I liked Sixpence right away. The others were playing with family money, but I got the feeling that he, like me, was a street kid who’d made it on his own. Plus, among his many acquisitions, he’d picked up a professional soccer team. In the summer of ’67, I’d seen them play. Back then I was sitting in the cheap seats eating greasy fish and chips. Now, here I was, twenty-two years later, sitting at Claridge’s having shirred eggs and smoked salmon with the owner.
When Rakesh Bhargava was through introducing his clients, Paul Saunders introduced me. “If any of you have read Market Wizards,” Paul said holding up a copy of the book, “then you know about Marty Schwartz, but in case you missed Market Wizards, here’s an article in this week’s Barron’s you might find interesting.”
With that he reached under the table and pulled out a half dozen copies of the October 23 Barron’s. The headline said “Upward to New Peaks or Watch Out Below.” Below it in big bold letters were the names of five great traders whom Barron’s had interviewed about the volatility in the market. Paul Tudor Jones was at the top. I was at the bottom. Everyone started reading. My picture was on page 15 next to the headline “Two Up and One Down: How Three Super Traders Fared on Friday the 13th.” The article went on to describe how I’d made a half million that week and hated to quit, but I had to fly to Europe to raise money for my new offshore hedge fund. It ended with a quote, “I’m going to Europe, but the market gave me a kiss and that’s good enough for now.”
“Well, here he is,” Paul said, “Marty Schwartz.”
This was heady stuff. Here I was out trying to raise money by selling my favorite commodity, me, Marty Schwartz, the Champion of Wall Street and Champion Trader, and Barron’s had just given me their seal of approval. I felt like Donald Trump. When you listen to Donald Trump talk, he always sounds so assured. He’s probably full of it, but he’s out there selling his best product, himself. Even though only his therapist knows the truth, Donald Trump sounds like he believes in himself more than anything else on the face of the earth.
That’s how I felt as I described the financial empire I was going to build. My fund was going to be the biggest and the best, and everyone at the table could feel it. Thanks to the Barron’s article, I was a celebrity, like Donald Trump. The Sheik, the Rug Man, Khayyam, and Sixpence were people whose only common denominator was making money, and by latching onto me they were getting a piece of somebody who could help them do it.
When the meeting was over, Rakesh Bhargava took me aside, “Marty, do you have any plans for this evening?” he asked. I didn’t. Paul Saunders and Kevin Brant were leaving for Europe, but I didn’t have to meet them in Geneva until the following week. I was just going to hang around, like when I was a securities analyst back in the seventies. “I have been invited to a party,” Rakesh said. “Omar Khayyam’s daughter is marrying the Sheik’s son, and, as is our custom, the groom’s father hosts the parties for the week before the wedding. I have talked to the Sheik and he would be honored if you would join us.”
“I’d like that,” I said and I really meant it. This party would be my entrée to a whole different world, one based on more money than I’d ever seen before, even in Aspen.
Fine, Rakesh said. “Kamran Khayyam, Omar Khayyam’s son and the brother of the bride, will call for you at seven. You will meet some very interesting people. I think you will enjoy it.”
Driving up to the Sheik’s country home was like driving into a fairy tale. It lay nestled in the rolling fields about twenty miles outside of London. On the way out, I learned that Kamran managed a branch of his father’s bank. We pulled into the courtyard behind Stirling Sixpence and his big canary yellow Bentley. It was gorgeous and must have cost a couple of hundred thousand dollars, but all the cars in the Sheik’s courtyard were gorgeous and cost hundreds of thousands of dollars. The Sheik was standing by the main entrance greeting his guests. He was a most gracious host. He personally walked me around introducing me to his family and friends. “Marty, this is my brother, a world bridge champion.” “Marty, this is the Chief. He controls most of the oil in Nigeria.” The Chief’s skin was as black as coal, and he had tribal marks all over his face.
The Sheik continued to show me around the house. He told me that the house was more than 350 years old and had been built by King Charles I as a hideaway where he could take his mistresses. For me, this was ironic because the three main streets in New Haven bear the names of three judges who fled to the New World in the seventeenth century after a failed coup during which they sentenced Charles II to die by hanging. These three judges were Dixwell, Whalley, and Goffe, and they’d all probably been in this very house.
