Nobody had the time to find out the facts. They didn’t give a shit. Everybody wanted something that was homogenized and pure. So I was a sacrificial lamb, a tar baby, and nobody wanted to get stuck with me. Meanwhile, the rent on my apartment kept coming due. I swallowed my pride, went down to the unemployment office on Broadway and 89th, and got in line. As the line inched forward, I felt my future inching away. Why had I ever listened to the Sphinx?
As it turned out, the great accounting sleuth didn’t know his ass from his assets. The hospital management stocks got creamed along with everything else in the severe bear market of 1973-74. But the companies continued to grow over the next two decades as health care expenditures skyrocketed from 6 percent of Gross National Product to 16 percent. With this bullish backdrop, the stocks appreciated several times over, even though they now sell at lower price-earnings multiples. So the report was part right and part wrong.
As for me, while the experience screwed up my career for a few years, it toughened me up and prepared me to become a better trader down the line. And I came to meet Zoellner because of it, which was a very good thing.
In hindsight, I should’ve kept on being a team player, throwing lunches for the hospital management industry. The Prophet had to have known that. What the hell was he thinking when he told me to team up with the Sphinx and write a negative report?
Standing in the unemployment line, it was clear to me that what the Prophet should have said when he read my proposal was:
INTER-OFFICE MEMO
Date: 9/28/72
To: M. SCHWARTZ
From: THE PROPHET
Schwartz, you idiot. I hate the start of your Hospital Management report and I urge you to shitcan it immediately. It has the potential of permanently wrecking both our careers. Nobody wants a negative report. Trust officers want reports that cover their asses. They put them in their files and then when the stock goes down, they pull them out and say, “Well, this guy who’s smarter and better paid than I am wrote this report and that’s why we bought the stock.” And stay away from the Sphinx. Sphinx is quite willing and very able to destroy you. Start looking out for Number One.
TP:mc
cc:T. Sphinx
Inside Skinny
I’d love to say that I’m above dealing in rumors because playing a rumor negates my very first premise for doing well in the market, hard work. Work makes you strong and when you play a rumor, you have no strength. You are what you eat, and garbage makes you weak. Usually when you get a rumor, you’re late and you have no information. If the stock goes south, you have nothing to fall back on. You’re intellectually weak, and when you’re weak, you’re the most vulnerable. Still, like everyone who plays the market, I’m a sucker for a rumor.
The worst tips always seem to come when you’re in a losing streak. One of the things that I always used to talk about was that I had a very small coterie of people who I’d deal with, but when you get in a cold streak, you start listening to everybody. You’re almost listening to the shoeshine guy. It’s like being at the track and you haven’t had a winner all day, so you lean over to some guy who’s on welfare next to you and ask him, “Who do you like in the eighth?” And he says, “Well, the six horse, Jerry Bailey’s on him, it’s a layup lock.” And Jerry Bailey doesn’t pop the neck, and the six horse finishes fourth.
What happens with all these rumor stocks is that they get jostled, they get pushed up and down, it’s like bobbing for apples. When the stock heads south is when you’re at your weakest point, and that’s when you’re most apt to panic because you don’t have any intellectual bias for being there. You’re not weak because you’re winning, you’re weak because you’re losing. Like the old cliché says, the chain breaks at its weakest link. At this point, your darkest fears take over and you say, “I’m an asshole, why am I doing this again, I’ve done this before, why is this happening to me?” You panic, you puke, you throw up the stock.
If you’re going to play a rumor, you want to get it from somebody who’s got a good batting average. My main source is Inside Skinny. Inside Skinny is an excellent stock analyst who likes to keep his ear close to the “Street.” He’s always going to lunch with CEOs, chumming around with guys who sit on corporate boards, giving a little here, getting a little there, scraping for another hit.
