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You Can't Become Rich In Your Pocket Until You Become Rich In Your Mind | ||||
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My firm was the investment banker and sponsor, and we told our brokers that it could give a 10-to-1 returnDivergence Is the Key to Following The Vital Few I DID NOT JUST WAKE UP ONE MORNING AND DECIDE THAT LOOKING for divergences in insider behavior was going to make me rich. I became wealthy over the years by perfecting my methodology of following insiders. Actually, my understanding of divergent behavior and its relevance to many walks of life started in my youth. I was born in Webster, Massachusetts, and lived there for the first 18 years of my life. My main love in high school was football. My team played in the Central Massachusetts Class 2 Division against schools much larger and better funded than ours such as Worcester South, Auburn, and Mary E. Wells of neighboring Southbridge. The rivalry between my school, Bartlett, and Mary E. Wells had started back in 1906 and by the time I came along, it was so intense that no one would go to the other town for any reason if we could help it, even during the off-season. In my senior year, I was co-captain and played starting quarterback. We were undefeated that year going into the annual Thanksgiving game in Southbridge. Wells had only one loss, so the winner would claim the division championship and bragging rights for the year. The last undefeated Bartlett team had won in 1925. It was our chance to do it again, and we were powered up. I knew Wells had been looking us over, and I had had a chance to watch them play as well. One of the things I noticed was that whenever the opposing team moved its fullback to one side of the playing field, Wells would shift their defense to that side. This made it tough to run against a stacked defense. I also knew that when our offense placed our fullback to the right or to the left, we always ran or passed to that side. Coach, I asked, can I talk to you about a strategy I think could win this game for us? Sure. Ive been watching Wells, and it seems they tend to overshift their defense to the fullbacks side. We need a reverse move of some kind to throw them off. Youre right, the coach said, but that means you will have to run with the ball. I have been thinking about this, but we would be in trouble if you got hurt. I must have looked disappointed because he immediately said, Since this is our last game, tell you what, lets run a play or two where you roll out to the opposite side of our fullback. Then you can run or pass, depending on what happens with their defense. Got it. One thing, George, dont do these rollouts too early in the game, or theyll be onto us and adjust their defense. Okay. The Thanksgiving game played on a beautiful day to a packed crowd of 6,000 fans. As expected, Wells shut our offense down the first half. With a minute left, we were down 12-0 and we had the ball on their 45-yard line. I figured the time was right and called a rollout to the right. I put our fullback, Pete Teguis, flanked out to the left. On this play, everyone was to run toward Teguis, except our two tight ends. One end would run straight and cross over to the right deep into the field. The other end would go to the right, about 15 yards in front of the other player. Then I would roll to the right. It worked like a charm. Both ends were wide open. I lofted the ball to the tight end closest to me. He pulled the ball out of the sky and rumbled into the end zone untouched. With the extra point we began the second half 12-7. Wells did not know what had happened, and we kept up our divergent strategy. I threw two more touchdown passes and even ran for one. We won the game 34-12 and went on to take the state championship. Recently, I met a man who played for Mary E. Wells in that game. He told me that for years he had thought about that game and had asked himself many times why his team had collapsed in the second half. When I told him about our divergent strategy, he thanked me. I guess I eased his pain. The practice of looking at abrupt changes in behavior patterns to alert you to impending problems can save you serious money, if you apply it to your business relationships. In the mid-1980s, I was a stockbroker with Drexel Burnham in Fort Lauderdale, Florida. I was asked on several occasions to participate in a question-and-answer show about the stock market on national television. Filming was in Los Angeles and the studio put me up at the Beverly Wilshire Hotel, directly opposite Rodeo Drive and across from Drexels office. Michael Milken owned the building and leased it to Drexel. During my third trip to L.A., I noticed that the companys name had been removed from the building. I believed the absence of Drexel Burnhams name was divergent behavior, and a sign of Milkens arrogance. In my opinion, he was telling Drexel that if they did not like what he was doing, then he would put another name on the buildingShearson, Milken or whatever. I resigned from my position at Drexel Burnham the next morning. One week later, a federal government grand jury indicted Milken and other Drexel officers for insider trading violations and other market manipulations. I was one of the few employee stockholders to get out with the bulk of my cash when a couple of years later the company was forced into bankruptcy. Years earlier, I was a stockbroker with E.F. Hutton in Pompano Beach, Florida. I knew quite a bit about tax shelters for high net worth individuals, so I decided to watch for new offerings in this area. In the mid-1970s, ordinary income was taxed at 50 percent, while dividends and interest were taxed at 70 percent. At that time, the U.S. government approved tax shelters for investors in order to encourage domestic oil and gas exploration. Generally, these programs offered oil and gas programs that promised a 5-for-1-tax write-off and a good chance of doubling the capital invested. For example, you could invest $10,000 and receive $50,000 in tax deductions. Even if you got only your principal back, it was a good deal because of the tax savings. Of course, there still was some risk. In 1975, Tesoro Petroleum offered an oil and gas tax shelter program that seemed to push the limits of reality. My firm was the investment banker and sponsor, and we told our brokers that it could give a 10-to-1 return. Our commission was $800 for each $10,000 invested, a good incentive to market the product. The day before I started calling leads, I saw an insider filing revealing that one of Huttons senior officers had sold a substantial amount of Tesoro stock. I viewed the sale as a divergence from normal behavior. I expected a senior officer of the firm in a high tax bracket to buy the offering and take advantage of the 5-1 write-off, so I decided against offering the tax shelter to my clients. The Tesoro tax shelter program was a disaster because one of their oil refining plants in Puerto Rico had major problems. The 10-for-1 return was reversed. Instead of a huge profit, the deal gave investors only ten cents back for each dollar invested. This fueled my interest in following and analyzing insider behavior. Perhaps the Hutton officer did not know that Tesoro was in trouble, but I found it very interesting that a few years later he donated $15 million to the Harvard Business School to establish a course in business ethics. Somewhere I read that the president of the business school said the gift was unusual, and I remember thinking, Could this be his penance? We will never know. Maybe he was just lucky. More important, however, I learned that I could follow what insiders did and ignore what they said if their actions did not support their words. Most of my investment career was built on the simple strategy of watching for divergences, a valuable business tool learned on the playing fields as a teenager involved in competitive sports. |
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