October 2003 Newsletter
Issue Ten, Volume Four

THE BEST OF WALL STREET

By Mike Gasior

Last month I promised a list of some of my favorite investment related books, movies, television shows and so on and I have chosen to expand that list even further to include all sorts of things. You'll see what I mean in relatively short order.

I was also interested in watching the Frank Quattrone trial end in a hung jury given that I had written previously that I didn't think the government had much of a case against him. I was ultimately pretty on target on the weakness of the government's case, but I had no way of knowing that Frank would almost blow the whole thing with his own testimony. Truthfully, I doubt that prosecutors really want to try this whole case again since I think their odds are even worse for them the second time around. However, I don't think they can live with the ramifications of just letting him walk without giving it at least another shot.

The case the Feds have against Martha Stewart is similarly weak and the results of the Quattrone trial has certainly got to worry the prosecutors going after my best friend Martha. Perhaps it might be time for the government to start cutting plea bargains with some of these defendants before everybody walks away Scott free and the prosecutors start to look like the JV team.

As lurid and sensationalistic as this whole Kobe Bryant case is, and is going to be, I am at least honest enough to admit that I am really looking forward to the trial. Perhaps it's because I know that it IS going to be lurid and sensationalistic. I was always upfront that I was sorry for OJ's trial to end because it provided me with constant new programming I could watch on television. For a guy who spends over 200 days a year on the road in hotel rooms I need lots of new stuff to watch on TV and OJ was very good for that.

The most important lesson I took from the OJ trial that I think has application in the Quattrone and Martha cases, is how badly the government can fare when a trial is anything close to a "fair fight". As much as OJ supposedly had the "Dream Team" representing him legally, the State of California had many, many times the level of resources than the defense could have ever dreamed of. To name just some of the depth available to Marsha Clark and the prosecution, they had the entire Los Angeles Police Department along with the State Prosecutors Office, The State Police and the FBI Crime Lab. You can be about 100% certain that if OJ were some homeless guy from Compton who had killed Nichole Brown and Ron Goldman he would have already spent quite a few years on California's death row. The minute a defendant can provide even a modicum of competition to the government you can almost always count on the prosecution having a tough time. Unless you're just hugely guilty beyond any shadow of a doubt, as Dennis Koslowski of Tyco seems to be, it is going to be tough sledding for the government. The Quattrone hung jury is more evidence that this is true.

REMEMBER THAT I TOLD YOU THIS - HILLARY IS GOING TO RUN

Now it is fairly common knowledge that I actually cannot stand the woman, but I predict here and now that Hillary Clinton enters the Presidential election sometime in the next few months.

As much as I may personally dislike her and disagree with her on many policy issues, I cannot deny the woman that she is indeed a professional and cagey politician and it would frankly shock me if she weren't running against Bush next November.

Originally I expected she would let the 2004 race pass her by, not wanting to enter the fray against a heavily funded incumbent president who is always going to be a formidable opponent no matter what the poll numbers might suggest. Her husband did not have even a tiny fraction of the political capital available to him as the governor of Arkansas back in 1992, and he lunged at the best opportunity he was likely ever going to get by entering an extremely weak Democratic field of candidates going up against (at the time) an extremely popular elder Bush.

Hillary is well aware that you often only get one golden chance to run for the world's most powerful office and timing is very, very critical. I had figured she would keep her political powder dry during 2004 and run against a lesser Republican opponent in 2008 who would likely carry much less stature than herself into the race.

Now I think she, and her advisors, are very cognizant of Bush's dicey polling numbers but appreciate that the election is still over a year away. What they are even MORE aware of is the hopeless group of losers currently seeking the Democratic nomination for President. If there ever was a more hopeless JV team trying to play varsity ball, this is the group. When your leader is the former governor of Vermont and the most entertaining person is Al Sharpton, you cannot be surprised that even Democrats aren't that interested in the race. And as much as I think John Kerry is an honorable man and true war hero, he manages to achieve the impossible task of making Al Gore seem like Rodney Dangerfield. God, can you imagine a more impossible thing? Even Wesley Clark joining the race only made it interesting for about 15 minutes before he started sounding as whiney and full of crap as the rest of the bunch.