So Inside Skinny calls with a tip, and why is he giving you this tip? Some people just like to help other people, it’s a feeling of power, of magnanimity, like making a charitable donation of information, but there’s two sides to the story. What you’ve got to understand is that Inside Skinny hasn’t just made one call. He’s already got his position, so he’s making twenty calls. Skinny wants to be a good friend to everybody, but he also wants to help his position along. So the stock ticks up an eighth and you and everybody else jump in. Then Inside Skinny’s function changes. He becomes a guidance counselor, he holds everybody’s hand while they wait for their college acceptances to come in.
“Skinny, Skinny. What’s happening? What’s going on here?”
“Everything’s still fine,” says Skinny.
“How’d the meeting go in Zurich?”
“Oh, everything was fine. Yeah, I know it’s taking a little longer, ’cause these things always take a little longer, they gotta do the due diligence, everything’s on track to come through, don’t worry, stop being so nervous, you’re always so nervous.”
As soon as you get stroked, you go out and buy some more stock. And nineteen other people do, too, so then the stock starts to look good on the tape. Everyone’s relieved because someone else knows something, and the stock’s acting better. Then the stock goes down five points and you puke.
You call Skinny and ask him what the hell happened. He doesn’t want to hear your problems. “I got killed, too,” he says. “And I had more than you did,” but in the meantime Skinny’s feeding his stock out into the third wave of buying.
That’s it, you vow for the umpteenth time that you’ll never play another rumor, but then a few months later, right in the middle of a losing streak, the phone rings. It’s Inside Skinny. “Hey,” he says in a hushed voice, “have I got a good one for you.”
5
Auric Schwartz
“Care for some more popcorn, Ellen?” I crooned, accidentally brushing the back of my hand against the front of her sweater, again. It was Christmas vacation, 1964, and we were seated in the back row of the Roger Sherman Theater on College Street in New Haven. I was a sophomore at Amherst and so far my social life had been a complete bust. Part of the idea of going to a good school like Amherst was to trade up into a better social stratum, and from James Hillhouse High, I had plenty of strata to go, but back then, I wasn’t much of a trader.
My research was strong. I’d pore over the freshman picture books from Smith and Mount Holyoke and pick out terrific-looking sophisticated girls who’d prepped at places like Emma Willard, Ethel Walker, and Miss Porter’s and give them a call. It was my execution that was killing me. “Hi, Susie, Susie Payne from Greenwich? Marty Schwartz from New Haven. How ya doing today?” Click. “Hey, Liz Hunter, great. Listen, this is Martin Schwartz from Amherst. I was wonderin’ if ya’d like to play some cards this weekend. Bridge? Yeah, sure, how much a point?” Click. “Hello, Kimberly Williams? Buzzy Schwartz here. I’m calling from Amherst ’cause I see you’re from Middleburg, Virginia, and that’s horse country, right? Yeah, so I figured ya might like to take the bus up to Hinsdale to play the trotters?” Click.
Now I was back in my own stratum. Ellen Fine was my date. Ellen had been in my class at James Hillhouse High and was a sophomore at Vassar.
The lights dimmed and the smooth, debonair image of James Bond filled the screen, his cool, lithe figure framed inside the barrel of a gun. Bond was about to match wits with another master criminal on behalf of Her Majesty’s Secret Service. It was no secret that 007 would also be called upon to service a bevy of beauties. That’s why I’d chosen Goldfinger for my date with Ellen. I was co
unting on Bond to break the ice. As he made his moves, I’d make mine.
I didn’t have to wait long. The movie had hardly started before 007 was wrapped up with beautiful, blond Jill Masterson. When Bond cuddled up to Jill on the balcony of the Fontainebleu Hotel in Miami, I cuddled up to Ellen in the back row of the Roger Sherman Theater in New Haven. When Bond put his arm around Jill, I put my arm around Ellen. When Bond went to first base, I went to first base. All the while, Jill and Ellen were whispering sweet nothings in our ears. Thanks to 007, things were going great, so I decided I was going to try and steal second. Slowly, smoothly, like 007, I made my move, the classic over the shoulder to the boulder holder. “Hey, Buzzy, slow down,” Ellen purred. “Who do you think you are, James Bond?”
