Fifteen years ago to the day, the internet bubble peaked at Nasdaq 5,000. That same week, I quit as head trader and co-founder of what was to become a multibillion-dollar hedge fund firm, easily the costliest decision of my life.
I didn’t quit because I was unwilling to work 60-80 hours a week anymore. I didn’t quit because I didn’t like my partner, though that was true. I didn’t quit because I didn’t love what I was doing – I did!
I quit because I came to the conclusion – after it punched me square in the jaw – that the stock market, Wall Street and especially the firm I was working for, were full of shit and I just couldn’t be a part of it anymore.
For those who weren’t trading during the late 90’s it’s just not possible to fully explain the euphoria that characterized the “internet bubble.” It was a true mania. At the time, I had a prospective hedge fund client who was day-trading his own money honestly ask me, “if you can’t double my money every year why would I ever give it to you to manage?” and he said this with a straight face. Just like this guy, many people sincerely believed that 100% return per year was not only a reasonable expectation but a minimum hurdle.
What made things especially challenging for us at the time was that we had a value discipline. Our methodology involved analyzing insider buying and selling but also had a foundation in Ben Graham-style value. This was in our funds’ literature and it was clearly used to sell them. In the late 90’s, value suffered, especially as the Nasdaq went parabolic into its peak, as investors had eyes only for high-flying tech stocks.
Ball Corp was one of our biggest positions. That simple jar and can company would eventually become one of our biggest winners but was dead money back then, like most “old economy” stocks. We shorted Enron and WorldCom before they blew up. The cash flow statements there didn’t lie but it was the massive insider selling by the top execs that sealed the deal for us. During the market blowoff, though, short selling became a losers’ game.
So one day, out of the blue, my partner tells me to buy one of the poster child bubble stocks for our flagship fund. As the junior portfolio manager I wasn’t out of line asking what sort of insider activity peaked his interest because there sure as hell wasn’t any value to be found there. In a roundabout way, he said he essentially liked the momentum in the name. I tried to argue that this didn’t fit our methodology or our mandate but he had none of it. ‘Just buy it.’
This was sometime during late 1999 and other names like this one started coming across my desk. I argued each time that they just didn’t fit out mandate but my partner was hell bent on turning us into a momentum shop. If I remember correctly this was right around the time Julian Robertson threw in the towel. He had simply had enough of trying to keep up with the mania without giving up his principles. My partner, in contrast, decided to give up his principles. ‘If you can’t beat ’em, join em.’ Ultimately, I decided that I couldn’t put aside my own values, by abandoning a true investment discipline.
But that was only half of it. I came to discover that abandoning our mandate was the least of my ethical concerns. And when I addressed these other concerns with my partner, he told me he intended to push the boundaries of what was legal let alone ethical. The greatest irony of all was that he had come up with our firm’s motto: “truth and disclosure.”
To my mind, everyone around me had gone crazy. The stock market had morphed into a strange sort of Pleasure Island from the Disney movie Pinocchio. Speculators were insanely euphoric and it felt like only I could see the gates closing behind them as they started turning into donkeys, my partner leading the way. I quit almost immediately and without giving any notice.
The firm went on to become very successful over the next decade without me. Eventually, however, karma caught up with them.
That was fifteen years ago but it is burned into my memory like it was yesterday. Ever since I’ve spent my career trying to figure out how to best help people with their investments in the most ethical way possible. In part, this is why I’ve been writing this blog for almost a decade now. I also write here, to some degree, to clear my own conscience for being involved with an industry I’m ashamed of because the industry is a magnet for people like my former partner. It also sanctions and encourages the sort of manic behavior we saw back then and you deserve better.