Taking Stock

It is a time for philosophy. Whenever there is a crisis, I call upon people who know history, who can perhaps see a light at the end of the tunnel and convince me that it isn't a freight train. Such a person is Henry the Red, whose nickname comes from the color of his former hair and who for many years has been in the maternity-dress business. The motto of his company is "You knock 'em, we frock 'em." The business runs itself, allowing Henry the Red to read books, indulge his hobbies and comment on the passing scene.

"The market crash is part of adult life," he tells me. "And all of adult life is a process of preparing us for death. Each ache and pain, each whack we take in business or in our personal lives gets us used to the idea that the end may not be so bad."

"Jesus, that's depressing, Henry," I say.

"We are entering a period," he continues, "when, like it or not, honesty is everything. People are going to be comparing their losses instead of trumpeting their triumphs in real estate or the amount they overpaid for a Frank Stella painting. When I was going off to college," he says, "the last of four children, I said to my father, 'Well, Dad, all of your kids are out of the house. You're finally going to be set free.'

" 'On the contrary,' my father said. 'My troubles are now just beginning.'

"That was smart," says Red Henry, "and I think America is in for some troubles. Know what the crash really means?"

"Tell me."

"It means that the easy money is finished; it's been made, in real estate, art and stocks. The wipe-out of billions of dollars in value means that in the foreseeable future, we are going to have to work our tails off. 'Hard work' is going to be the motto for the Nineties. If you're not willing to do it, you're going to suck wind."

Bernard Baruch was once asked, "How much money do you need to retire?"

He answered, "A little more."

I manage money for more than 1000 people all over America, from board chairmen to cabdrivers, from Pulitzer Prize winners to ex--K. G. B. agents. All of them checked in after the stock market's implosion to ask about their money and their future, and also to ask about the state of my health. "How have you been sleeping?" inquired a Hollywood producer.

"I'm sleeping just like a baby," I said. "Every two hours, I wake up and cry."

At the end of last October, the time of the crash, fewer than 28 percent of American households owned stocks. But if you think you're not going to be affected by the crash because you don't own stocks, you are wrong. It will affect all of us in varying degrees. The worst affected will be the people who believed that good times would roll forever and borrowed to live for today.

I know a stockbroker who has been called Mickey the Wise Guy since grammar school. Mickey represents the kind of person who was destroyed by the crash. He lived for the commission in the investment business, not for the clients, and he practiced what he preached; leverage was his middle name. He borrowed money in high school to buy clothes: the most pegged of pants, the bluest of suede shoes, the biggest rolled collars. And he hustled pool and candlepins to pay back the loans, except for those from girls, whom he usually stiffed or kept stringing along until graduation, when they would leave town for college and never see Mickey again. A real sweetheart, even though he did have the finest D.A. haircut in town. Mickey went where the easy action was, and in 1983, he became (continued on page 160)Taking Stock(continued from page 68) a stockbroker, marking up municipal bonds four points for widows. (A point is ten dollars per $1000 bond, the usual charge. Four points is considered a felony.) He cold-called gullible doctors and lawyers at dinnertime to sell specialized products such as movie syndications, storage centers, commodity-strategy funds and options on anything from gold to IBM. With their sizable commissions, options tend to be brokers' dreams and customers' nightmares. Mickey played the market himself, heavily into options on the Standard & Poor's 500 average, heavily into low-price stocks on margin. Mickey also bought everything else in his life on margin: a Jaguar, a beach house, a Wagoneer for off-road picnics, a condominium in town, a fisher coat for his wife, private schools for his kids--the Wise Guy's dream. Even while making $700,000 a year in commissions, Mickey would deliberately send the mortgage check on the beach house to the finance company holding the paper on his car loans and vice versa, to pick up the float.

I recently saw Mickey in the men's room of a restaurant. He was locked into his own image in the mirror, combing his hair into a D.A., endlessly combing. Everything had been sold out from under him. "They say that the Eighties are like the Fifties," Mickey told me tonelessly. "It's not like the Fifties. My pants aren't pegged. My killer smile is gone. I can't skip on my loans from the girls." I left him trying to recapture his D.A. and saw the death of the Wise Guys all over America.

If the easy money has been made and now unmade, and if we all must get back to the work ethic that made this country, what also is necessary more than ever is a plan. I suggest a three-pronged program, either to initiate a financial scheme or to rebuild from the rubble.