She broke from the clinch. Unlike a Bond martini, I was stirred but not shaken. I was sure that Ellen was just pacing herself. I had to be cool, like 007. When I looked up at the screen, Bond was playing golf with Auric Goldfinger. They were at some beautiful English country club. Right away, I liked Goldfinger. He reminded me of when I used to caddie for Pappy Snyder. Bond and Goldfinger were on the sixteenth green and Goldfinger was lining up an easy two-foot putt. “What’s your game, Mr. Bond?” he said, addressing his ball. “You didn’t come here to play golf.”
Plop. Bond dropped a gold bar on the green right next to the cup. Goldfinger’s body twitched; he missed his putt. I sat up in my seat. I’d never seen anything as beautiful as that gold bar gleaming on that green grass. I lost interest in Ellen and second base. I became absorbed in Auric Goldfinger’s plan to nuke Fort Knox. It was brilliant. Why try to steal the gold from Fort Knox when you could just irradiate it? If the largest deposit in the world suddenly became worthless, Goldfinger’s own huge holdings would soar in value. Of course, Bond foiled Goldfinger’s plan, but even in defeat, Auric Goldfinger became my new hero.
I’d always been fascinated with gold. In many respects, this fascination was as much cultural as it was mercantile. From the days of the pharaohs, Jews have loved gold because gold has always been a way for people on the run to carry their wealth. When Moses came down from the mountain with the Ten Commandments, his followers had made their graven images from gold. Then came the Spanish Inquisition, the pogroms of Eastern Europe, Hitler and the Holocaust. Jews have always been on the run. When my grandfather Sam Schwartz escaped the pogroms of Eastern Europe and fled to America at the turn of the century, he knew where to keep his savings. As a tailor in New Haven, Grampa Schwartz was pressed for money, but what little wealth he had, he kept in gold. With that history, the desire for gold was in my genes.
Gold is unaffected by air, heat, moisture, and most solvents. Historically, it has been highly valued not only because of its beauty and resistance to corrosion, but because it’s easier to work than all other metals, and easier to obtain in pure form. It was hoarded because of its rarity. For these reasons, gold’s been used as currency since the days of the pharaohs.
Over time, one country after another valued its currencies in terms of gold (the “gold standard”) and when the great increase in commerce in the late nineteenth century created the need for a formal system of settling international trade accounts, gold became the basis for international monetary transactions. With some exceptions, the gold standard lasted until the Great Depression, but between 1931 and 1934, virtually all countries found it necessary to abandon the gold standard. The reason was that most countries figured their exports would be stimulated if they devalued their currency. However, any advantage they got was soon lost as other countries also deserted the gold standard.
FDR was forced to follow suit after he took office. In April 1933, he ordered Americans to turn in their gold coins. Most people did, but there was a lot of hoarding. Grampa Sam wasn’t about to turn in his $20 gold pieces. Instead, he squirreled them away. America was falling to pieces and who knew when the Schwartzes might be on the run again.
Grampa Sam held those coins until 1957 when he turned senile. One day, without telling a soul, he walked down to the Westville Savings Bank at the bottom of Fountain Street and cashed in his Double Eagles for their face value, $20 apiece.
What was left of Grampa’s mind must have reacted to FDR’s order twenty-four years late. By this time the market value of the Double Eagles had soared to around $100. Fortunately, Gramma Rose had squirreled away a few coins of her own, and when I turned thirteen, she gave me one, a 1925D Saint-Gaudens Double Eagle.
Designed by Augustus Saint-Gaudens in 1907, one side bore the image of a majestic eagle flying over the sun, suspended in its rays. Above the eagle were the words
United States of America Twenty Dollars
Below the eagle, perched on the rim of the sun like a corona, were the words
In God We Trust
On the obverse was a woman with long, wavy hair, clad in a sheer gown, holding the torch of Liberty in her right hand and the olive branch of Peace in her left. Her left leg was raised upon a rock, pulling her sheer gown tight. She was beautiful. I was sure that I could make out the nipple of her right breast. Just above the rock was the date “1925” and above that, nestled between two sunbeams, the mint mark “D.” Low in the background, by her right foot, amid the rays of an unseen sun, was a tiny U.S. Capitol. Above it all was the word LIBERTY, and little stars ran around the circumference. I loved that coin. I fondled it hour after hour until, finally, I turned numismatic.
