was a little disconcerted
to be in Palm Beach grubbing for money with all the other
twerps. I envied the superstar hedge-fund guys who have a surfeit of
capital and don’t deign to appear at conferences. It is only we struggling
mortals who want money who come hat in hand. The superstars have
marketing managers who organize their own annual meetings with
their investors, complete with elaborate presentations by the messiah
himself and his entourage. In the glory days of Tiger, Julian Robertson
took this venue to new heights, with glittering formal dinner dances
following annual business sessions in wonderful settings like the Temple
of Dendur at the Metropolitan Museum of Art, the Duke of Wellington’s
house in London, and a chateau outside Paris. However, hedgefund
investors are not fools, and parties are not substitutes for
performance. Julian’s investors liked the parties, but they loved his performance
even more.
The group presentations are grindingly repetitious. The day is divided
into 45-minute segments with 10-minute intervals, and the
crowd circulates from one room to another. Madhav and I made the
same basic presentation over and over to groups of 10 to 30 people.The
skeptical faces gaze up at you, and by the fourth or fifth rendition you
are varying the routine to keep yourself from going batty, but by then
you can’t remember what you have or haven’t said.
On the second evening at The Breakers, there is a cocktail reception
on the terrace.The night was clear with stars and a moon, but cold
for Florida. Moët et Chandon champagne and the best California
chardonnay flowed under a cold, pale moon with a vast crowd of beautifully
dressed people milling about, gossiping in many tongues about
the rise and fall of hedge funds and their managers. In this milieu, a
Swiss accent is worth an automatic 50 IQ points, and an Oxbridge
tongue is worth 25. Plain old American is definitely déclassé.
partner in illusion, and I flew to Palm Beach for Morgan Stanley’s fabled
hedge-fund conference at The Breakers.This conference is widely
considered the prime event at which to raise money because it attracts
the biggest, richest collection of hedge-fund buyers in the world. I had
never attended before. It is an amazing event.There must have been at
least 500 people in attendance, overflowing the richly appointed meeting
rooms and lawns of the great hotel by the ocean.
After an elaborate opening dinner and a couple of investor panels
with various hedge-fund managers trying to talk smart and appear brilliant,
there were two long days of nonstop group presentations and oneon-
one pitches with another fancy dinner the second night. The
intensity and the hustle level were incredibly high. Everybody was on
the make.The conference is organized and paid for by Morgan Stanley’s
Prime Brokerage division, and its sole purpose is to bring together
prospective investors in hedge funds with the funds that either clear
through or (like us) are going to clear through Morgan Stanley. Morgan
Stanley’s prime brokerage guys made a big deal of my being on an investment
panel and of our being given a major slot to present at the
conference.
Morgan Stanley is the biggest factor in the very lucrative prime
brokerage business.The firm’s prime brokerage business is an extremely
well managed, big fat gold mine.Why is it so attractive? Because it is a
direct beneficiary of the growth of the hedge-fund industry, which has
been, by far, the most dynamic segment of the asset management space.
The money managed by hedge funds has grown from $36 billion in
1990 to more than $1 trillion by the end of 2004, and no business that
the world’s investment banks are involved with has anywhere near those
growth and profitability characteristics. However, there are so many
new entrants trying to buy their way into the business by poaching
people that the bloom is beginning to come off the rose. Some large
hedge funds, in an effort to spread the wealth around, have more than
one prime broker.
What do prime brokers do? They provide securities to cover short
sales, make margin loans, clear trades, provide reporting services and
custody assets, provide research, and help with money raising. A fund’s
prime broker executes roughly 25% to 30% of its hedge-fund clients’
transactions, and most provide a daily net asset value (NAV) and a rudimentary
risk management system. The prime broker will find a new
hedge-fund office space, an operations officer, and traders, and it will
also provide basic accounting systems. How do prime brokers make
money? First, they earn from commissions and order flow, and hedge
funds now account for about one-third of total trading volume. Second
and most important, hedge funds are a captive source of demand for the
lucrative securities and margin lending activities from which a prime
broker locks in a fat spread. Morgan Stanley has the biggest prime brokerage
book, and its volume and profits have been growing at around
20% per annum. It’s now a major and cherished profit contributor to
the firm, with revenues currently well over $1 billion.