1.Reconstruct by buying zero-coupon Treasury bonds. These double your money in about eight years and are an ideal way for some investors to get back in the game with virtually no risk. Some high-grade zero-coupon corporate bonds have an even higher yield and may be appropriate.

2.Make a small list of several blue-chip companies, such as IBM, AT&T, General Motors. Dollar-cost averaging over several years will provide, in my opinion, a significant positive return, and you have the chance to initiate buys in companies at major discounts from their highs. Patience is the key in this strategy, as it always is when you are serious about your money.

3.Compile, or have your new stockbroker or advisor compile, a list of quality secondary companies--something I am calling a Vulture Fund. This third part of a portfolio that can afford risk for possible greater return should be invested in companies that either have lots of cash and no debt or have unusual long-term prospects. These stocks (particularly in the over-the-counter market) should have been hammered down out of all proportion to their worth and should be selling at two, three, four, five dollars to nine dollars a share--though they had been selling as high as ten dollars to $25. If you buy 1000 shares of ten such companies on the bargain counter, it would cost, say, $35,000. This is a portfolio designed to perhaps triple over the next several years because of the fictional prices of many issues that got destroyed in emotional selling. Many of these are true bargains, regardless of the pessimism that surrounds us all right now. Remember the words of Baron Rothschild when asked how he made all of his money: "When the streets of Paris are running with blood ... I buy."

The next several years will also be a time for concentration, for judgments that are not emotional. Gone will be the clichés of recent times, such as "Good real estate only goes one way--up." Or "Mutual funds are the path to riches." Or "Sure, refinance your house; a home-equity line is the best tax shelter there is." This is what I mean by concentration:

Luigi, a tailor from a small village in the hills of Umbria, gets an audience with the Pope. He stays with the Pope a long time, 20 minutes, a private audience. When he goes home to his village, the people line the streets. They celebrate a huge welcome home for Luigi. The people crowd around their hero. "The Pope," they cry. "Il Papa. What was he like?"

The tailor looks at them. "What was he like?" Luigi says. "A forty-two long."

It is going to be a time to focus on a specialty, to make yourself particularly good at what you do or what you are thinking of doing. In an economic climate in which fat is going to be trimmed, companies are going to be more bottom-line conscious than ever. You are not going to be allowed to fake it anymore.

For many, it will be a desperate period as well; people will not believe that the big-spending days are done. Before every period of stress in the past 20 years, a man has appeared in my office, wild to make the last big score before reality sets in. He is Sid the Schemer. His appearance always augurs tough times ahead. Sid is a psychologist by profession. He is the kind of person who gives psychology a bad name, the way doctors and dentists who spend time on real-estate deals and tax scams give medicine a bad name. In the mid-Seventies, Sid tried to get me to raise $100,000 for a device he was promoting that would enable women to pee standing up. This time, the stakes are higher, because Sid's time is running out. "I've got letters to IBM, Digital, Wang," he says. "I've got something that will not only make us a fortune but earn us the thanks of every mother in the world. A quarter of a mil will return a billion in five years."

"What is it, Sid?" I ask him.

"I'm working on an implant for children, an alarm system to prevent kidnaping or sexual abuse. It's put in a tooth or underneath an arm, and it emits a signal if the child is threatened. It rings in police headquarters, and it's gonna win me the Nobel Prize. Except for IBM, Digital and Wang, I came to you first." I usher Sid from my office and tell him to wait until he hears from IBM.

Frantic people will be coming out of the woodwork. They don't want to have to go to work.

But one result of the crash of 1987 will be a bonus. My wife and I recently went to a cocktail party given by a novelist to celebrate nothing more than the season. He provided entertainment, an old-fashioned idea--a singer accompanied by a piano. The singer sang songs by Gershwin, Rodgers and Hart, Cole Porter. She sang songs of romance and finished with "Let's do it, let's fall in love."

We are heading into a time when romance will be in fashion--the simple romance of strolls in the country and walks in the rain. Lyrics will inspire and sustain us. This isn't all bad.

I tried this observation out on the person who shines shoes in the office for two dollars a shine. Usually the tip is another dollar. "I agree with you," the shoeshine person said. "But that's maybe your childhood. My friends and I want to go back to softer days also--the Beatles of Strawberry Fields, the blues, people sharing low-down, not high time." I ignored my Quotron and listened. The shoeshine lady graduated from Wellesley College, class of 1987. She majored in history.

"Remember the words of Baron Rothschild: 'When the streets of Paris are running with blood ... I buy.' "