In 1958, I bought a used copy of the “Red Book,” A Guide Book of United States * Coins * 10th Edition * 1952, by R. S. Yeoman. The Red Book was the numismatist’s bible. A new edition came out every year and listed the approximate price you could expect to pay for any U.S. coin, depending on condition and scarcity. I’d go down to the bank with my Red Book and a ten-dollar bill and get either a roll of quarters or two rolls of dimes. Then I’d go over to the counter, break the rolls open, spread the coins out, and start looking for “Winged Liberty Head” dimes or “Standing Liberty” quarters.
I’d keep going back to the teller, recycling the coins and getting more rolls. Once again, I was the detective. When I finally found a coin I wanted, I’d check the date, where it was minted, and then look it up in my Red Book. I’d see how many of that particular coin was minted and what it was worth, and then I’d shop it around to different dealers, or if I had a whole series, advertise it in Coin World or Numismatic News and sell it directly to a collector.
I made some good money trading silver coins, but all the time my real love was gold. Finding a Winged Liberty Head dime or a Standing Liberty quarter was neat, but it couldn’t compete with fondling my Saint-Gaudens Double Eagle. I’d come home from the bank with my dimes and quarters and lay them out on my pillow and dream that they were all Double Eagles. I wanted gold, but I couldn’t afford it, and technically it was still illegal for individuals to hold gold coins other than for numismatic purposes.
It wasn’t until December 31, 1974, that Americans were allowed to purchase gold as an investment. And I was always going tapioca playing the market, so I wasn’t able to buy much gold. It wasn’t until I married Audrey and started trading on the American Stock Exchange that I began buying gold coins on a regular basis. By that time, the price of gold had risen to more than $500 an ounce, but whenever I had any extra money, I’d buy a few Krugerrands and Canadian Maple Leafs. After I had a dozen or so, I’d take them out and lay them out on my pillow, and flip them up into the air like Scrooge McDuck. It was a good thing to do if you’re not in a mental hospital, because I remember thinking to myself, You know, these ain’t worth $500 apiece, and somebody’s making a real killing on them.
But the price of gold kept going up as the fear of inflation drove more and more people into hard assets. Financial best-sellers were coming out one after the other, predicting the end of the world. Doug Casey wrote Crisis Investing, Jerome F. Smith The Coming Currency Collapse, Harry Browne How to Profit from the Coming Devaluation, and Howard J. Ruff How to Prosper from the Coming Bad Years, each disse
minating his own brand of fear-mongering and predicting the end of the financial system as we knew it.
I became so fascinated with gold that late in 1979, after I made my first hundred thousand on the Amex, I considered selling my seat and buying one on the New York Commodity Exchange (COMEX). I wanted to become Auric Schwartz, the gold trader. I discussed the idea with Audrey, and we agreed that it wouldn’t be such a good idea. “Buzzy, you’re doing real well on the Amex,” Audrey said. “If you want to trade gold, trade the gold stocks.”
Easier said than done. There weren’t that many public companies producing gold, and only a few were traded on the Amex. ASA was a closed-end investment company investing in over-the-counter South African gold mining stocks that was traded on the New York Exchange, but Louis “Chickie” Miceli’s group, the ones that made the market for Mesa Petroleum options, made the market for ASA options on the Amex. ASA was traded right next to Mesa and Peter the Mustache, who worked for Chickie, handled the ASA options.
As usual, I did my homework before I started playing ASA options. One of my rules was never to get into something until I’d fully researched it and made sure that it fit my methodology. In analyzing ASA, I discovered an interesting correlation between the Canadian and American gold stocks and the price of gold itself. The stock prices tended to rise and fall before the price of gold, which made them a leading indicator for gold prices. ASA, which invested in South African gold producers, would rise and fall more in line with the metal itself, so I knew that when the Canadian and American gold stocks went up, ASA would undoubtedly follow.
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