A "Loser's Game"

Although unaware it was a stacked deck, in the decade of the 1960s individual investors found themselves in a financial services world where they could not hope to out-perform institutional investors. It was a "losers' game" in all aspects. In fact, one could argue without danger of contradiction that the game was run by insiders who held and dealt most of the cards.¹

"When This Writer Entered the Money Management Business…"

In the mid-1960s, common stock trading levels on the New York and American Stock Exchanges were minuscule by current measures. Trading volumes exceeding 3 million shares in a day (versus 4-5 billion today), or a Dow Industrial Index move of more than five points would rate an above-the-fold headline in the Boston Globe's financial section. The S&P 500 Index had yet to be devised. Access to international stock markets was limited to American Depository Receipts (ADRs) — foreign company-based proxy certificates purchased by the investor on the New York or American Stock Exchanges. Stock purchases and sales were settled in four business days (versus three today and soon to be one day), and brokers earned significant sums in transaction commissions as well as on the float carried on their books during the five-day settlement period.

Back then, stock and bond trades were settled physically. In the case of a sale, a stock certificate was literally removed from the owner's vault folder and mailed or carried by messenger to the other party in the transaction. Brokerage account statements, trade transaction advices, and trade confirmations were normally typed and sent via messenger or USPS. At the execution desk, traders transacted orders via telephone and kept track of their positions on 13-column National Blankbook lined pads and manually maintained ledgers. More than a few trades were closed during the course of two tumbler-full martini spreads over lunch at Brandy Pete's in downtown Boston. Some technicians and portfolio managers would daily use graph paper to manually plot "point and figure" stock price action of individual issues, claiming to be able to forecast individual stock behavior. "Head and shoulders" common stock chart patterns, according to these "technicians", were thought to predict a bullish-to-bearish market reversal, an enduring myth which persists to this day and has even been enshrined in some contemporary computerized FinTech black box models.

Bonds Were Purchased, Added to the Portfolio and For the Most Part, Held to Maturity

Active management of fixed income holdings, pioneered in Boston by Andy Carter, Jack Doyle, Dan Fuss and Keith Brodkin, began in the very late 1960s. Generally, the corporate bond market was transacted through broker-dealer-maintained principal positions carried by each brokerage firm, mostly financed by bank borrowings. Bond dealers' inventory markups were closely guarded secrets, but usually more than enough to cover carrying costs.

The small lot tax-exempt bond market was the creation of a publication titled The Blue List which arrived each day at every subscriber's door around 6:00 AM. It attempted to list the country's entire tax-exempt bond inventory available for sale, including the seller's offering price. With hundreds of pages of positions held in each edition, it was printed on light blue onionskin-like paper, and throughout the day passed from one portfolio manager to another for reference.

In the early 1970s, Andy Carter, Jack Doyle, and Niles Peterson (at Boston's Wellington Management Company) scandalized the Boston and Wall Street bond dealer communities by inviting then Solomon Brothers' Joe Lombard and other dealers to assist in the active management of their collection of bond holdings. Dan Fuss at Loomis, Sayles and Company, and Keith Brodkin at Massachusetts Investors Trust joined the active bond management movement. "Buy and hold to maturity" in the fixed income world became a practice of the past.

Equity and fixed-income securities investment research was a top-down, macro-driven exercise. Since the Federal Reserve Board maintained tight secrecy about its rate policy discussions and intended direction, economists and portfolio strategists spent untold hours trying to divine the Fed's intentions. Economists and Investment Committees labored to decode Federal Reserve Board Chairman William McChesney Martin's oracular missives, or lack thereof, attempting to predict the future course of central bank policy and mandated interest rates.

Insider Trading Among the Well-Connected

In the 1960s and early 1970s, institutional securities research analysts built elaborate networks of broker and operating company management contacts, hoping to gain an information edge that would result in superior stock selection and portfolio investment results. Who one knew in the brokerage and corporate worlds counted as much as any proprietary deductive research or superior analytical findings. Monthly, Gil Kaplan's Institutional Investor magazine kept track of Wall Street's "Who's Hot and Who's Not" research analyst totem pole.