He took me to a dining room. There a large mahogany table was ringed by twelve massive silver chairs sculpted in the style of George III. “Here, come try one of these chairs,” the Sheik said. I went to pull a chair out, but could hardly move it. “Solid silver. They each weigh eighty pounds.”
We moved on to a sitting room. “Marty,” the Sheik said, taking the arm of a strikingly beautiful woman. “I would like you to meet Benazir Bhutto, a dear friend of our family.” This was not the woman I’d seen on TV, her body covered in drab black tentlike garb, her thin ascetic face devoid of makeup, her straight black hair pulled back under a black scarf. Her sleek figure was clothed in a luxurious gold and silver satin gown. A gold chain hung over one shapely shoulder and attached to it was a quilted black Chanel pocketbook. Chanel beads, Chanel shoes, and Chanel fragrance all adorned Benazir—Coco in her most opulent hour had never worn as many accoutrements as Benazir Bhutto. This woman had money radiating out of every aperture.
“Marty was just on the front page of Barron’s,” said the Sheik proudly. Benazir Bhutto nodded approvingly. I couldn’t believe it. Here I was, the kid from New Haven, a celebrity in the house of celebrities.
I walked through the gardens onto the lawn where two big tents had been set up. Cocktails were served in one tent, dinner in the other. There were foods from a hundred different nations: Beluga caviars, pâtés de foie gras, oysters, prawns, roast suckling pigs, spring lambs, countless kabobs and cheeses, opulence, excess, and greed abounding. I couldn’t wait to get a taste of it. Jugglers juggled, belly dancers jiggled, sword swallowers gorged, and fire breathers flared. Entertainment beyond entertainment. Food beyond food. I had never seen anything like it.
It was two in the morning when Kamran Khayyam finally dropped me off at Claridge’s, but I couldn’t sleep. I didn’t need to sleep, my dreams had come true. I’d been worried about my offshore fund, but now I was a star, the man with the Midas Touch, the cover boy of Barron’s, a celebrity in the house of celebrities. I wasn’t going to have any trouble funding Sabrina Offshore Fund Ltd. People had been thrusting business cards at me all night. They knew I could make them even richer than they already were.
The rest of the trip was almost as good. Geneva, Zurich, Paris, everywhere I went, there I was, my name on the front page of Barron’s. When I disembarked from the Concorde at JFK, I couldn’t wait to get back to my new fancy office and start sorting and cataloging the bundles of cards that were bulging from every pocket of every suit.
After a couple of weeks, the bank wires started humming in, but there were no names, just numbers. There was nothing to match with my newly cataloged collection of business cards from all my new international jet-setter friends. The wires were from banks in places like Bermuda, the Bahamas, Guernsey, the Isle of Man, and the Cayman Islands. We were getting a half million, a million, two million a day, and we didn’t have a clue who was sending any of it. We called the banks in Bermuda, the Bahamas, Guernsey, the Isle of Man, and the Cayman Islands, but nobody would give us any names. They said they didn’t know any, all they had were numbers, so that’s what Sabrina Offshore Fund Ltd. became, a $20 million fund of numbers with no names. For all I knew, my investors could have been Noriega, Gadhafi, Idi Amin, or, God forbid, somebody worse, if possible. I was told not to worry, I didn’t have to know whose money it
was. All I had to do was make more and everything would be fine and everyone would be happy.
14
How’s My Money Doing?
I lay down on my bed, set the alarm on my night table for 7:00 P.M., closed my eyes, and drifted into a fitful sleep. It was 6:30 on Monday evening, October 29, 1990, and I’d just gotten home from the office at 750 Lexington Avenue. It had been a grueling month and I was trying to catch a nap before I left for a client’s dinner at Lutèce, the most chic restaurant in all of New York. I’d asked the investors in Sabrina Partners L.P. and Sabrina Offshore Fund Ltd. to let me know during November whether or not they were going to keep their money with me for another year. So all through October, in addition to my regular work, I’d been meeting with clients telling them what a super job I was doing for them. If you’re running a fund, you can’t afford to lose any of your investors. At this level, they’re a small crew, and when somebody jumps ship, others head for the rail.