The competition for clients among the prime brokers is about service
and back-office infrastructure, but it is also about so-called capital
introductions. Prime brokers legally can only introduce hedge funds to
prospective investors; they can’t actually make pitches or solicit clients.
Only the hedge funds themselves can do that. Morgan Stanley has been
helpful in critiquing our presentation and advising us on office infrastructure.
In the months to come, the prime brokerage will organize
lunches or dinners for us with prospective investors across the United
States and in London, Geneva, and Hong Kong. At these functions, we
will tell our story. After that, about all Morgan Stanley can do is call the
prospective investor and ask if they would like to hear more. In addition
to the Breakers conference, Morgan Stanley and the other prime bro-
kers have various conferences for new managers throughout the year in
the United States, Europe, and Asia, but the meeting at The Breakers is
the big one!
I viewed the conference with trepidation.While at Morgan Stanley,
I had certainly peddled to plenty of blasé, semiskeptical audiences, but I
had also accumulated my allocation of hubris, and I was a little disconcerted
to be in Palm Beach grubbing for money with all the other
twerps. I envied the superstar hedge-fund guys who have a surfeit of
capital and don’t deign to appear at conferences. It is only we struggling
mortals who want money who come hat in hand. The superstars have
marketing managers who organize their own annual meetings with
their investors, complete with elaborate presentations by the messiah
himself and his entourage. In the glory days of Tiger, Julian Robertson
took this venue to new heights, with glittering formal dinner dances
following annual business sessions in wonderful settings like the Temple
of Dendur at the Metropolitan Museum of Art, the Duke of Wellington’s
house in London, and a chateau outside Paris. However, hedgefund
investors are not fools, and parties are not substitutes for
performance. Julian’s investors liked the parties, but they loved his performance
even more.
The group presentations are grindingly repetitious. The day is divided
into 45-minute segments with 10-minute intervals, and the
crowd circulates from one room to another. Madhav and I made the
same basic presentation over and over to groups of 10 to 30 people.The
skeptical faces gaze up at you, and by the fourth or fifth rendition you
are varying the routine to keep yourself from going batty, but by then
you can’t remember what you have or haven’t said.
On the second evening at The Breakers, there is a cocktail reception
on the terrace.The night was clear with stars and a moon, but cold
for Florida. Moët et Chandon champagne and the best California
chardonnay flowed under a cold, pale moon with a vast crowd of beautifully
dressed people milling about, gossiping in many tongues about
the rise and fall of hedge funds and their managers. In this milieu, a
Swiss accent is worth an automatic 50 IQ points, and an Oxbridge
tongue is worth 25. Plain old American is definitely déclassé.
INVEST FIRST AND ASK QUESTIONS LATER
Suddenly a familiar face loomed up out of the cocktail party mist. It was
Jim, a guy I knew from the past, a guy a lot of people refer to as Jim the
Trigger. When he is working, Jim is an investment manager like me.
People in the business call him the Trigger, as in hair trigger, because, as a
portfolio manager, he reacts so quickly to a story.This sobriquet is not
necessarily flattering; invest first and ask questions later is what is implied.“
Ready! Fire! Aim!” is the Trigger’s modus vivendi. In a bull market,
when the mongrels are running, it works great. In tougher times
like now, it’s not so effective.
The Trigger is a handsome guy in a sleek, sculptured, California sort
of way.The top three buttons of his fitted shirt are unbuttoned, and his
sports jacket clings to his shoulders. Our eyes meet. Jim’s are haunted
and a little mad, but who is not a little deranged on the terrace of The
The Trigger’s career has experienced a few undulations. He is always
into what is hot, but sometimes gets there a little late or just before
it gets cold.The Trigger is and always has been a momentum investor, a
player in the parlance, and his strength (and his weakness) is that he has
no memory for pain. He unfailingly gravitates to where the fast money
is, and he is capable of putting up enormous numbers in a hot, trending
market. However, in the past he has often followed the lemmings over
the proverbial cliff. I like him, though, because, in the heat of each moment,
he truly believes his own bullshit and doesn’t pretend to be anything
other than what he is—a stock jockey.