And as much as I hate to give advice to the Democrats, I must say that they just have to give up all the whining and complaining as a strategy. Just telling me "Bush sucks" is not going to end up working. You know what? Maybe at the moment he does suck, but why don't you spend a couple minutes telling me what YOU'D do instead. Don't just complain about the deficit or Iraq, but tell me tangible alternatives that you might pursue. Voters aren't nearly as stupid as politicians would like sometimes, and they understand that saying "I would roll back the tax cut for the richest Americans" simply MEANS, "I am going to raise taxes". And I don't think anyone believes a cranky Howard Dean or comatose John Kerry would have any more success than Bush has had getting other countries to help out in Iraq.

Which all brings me back to another one of my best friends, Hillary. Hillary may be many things, but one of them is that she is as smart as the day is long. The moment she announces she is running she will immediately vacuum every molecule of oxygen from the Democratic race and will have access to fund raising that will make the rest of the field look like the JV team they are. She will also have the ability to learn from mistakes being made by the current candidates and not make them herself.

For example, the entire platform for ALL the Democratic candidates running against Bush can be summed up in two simple issues:

--The Economy
--Iraq

Well it was just announced today that the economy grew in the third quarter of this year at the highest annualized rate in about 20 years.

And what if U.S. troops actually capture Saddam Hussein next week?

Clearly, neither of these things would suddenly make Bush a "lock" for re-election, but could certainly put a big kink in the current strategy being used to go after him. Hillary, however, has not made this mistake having not been a candidate herself to this point.

All of which leads me my conclusion: If the economy begins to actually improve and if the Iraq situation appears to begin turning around, the current crop of Democratic candidates become even more impotent than they already are. At that point I don't think Hillary will be able to resist snatching the nomination in what may ultimately be the easiest race in many, many years. Whether or not I like her or agree with her, she is absolutely a varsity player and a formidable opponent to President Bush regardless of how rosy the economy might be or benign Iraq may become. No matter how much Howard Dean and his supporters think they have a reasonable shot at Bush, I think Bush wipes the floor with Dean even if the economy stays crappy and Iraq stays difficult, never mind if both situations display improvement.

So there is my prediction. The 2004 Presidential election is George W. Bush versus Hillary Rodham Clinton. Remember who told you.

THE BEST OF WALL STREET

Very much like my previous lists regarding music, this list reflects MY personal opinions as to the best of different things. I am assured of plenty of mail disagreeing with some picks, but isn't that just the fun of these things? Here goes.

BEST STOCK MARKET INVESTOR OF ALL-TIME - "WARREN BUFFETT"

I will no doubt get grief because this seems so obvious a choice, but that would be akin to giving me grief for calling Michael Jordan the best basketball player ever or Jack Nicklaus the best golfer ever. The only thing is, Buffett's statistics are much more impressive than Jordan's maybe even Nicklaus too.

Imagine this. Had you invested $100,000 in Berkshire Hathaway back in 1965 when he took over the company, your investment would now be valued in excess of $51 million. Not to mention that the partnership that Buffett managed prior to Berkshire Hathaway managed to make gains of 1,156% from 1957 until 1966 which is hugely impressive considering the Dow Jones Industrials only posted a 122.9% gain during the same period of time.

What is perhaps most impressive about Buffett is the extraordinary length of this record and that he accomplished it:

--Without ever using any leverage at all.
--Never has had even a single down year - EVER.

I would be remiss if I didn't give an honorable mention to Peter Lynch whose track record at Fidelity Magellan is legendary and deservedly so. The honest truth is that Buffett's compound rate of return is higher than Lynch's as well as twice as long. Still, Lynch honestly deserves a very solid second place.

BEST BOND MARKET INVESTOR OF ALL-TIME - "BILL GROSS"

This is another fairly obvious choice, but Bill Gross who runs PIMCO out in Newport Beach, California is in a similar league of his own, much like Warren Buffett. No other bond market investor has racked up long-term rates of return comparable to Gross. Period. Paragraph.

Over the past 30 years, Bill Gross has managed an average of 10.6% returns on a bond portfolio, which is unheard of. That beats the Lehman Brothers Bond Index by over 150 basis points and almost matches the 13% annual return offered by the S&P 500 during the same time period.

BEST OVERALL INVESTOR OF ALL-TIME - "GEORGE SOROS"

Yet another easy pick for me.

If you had invested $100,000 in the Quantum Fund back in 1969 when Soros started it, your net asset value on the 30th anniversary in 1998 would have grown to $49.8 million. Even better, you would have gotten over $92 million in cash distributions from 1989 through 1998.