I was outperforming the stock market with an 18 percent gross return, but during my meetings it was becoming obvious that I was up against three problems. The first was my fees. I’d come out of Jack Schwager’s book as a Market Wizard, one of the top dogs, and I’d figured that if I was going to go through the hassle of managing other people’s money, I wanted to get paid the big bones. I was going to charge the same fees that Paul Tudor Jones, Bruce Kovner, and Louis Bacon were charging. The problem was, Jones, Kovner, and Bacon were running pure futures funds, and I wasn’t.
Sabrina Partners L.P. and Sabrina Offshore Fund Ltd. were set up to trade 25 percent in futures and 75 percent in stocks, so they weren’t futures funds, they were equity funds. Most equity fund managers charged “1 and 20,” a 1 percent annual management fee on the invested capital and 20 percent of the profits. Only the really top dogs, the guys who were running pure futures funds, had the cojones to charge “4 and 20,” but that’s what I was charging. That meant that on a return of 18 percent, I was getting 6.8 percent, more than one-third of the action: 4 percent off the top plus another 2.8 percent of the profits (20 percent of the remaining 14 percent), and a lot of my investors were starting to figure out that that wasn’t such a good deal.
My second problem was the market. It had been behaving erratically all year and I’d had trouble identifying any trends. When I started trading for the funds in November 1989, the market was whipsawing above and below my moving averages, so I took what I thought would be a conservative approach and set up several positions in proposed or rumored takeover deals, hoping for a consistent rate of return to underpin my S&P futures trading. I bought some Lin Broadcasting and Georgia Gulf, but with every rumor, the spreads would widen, and concerns about financing would create havoc with my short-term profitability. As a part commodity fund, I was required by the futures regulators to report to my investors every month, and this produced short-term pressures. I thought that these arbitrage positions would provide a favorable rate of return in a nontrending market. I was wrong. They didn’t pan out and after only five weeks, I was down 6 percent, or $2.4 million, of the $40 million that I’d raised.
I’d never lost that much money before, and my confidence was slipping away with my money. I started cutting back my positions, protecting my capital, and taking my profits when I could. It worked. By the end of March, the funds were up 7.6 percent while my measuring stick, the New York Composite Index, was down 4.2 percent. Beating the index by 11.8 percentage points in a three-month period was a differential that any reasonable investor would have to consider extraordinary. And many investors did, which led to my third problem.
One of my main concerns when I started trading for the funds was whether I could manage $40 million of other people’s money as effectively as I’d been trading $10 million of my own. In two previous experiences, I’d found that handling larger positions had changed my time horizons. I tended to hold my positions longer, which cramped my style of taking profits quickly, but my results for the first quarter of 1990 had convinced me that I could manage large sums of money. So on April 1, I’d raised the bar another notch. I opened the funds up to new capital, and an additional $30 million poured in.
Most managers with $70 million would diversify, look for niche investments, spread the risk, and let their young Turks do all the grunt work while they took a broad overview and planned the grand strategy. But that wasn’t my style. I’d always been a control freak and I didn’t have any young Turks. I’d gotten rid of the two old Turks I’d hired earlier and was doing all the trading myself. I kept playing my defensive game and posted another 1.5 percent gain in April, but in May and June, the market ran away from me. I completely missed a major rally, and right away, the pressures began to build. All through the rally investors kept calling me, asking, “How’s my money doing?”
When you’ve cut yourself in for more than a third of the action, investors only want to hear one answer, “Fuckin’ A Fantastic!” but I couldn’t say that. At the beginning of each month, I’d send a letter to my investors telling them how we were doing and the best I could say in June was:
As the largest investor in the funds, I personally feel far more comfortable trying to be profitable every month as opposed to taking large risks “trying to hit a home run.” My investment record has been based on consistent profitability allowing the power of compound growth to work its mastery.