In Boston during the late 1960s and early 1970s, open lines of direct communication between senior operating company management and the downtown professional investment hierarchy regularly facilitated what today would be regarded as unalloyed "insider trading." One such assemblage was called "The Vault" — a group of Boston's corporate moguls and well-connected brokerage firm players. They met regularly over lunch, often in the dining room on the second floor of the Boston Stock Exchange, to brief each other on Boston company dividend increases to be announced, anticipated mergers and acquisitions, and corporate capital underwriting expectations.

Initial Public Offering (IPO) underwritings were allocated according to favored corporate management-broker relationships, often with the understanding that if a newly issued stock moved to a premium level from its offering price, the originating underwriter-issuing brokerage firm was assured, by a handshake arrangement, of handling the subsequent resale transaction.

"Private Letter Stock" was often issued directly to mutual fund managers at discounts of 25%-40% of prevailing market prices. Then, after a specified holding period of usually 3-6 months, the stock was registered with the SEC and marked-to-market with the attendant incremental performance enhancement for the owner's portfolio.

Creating A Profession Out of the Money Management Business - The Origins of the CFA Movement in Boston

In the mid-1960s, Lynn Savage, head of the New England Merchant's National Bank Trust Department Investment Research staff, called a meeting of his department and briefed us on the nascent Chartered Financial Analyst (CFA) credential program. He, with a few others in Boston and a bit later with Dan Fuss in Chicago, were aiming to elevate the business of managing other peoples' money to professional status with high standards of competence and ethical conduct. He challenged us to take the three tests of competence which he predicted would eventually lead to the CFA designation signaling a significant career path in finance. The CFA Institute, of which the Boston chapter is today one of the largest, currently numbers 165 Country Societies with 150,000 members world-wide — a tribute to Lynn, Dan and others prescient enough and willing to put in the time and effort to achieve these goals.

Brokers Lose Control

Until 1975 when negotiated commissions arrived, brokers were able to charge anywhere from 1% to 5% on both retail and institutional transactions. Front-end brokerage commissions on "load" mutual fund purchases approached 5%, an exception being T. Rowe Price's offerings where one had to purchase its no-load funds directly by sending a check or money order to Baltimore. Common stock new issue (IPOs) and bond underwriting commissions ranged from 5% to 7%, a portion of which was often rebated by check from underwriting brokers to substantial institutional buyers. But in 1975 when negotiated commissions were implemented, "Buy-Side" — portfolio managers and individuals — began to gain the upper hand.

The High Net Worth Market Becomes Competitive

In the late 1960s and early 1970s, the Boston firm of D. L. Babson made its reputation as a specialist in highly recognized large company growth stocks. Its weekly market analysis and investment strategy letter, written by David Wendell and later Brad Perry, was delivered by messenger throughout Boston. It was required reading in the financial district and often the subject of debate at institutional money management and investment committee meetings. David's personal special interest was emerging small U.S. growth companies, a pioneering focus at the time. Later in the early 1980s, he founded his own firm in Portsmouth NH, today run by David's daughter, Karen, continuing to focus on smaller growth equities. I served with David as co-trustee on trusts invested in a number of his small company selections.

From the beginning, the Boston portfolio management scene was devoted to the active individual stock picker's mode. But as the late 1960s and early 1970s unfolded, a number of converging movements questioned the assertion that superior information yielded better than average return results. Meanwhile, active portfolio investment management firms in cities including New York, LA, San Francisco, and Chicago were emerging as competitors on the national playing field, and in the 1980s the passive approach began to make inroads into the markets for HNW account management.

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¹ Charles Ellis, Winning the Loser's Game: Timeless Strategies for Successful Investing, McGraw-Hill Education, 2013.

 

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