Besides the legendary stories of Soros being the man who "broke the Bank of England" and ruining the economies of Thailand and Malaysia a couple of years ago, no other investor has made larger gains than Soros over the past 30 years. Not Buffett. Not Lynch. Not Gross. Of course, Soros has applied leverage and used the derivatives market to achieve these gains, which neither Buffett, Lynch or Gross has. Still, no one can ever argue with success, and Soros has enjoyed plenty of that. Along with being the highest paid person who has ever lived, personally earning $1.6 BILLION back in 1999, and that makes Dick Grasso look like a piker.

BEST WALL STREET DEAL MAKER EVER - "MICHAEL MILKEN"

There was never anyone like Michael Milken before him, and no one like him since. He created monsters like Ted Turner, Rupert Murdoch, Ron Perlman among many, many others. He quite literally invented the non-investment grade (or the more impolite "junk bond") bond market from scratch.

He is also in the Guinness Book of World Records as the highest paid employee ever, earning $550 million back in 1987 when half a billion dollars was still a lot of money, and makes the likes of Frank Quattrone and Dick Grasso look like chump change artists. He also has always been a very forward thinking visionary able to see mega-trends long before others would see them.

Currently, his company Knowledge Universe is fast becoming the largest educational company in the world, and doing it in a very quiet manner. They are acquiring any educational business from nursery schools to private colleges as well as corporate training companies. Milken believes we are in the middle of only the second mega-transition in this country as we move from an industrial economy toward a service economy, quite similar to when we moved from agriculture to industrial over a century ago. As the move continues, people are going to need to be re-trained and re-educated and it is very likely that one of Michael Milken's companies will be providing it. I'm just hoping he isn't interested in buying out a little, financial seminar company like mine since I'm not quite ready to sell out yet, and how do you say no to him? It would be like Tony Soprano wanting to buy you out.

BEST WALL STREET DOCUMENTARY OF ALL-TIME - "THE GREAT GAME"

I saw this documentary produced by CNBC back when they first produced it three years ago, and I was impressed at its depth and breadth in covering the history of Wall Street going all the way back to when New York was still New Amsterdam.

They used to run it pretty consistently on days that were market holidays since it filled up two hours of programming. I haven't seen it in a few years, and I don't know if CNBC is selling copies of it. I would certainly recommend it in an academic environment for giving a class a true history on how Wall Street developed and works.

BEST FINANCIAL OR ECONOMIC DOCUMENTARY - "TRILLION DOLLAR BET"

This is a completely wonderful documentary that follows the quest of economists for a way to play the financial markets without risk and culminates in the discovery of the Black/Scholes Option Pricing Model. Then, the story follows Myron Scholes and Robert Merton (who were awarded the Nobel Prize in economics for their work on the model) joining former Salomon Brothers bond trader John Merriweather and other partners to form the hedge fund Long Term Capital Management.

It is an excellent story and the film is stacked with absolutely "Who's Who" of economics and finance being interviewed. I totally recommend watching the film sometime, which was produced by WGBH in Boston and can be purchased on their website at:

http://shop.wgbh.org

BEST HOLLYWOOD MOVIE ABOUT WALL STREET - "WALL STREET"

This was definitely my easiest pick, since this movie is to Wall Street people, what Caddyshack is for golfers. Someone wrote me last month with the best point to consider, which is how quotable the movie is. I can assure you that anyone who receives a phone call from me prior to 7:00 in the morning will hear the words "Wake up pal, money never sleeps."

The film Boiler Room was alright, although they could have skipped the sappy father/son part of the story. The whole movie was just a little too much everything. Too much drugs. Too many hookers. Too much Ben Affleck. But the most realistic part was where Giovanni Ribisi's character was walking through the HUGE, empty house of one the young brokers only to find everyone sitting on the only furniture in the house, which was a couch in front of a big screen TV and all the young brokers were watching Wall Street and were reciting the dialogue along with the characters.

There are actually more movies with Wall Street connections than you may think, and I'll just give you the ones I still enjoy a lot.

--Trading Places with Eddie Murphy and Dan Aykroyd
--Barbarians at the Gate with James Garner
--Quick Silver with Kevin Bacon
--Rogue Trader with Ewan McGregor as Nick Leeson
--Rollover with Kris Kristofferson and Jane Fonda

BEST TELEVISION SCENE ABOUT STOCKBROKERS EVER - "LOUIE ON TAXI"

I remember almost peeing my pants watching this show, where all the employees of the Sunshine Cab Company on the show Taxi had to go out and find other jobs. Our friend Louie DePalma played by Danny Devito becomes a stockbroker.