That appeased nobody. They kept calling, faxing, and writing, whining about their returns and comparing me with managers whose results were better, a lot better. The middlemen representing the foreign money were the worst. They’d call two or three times a day while I was trading and say, “Martay, Martay, how’s my monay doing?” I couldn’t believe these bozos. They were locked in for a year, so what difference did it make how they were doing every day? Didn’t they know that I had double-digit profits for ten consecutive years in all kinds of markets, that I was the Champion Trader?
In July, I tried to buttress my June letter by reminding them that they were in for the long haul and attaching a two-page excerpt from Richard Russell’s Dow Theory Letters. This excerpt showed how the effects of compounding were the best way to accumulate great wealth and for the really smart investor, slow and steady was the name of the game. I ended my July letter by once again staying on the defensive:
When I set this fund up I knew there would be periods when I would outperform others and then times when I would underperform—that was the reasoning behind requiring a minimum one-year investment period and that is what I believe I should be judged on. As the year draws on, all of you will decide whether or not to continue your investment or increase it as a number of you already have done. All I ask is that you judge the results at the end of the appropriate period and compare them both on an absolute and relative basis to other managers and the opportunities that were available.
What I didn’t tell my investors was that I was getting ready to go on the offensive. I was going for the long ball.
Audrey had decided to renovate our co-op on Park Avenue over the summer. When the kids got out of school, we packed up and moved out to the summerhouse in the Hamptons. I played tennis out there with an oily operator who ran another hedge fund. One day he said to me, “So, Motty, whaddya hear about Upjohn?”
“Upjohn?” I said, like I knew something. “Why? What do you hear?”
“I hear that a Swiss company is about to take ’em over. I’m buying.”
I called Inside Skinny. Skinny had his ear glued to the Street and if anybody was going after Upjohn, the big pharmaceutical company out in Michigan, Skinny’d know about it.
“Motty,” Skinny whispered into the phone, “I was just about to call ya. My Swiss contacts just told me it’s a done deal and, ya know, there’s a lot of European buying. It’s got the smell of the old days, takeover, redux revisited.” Skinny had a way with words, and that was all I needed to hear. If I were going for the long ball, Upjohn had to be it. I started to load up on Upjohn. I’ve always been a glutton for gadget
s, and I had finally succumbed to a cellular phone, a big awkward thing that looked like a car battery. I’d sit by the court watching Audrey play team tennis and yell into the phone, “Buy me another ten thousand. Buy me another ten thousand.” All through July, Upjohn kept inching up and I kept buying. I’d be at the beach on a Friday afternoon watching the kids build castles in the sand, yelling into my car battery, “Buy me thirty thousand on the bell! Get it!” I was getting longer and longer. I was burying myself in Upjohn. By the beginning of August, I was halfway to China and still digging. I had more than $40 million, over half the funds’ money, invested in almost a million shares.
On August 2, Saddam Hussein invaded Kuwait, the market headed south, and oil futures headed north. Upjohn went into the john as the market plunged a quick 10 percent. I started hedging my position by shorting the S&P futures, but it took me another week of getting killed before I realized that the Beta on Upjohn, the correlation of the individual stock’s moves with the action of the overall market, was about double the S&P. This basically meant that for every 1 percent the market moved, Upjohn was moving 2 percent. In this case, 2 percent down. I was shorting $40 million in futures, but that wasn’t nearly enough; it should have been $80 million.
On a Monday morning in the middle of August, I was short four hundred S&P contracts and the market opened way down. I made $1.8 million in five minutes, but Upjohn dropped another 17/8 and the funds ended up just breaking even for the day. Meanwhile, thanks to Saddam Hussein, crude oil and lots of other commodities were going crazy and the futures guys like Jones, Kovner, and Bacon, who weren’t buried under a million shares of Upjohn, were making fortunes by going long. Because of Market Wizards, I had a reputation as a futures player, but I didn’t trade many pure commodities. My real expertise was in the S&Ps, which was really the stock market, which was getting hammered. While the top dogs were going long commodities futures, playing the potential inflation bubble and making millions, I was going short S&P futures to hedge my million shares of Upjohn and just breaking even.
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