I first knew the Trigger in the early 1980s when his aggressive
growth-stock fund was loaded with whisper stocks like the small oil exploration
companies and drillers with names like Three Guys and a
Rig. He was up 40% in 1979 and 65% in 1980, and the money came
pouring in. But then in 1981, when oil overnight went from being
black gold to just another commodity, the Trigger’s fund was down
55%. He almost lost his job, as I remember it, but in 1982 and 1983, he
came back and shot the lights out with the small tech and emerging
growth stocks, his “beloved athletes” as he called them. In those days he
would go to a company presentation, meet the adolescent storyteller,
listen to the pitch, come out saying,“The kid’s a gifted natural athlete, a
winner,” and then buy a couple of hundred thousand shares without
ever seeing a number.
Subsequently, when his beloved athletes died horrible deaths and
the moon balls crashed in the mid-1980s, the Trigger actually did get
fired, but he has a great sense of the game and he always gravitates relentlessly
toward relative strength.Value was in and growth was out, and
he knew he had to change and find new faces to fall in love with. He
caught on with a value investing firm called U3—for Undervalued,
Underowned, and Unloved—which also did risk arbitrage. However,
value was too slow for his blood; the Trigger needed emotion and momentum
in his life. It was hard for him to truly fall in love with a dirty
industrial dog just because it was cheap.
I remember at the time his telling me, “Value sucks and Ben Graham
was a loser. Buying cheap stocks on book value analysis is for
small-minded accountants. I miss the adrenaline rush from an up stock
or running in the shorts with a tail.”This was sacrilege, because (just in
case you don’t know) Benjamin Graham is the god of value investing
and wrote the bible, a book called Security Analysis. So the Trigger left
U3 for an emerging markets boutique, and for a while he actually lived
and operated out of Hong Kong and Eastern Europe. Then came the
Thai baht and Russian debt busts, and the emerging markets became
the submerging markets.
Almost as if it were foreordained, he migrated back to tech in the
late 1990s.Tech was the perfect milieu for the Trigger. Before tonight, I
had last seen him in late 1999 when he ran a tech fund for a big, very
aggressive mutual fund company in Denver.Those were the days when
the new-issue market was on fire, and the Trigger was giving spellbinding
speeches around the country about tech, Internet productivity, and a
new era.The public was pouring money into his fund, and the Trigger
was riding high on the hog. That day he had come for lunch with a
young, statuesque woman on his arm who drank Stolichnaya straightup.
I wondered why he had brought her because she was obviously
bored with the stock talk, although occasionally she shot him languid,
but amorous glances.
The Denver mutual fund company stocked smart, quick, fast-talking,
momentum guys and gals who had heard every story long before I did.
I remember going to visit them once during those days, sitting in a conference
room with half a dozen kid portfolio managers who looked so
young and fresh and innocent that you expected them to still have
braces on their teeth, and realizing that I had nothing to say that interested
them.They thought I was a useless, old fuddy-duddy, and that afternoon
I felt like one. They didn’t care a P/E ratio about valuation,
fundamental change at the margin, or the economy.They wanted stories
about up stocks.They wanted action, stocks on steroids. As the meeting
went on, I realized they weren’t at all innocent.They were baby-faced
killers and it was I who was the innocent. The Trigger’s fund, stuffed
with new issues,was up 85% that year.
Jim, a guy I knew from the past, a guy a lot of people refer to as Jim the
Trigger. When he is working, Jim is an investment manager like me.
People in the business call him the Trigger, as in hair trigger, because, as a
portfolio manager, he reacts so quickly to a story.This sobriquet is not
necessarily flattering; invest first and ask questions later is what is implied.“
Ready! Fire! Aim!” is the Trigger’s modus vivendi. In a bull market,
when the mongrels are running, it works great. In tougher times
like now, it’s not so effective.