As I made literally tens of thousands of cold calls I would always recall the wisdoms of Louie from his cold calling experience.

"Is your Mommy home? Well, do you know where your Mommy keeps her checkbook?"

"Sure. This company could create a disease that wipes out half of the people on earth, but if you're in the half that survives, don't you want to be RICH?!"

Enough said.

BEST BOOK FOR STOCK MARKET INVESTING - "ONE UP ON WALL STREET"

Although this book provides one of the better blueprints for actually picking stocks and formulating a mutual fund strategy, it could have been more thorough in explaining when is the appropriate time to sell a stock.

As much as Peter Lynch the author wants people to believe picking stocks is child's play, if you actually read and digest the book, you get a sense for Lynch's genius and discipline and come away knowing that it truthfully isn't as easy as it looks.

BEST BOOK ON THE FIXED INCOME MARKETS - "THE HANDBOOK OF FIXED INCOME SECURITIES"

Lots of books get called "bibles" or their respective topics, but this seminal book is one that actually deserves that sort of accolade. Hard core bond guys like me want to find the few flaws and errors contained in this Frank Fabozzi classic, the fact remains that this book is without peer. Although you won't be renting a cabin in the woods and settling next to the fireplace to cuddle up with this 1373 page monster anytime soon, it does double as an amazingly effective doorstop.

BEST BOOK ON MORTGAGE-BACKED SECURITIES - "THE HANDBOOK OF MORTGAGE-BACKED SECURITIES"

Since I was already tooting the Frank Fabozzi horn, I might as well mention this volume as well, since it is probably MORE important than the previous book with respect to the particular market it focuses on. This is another instance where there is no peer to this book and it sort of wins by default. If you need to understand this market, you HAVE to own this book. To that fact, there is no debate.

BEST BOOK ON DERIVATIVES - "OPTIONS, FUTURES AND OTHER DERIVATIVES"

This book by John Hull is still the leading book in a field that has become more crowded in the last few years. The former NASA, rocket science types complain that it lack intricacy, but I feel there is plenty of complexity to cause anyone to want to kill themselves.

Suicide attempts aside, this is a seminal book on a complicated topic and a tremendously useful guide to anyone who works with these products and I've enjoyed many parts of it.

BEST BOOK ON OPTIONS - "OPTIONS AS A STRATEGIC INVESTMENT"

I had to get this book onto the list since it was the book that spawned my life long love of options and derivatives in general. It has been a huge book for 20 years and Larry McMillan manages to explain some fairly complex strategies without burying you alive. I totally recommend this book.

BEST BOOK ON MARKET BEHAVIOR AND HISTORY - "A RANDOM WALK DOWN WALL STREET"

This book has become required reading in many finance classes and Burton Malkiel recently put out the eighth edition of this classic. Although I don't buy into Malkiel's theory that no one can actually beat the market (please see my previous comments on Buffett, Lynch and Soros), this book does tell the story of most major investment manias over the past 300 years including the most recent Internet bubble. It gives the reader a serious history lesson and some perspective that was sadly missing during the second half of the 1990s for many people.

BEST CLASSIC BOOK REGARDING WALL STREET YOU MUST READ - "REMINISCENCES OF A STOCK OPERATOR"

This book was written in 1923 and is the most required reading I could ever mention for anyone who wants to be a participant in the investment markets. I will save you all the gushing, but this is one of those timeless books that is as completely relevant today as it was 80 years ago. Remember my opinion of people who "don't know history..."

BEST BOOK FOR ANYONE WANTING A CAREER ON WALL STREET - "THE ART OF WAR"

People might think I'm just being overly dramatic here, but no book will serve you better than this one for preparing you for a career on the street. Sun-Tzu has been dead for the better of 2400 years, but his advice is direct and easy to understand. Consider this passage:

"Lure them in with the prospect of gain, take them by confusion"

Obviously, any book that is quoted by Gordon Gekko and Tony Soprano isn't for everyone, but I have always enjoyed the book and make use of much if the guidance offered in it. Worth checking out.

BEST BOOK TELLING A TRUE STORY OF WALL STREET - "WHEN GENUIS FAILED"

I could mention many books in this category including Liars Poker, Den of Thieves, Rogue Trader and many others, but this Roger Lowenstein volume that tells the story of the rise and fall of Long Term Capital Management is my favorite.

