Christmas Cookies and Managing Money
At the close of trading on December 23, 1992, I ended my career as a hands-on institutional portfolio manager. That year is not very memorable in stock market history. After a bunch of ups and downs, the market posted a 7.6% gain. Although the market eked out a small return for the final month of the year, my portfolios, representing about $3.5 billion in client assets, gyrated wildly. As December began, I’d built a 2.5% lead over the S&P 500 in a year where institutional managers were struggling to beat the market.
My computer screen had a small box in the upper left corner that continually compared my performance to the S&P 500. I hated that box, and it produced endless bouts of stress. In August, IBM had driven me out of the office when it announced that mainframe sales had gone flat. The stock plummeted and my lead over the S&P 500 vanished. The managing directors at my firm kept walking into my office asking me what I was going to do about IBM. They offered conflicting opinions. I bolted, driving the back roads around Westchester Airport and walking the trail along the Byrum Gorge to calm my nerves. I’d do anything to get away from that little box on my computer screen.
By December, I had my lead back as well as a conviction that I needed to stop managing money. Around the middle of the month several key holdings started to falter. There were rumblings that lawyers were about to have a breakthrough in a series of lawsuits against the makers of gel breast implants. I owned Corning Glass and Dow Chemical. They jointly owned Dow Corning, an implant manufacturer. I also held Bristol Myer, which had a subsidiary that made implants. Those stocks started trading lower and my advantage shrank.
My analyst, Cathy Moore, got on the phone with the companies and various Wall Street analysts. It was hard to gauge the outcome of the litigation. The managing directors camped out in my office pressing me for answers. They especially wanted to know if I was going to beat the S&P 500, because they’d been telling clients we were ahead of the market. One of the managing directors was a chartist and kept telling me that one stock chart or another “looked horrible” or “had bounced off an important support level [I think that’s supposed to be good].” My trader was telling me the markets were very illiquid, and I wouldn’t be able to buy or sell any of these securities without disturbing the market.
On December 23rd, a jury awarded Pamela Jean Johnson $25 million from a subsidiary of Bristol Myers. She’d sought $63 million. With Wall Street preparing for the holidays, there weren’t too many investors or traders around, and the selling precipitated by the jury decision turned into a rout. Suddenly the market was convinced that the hundreds of other pending lawsuits might in fact succeed. My lead over the S&P 500 was gone, and so was I.
At the close of trading, I wished everyone a Merry Christmas and went home for the remainder of the year. There was no sense in trying to move the portfolio around and trade my way out of my growing deficit against the S&P 500. I joined my wife and kids in baking cookies and ignored the stock market.
I spent the week after Christmas with family and friends, and avoided the little box on my computer screen. On January 2nd, I returned to the office to discover that my portfolios had rallied and I’d eked out a 70 BP (0.70%) margin over the market. In the end, baking cookies with the kids was far more rewarding than beating the market.