The Trigger is a handsome guy in a sleek, sculptured, California sort
of way.The top three buttons of his fitted shirt are unbuttoned, and his
sports jacket clings to his shoulders. Our eyes meet. Jim’s are haunted
and a little mad, but who is not a little deranged on the terrace of The
The Trigger’s career has experienced a few undulations. He is always
into what is hot, but sometimes gets there a little late or just before
it gets cold.The Trigger is and always has been a momentum investor, a
player in the parlance, and his strength (and his weakness) is that he has
no memory for pain. He unfailingly gravitates to where the fast money
is, and he is capable of putting up enormous numbers in a hot, trending
market. However, in the past he has often followed the lemmings over
the proverbial cliff. I like him, though, because, in the heat of each moment,
he truly believes his own bullshit and doesn’t pretend to be anything
other than what he is—a stock jockey.
I first knew the Trigger in the early 1980s when his aggressive
growth-stock fund was loaded with whisper stocks like the small oil exploration
companies and drillers with names like Three Guys and a
Rig. He was up 40% in 1979 and 65% in 1980, and the money came
pouring in. But then in 1981, when oil overnight went from being
black gold to just another commodity, the Trigger’s fund was down
55%. He almost lost his job, as I remember it, but in 1982 and 1983, he
came back and shot the lights out with the small tech and emerging
growth stocks, his “beloved athletes” as he called them. In those days he
would go to a company presentation, meet the adolescent storyteller,
listen to the pitch, come out saying,“The kid’s a gifted natural athlete, a
winner,” and then buy a couple of hundred thousand shares without
ever seeing a number.
Subsequently, when his beloved athletes died horrible deaths and
the moon balls crashed in the mid-1980s, the Trigger actually did get
fired, but he has a great sense of the game and he always gravitates relentlessly
toward relative strength.Value was in and growth was out, and
he knew he had to change and find new faces to fall in love with. He
caught on with a value investing firm called U3—for Undervalued,
Underowned, and Unloved—which also did risk arbitrage. However,
value was too slow for his blood; the Trigger needed emotion and momentum
in his life. It was hard for him to truly fall in love with a dirty
industrial dog just because it was cheap.
I remember at the time his telling me, “Value sucks and Ben Graham
was a loser. Buying cheap stocks on book value analysis is for
small-minded accountants. I miss the adrenaline rush from an up stock
or running in the shorts with a tail.”This was sacrilege, because (just in
case you don’t know) Benjamin Graham is the god of value investing
and wrote the bible, a book called Security Analysis. So the Trigger left
U3 for an emerging markets boutique, and for a while he actually lived
and operated out of Hong Kong and Eastern Europe. Then came the
Thai baht and Russian debt busts, and the emerging markets became
the submerging markets.
Almost as if it were foreordained, he migrated back to tech in the
late 1990s.Tech was the perfect milieu for the Trigger. Before tonight, I
had last seen him in late 1999 when he ran a tech fund for a big, very
aggressive mutual fund company in Denver.Those were the days when
the new-issue market was on fire, and the Trigger was giving spellbinding
speeches around the country about tech, Internet productivity, and a
new era.The public was pouring money into his fund, and the Trigger
was riding high on the hog. That day he had come for lunch with a
young, statuesque woman on his arm who drank Stolichnaya straightup.
I wondered why he had brought her because she was obviously
bored with the stock talk, although occasionally she shot him languid,
but amorous glances.
The Denver mutual fund company stocked smart, quick, fast-talking,
momentum guys and gals who had heard every story long before I did.
I remember going to visit them once during those days, sitting in a conference
room with half a dozen kid portfolio managers who looked so
young and fresh and innocent that you expected them to still have
braces on their teeth, and realizing that I had nothing to say that interested
them.They thought I was a useless, old fuddy-duddy, and that afternoon
I felt like one. They didn’t care a P/E ratio about valuation,
fundamental change at the margin, or the economy.They wanted stories
about up stocks.They wanted action, stocks on steroids. As the meeting
went on, I realized they weren’t at all innocent.They were baby-faced
killers and it was I who was the innocent. The Trigger’s fund, stuffed
with new issues,was up 85% that year.
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