Although there seems to be oodles of detail, I actually wish Lowenstein had given even more. This book reads like a novel and you have to remind yourself that this is a true story. Excellent and entertaining.

BEST BIOGRAPHY - "TITAN"

This one is another monster at over 800 pages, but it tells the story of John D. Rockefeller and he lived to nearly 100 years old.

Written by Ron Chernow, this is another book that reads like a novel, and for those not old enough to remember how rich Rockefeller was this book will tell you. In current dollar terms he would have at least 7 to 8 times more money than Bill Gates. Perhaps closer to 10 times. Like When Genius Failed, there will times when you will need to remind yourself that this is a true story. I loved it.

TRUST ME HERE AND PLEASE BUY AND READ THIS BOOK - "THE GREAT BOOM AHEAD"

I saw Harry Dent Jr. on PBS over 10 years ago humping the book of his that had just been released called The Great Boom Ahead. He wrote it in 1992 and used demographic to PERFECTLY predict what would transpire during the 1990's including a Dow above 10,000 when it was barely 2,000. I want you to read what he predicted would occur AFTER the bust of the late 90's (yes...he predicted that too).

You can get this book in paperback on Amazon for $10.95 or used for a buck and a half. The best money you'll ever spend.

BEST FINANCIAL NEWSPAPER - "WALL STREET JOURNAL"

Easy one here since it is still the Wall Street Journal, which is much improved after their makeover almost two years ago. I enjoy the Financial Times, but there is nowhere near the depth and breadth the Journal offers.

BEST FINANCIAL MAGAZINE - "THE ECONOMIST"

Business Week is a very close second, but I enjoy the detail in The Economist.

BEST MAGAZINE FOR WALL STREET INSIDERS - "INSTITUTIONAL INVESTOR"

Although IDD (Investment Dealers Digest) is an outstanding read as well, Institutional Investor is still the premier magazine for the institutional community.

BEST PUBLICATION FOR THE ROCKET SCIENCE CREW - "FINANCIAL ENGINEERING NEWS"

It is a pretty heavy-duty publication, but remember the audience it is geared toward.

BEST FINANCIAL TELEVISION - "THE NIGHTLY BUSINESS REPORT"

You can see that I prefer detail, and The Nightly Business Report does the trick for me. Obviously, CNBC is the King of financial television and I can really enjoy Squawk Box and Kudlow & Cramer. But when I must narrow to a single show, you already heard my vote. I still have to tune into to Lou Rukeyser because he still books the best guests. Considering how CNBC is the King of financial television, I always wonder why their website is so awful. Doesn't NBC have a relationship with Microsoft who they might want to call for some advice?

A PRETTY DARN GOOD BRAIN TEASER THIS MONTH

I think you will enjoy this one, and it took me a little while to focus on what the logic was before I could solve it. I also got a wonderful suggestion that I should publish the answer to the previous month's brainteaser in the next month's issue and that will begin this month.

First this month's brain teaser:

"When Dr. Cohen finally finished typing her treatise 'The Sleeping Habits of the Columbian Edible Ants' she was rather surprised to notice that the number of digits she used to number the pages was exactly a multiple of the number of pages in the treatise itself. This substantial piece of work contains over 1,000 pages, but fewer than 10,000. Exactly how many pages does it contain?"

As always, give yourself a decent chance at figuring it out on your own before being a weasel and peeking at the answer. You can view the solution at this URL:

http://www.afs-seminars.com/brainteaser_Oct2003.html

And the answer to last month's brain teaser is:

The beauty of last month's brainteaser is that you don't need to know anything about the boats' relative speeds to figure out the width of the river (although you can certainly deduce the relative speeds after obtaining the answer).

When the boats first meet, the total distance they have traveled equals the width of the river. By the time they meet again, the total distance traveled equals three times the width of the river. (Draw a diagram to convince yourself.) The boats are each traveling at a constant speed, so they each will have traveled three times as far by the second meeting as the distance they'd traveled by the first time they met.

Because the boat starting in New York had traveled 720 yards at the first meeting, it must have traveled 2,160 yards at the time of the second meeting. But this distance is 400 yards from the other shore, so the width of the river equals 2,160 - 400 = 1,760 yards. Conveniently, this is exactly one mile.

http://www.afs-seminars.com

Copyright 2003, Michael Gasior. All Rights Reserved.

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