Trading Reality

by Michael Ridpath

  ‘Surely this company must make profits some time?’ I said.

  ‘Richard said we would make a lot of money next year.’

  ‘And did you believe him? Did he have numbers?’

  ‘No, he didn’t have numbers,’ said Willie. ‘But he seemed very confident. I like to see numbers as much as the next man, but somehow I believed him.’

  I didn’t hide my scepticism. Trust me. That is what Richard always said, and that is what people always did, be they Karen and me, or Willie here. But eventually he had to come up with the goods or the bills would not get paid, and the electricity would be switched off.

  These spurious Jenson Computer payments that might come in later on in the year were typical. I doubted they would ever materialise, and I wasn’t going to put any faith in them. I just hoped we could rely on those payments due in the next three months.

  Willie could see what I was thinking. He wrung his hands again.

  But we still had till August. When Richard had called me that night, I had suspected that the company had a much more urgent cash-flow problem, something that would hit in days, not months. FairSystems’ problems were big, sure enough, but they weren’t that immediate.

  ‘Richard called me a few days before he died,’ I said to Willie. ‘He wanted to talk to me about something urgently. Have you any idea what it might have been?’

  Willie thought for a moment and shook his head. ‘I can’t think of anything. It was nothing he spoke to me about.’

  ‘It wasn’t a cash crisis, then?’

  ‘I don’t think so. As you see, we still have two hundred thousand in the bank. It’s not much, but it’ll keep us going for a few months, especially when we get the Jenson payments in.’

  ‘How about trading in FairSystems’ shares?’

  ‘Could be,’ said Willie. ‘He did ask me for information on our shareholder register. But that was three weeks ago.’

  That would have been just before Richard had first spoken to Karen and me about his suspicions.

  ‘Nothing since then?’

  Willie thought a moment. ‘No.’

  ‘OK,’ I said. ‘Can you show me what you showed Richard?’

  ‘Certainly. But I don’t think it will be very helpful.’ Willie pulled a file out of a cabinet behind him, opened it up and passed it over to me. ‘This is the shareholders’ register.’

  Some of it was self-explanatory. The major individual shareholders of the company showed up clearly. There was a total of two million shares outstanding. Richard’s stake was still shown intact at eight hundred thousand shares or forty per cent of the company. After dividing this stake up, I was the largest shareholder with 23.75 per cent, followed by my father with twenty per cent. The other individual shareholders named were Walter G. Sorenson III with four per cent, Karen Chilcott with 3.75 per cent, Rachel Walker with 3.5 per cent, David Baker with two per cent, and William Duncan with one per cent. There were about five hundred more shareholders, but these were all identified by ‘Wagner Phillips nominees’, and then a number.

  ‘What are all these?’ I asked pointing to the numbers, which went on for ten pages.

  Willie explained. ‘As you know, we sold the shares to the public on NASDAQ last November,’ he began. ‘Do you know about NASDAQ?’

  I nodded. It was I who had suggested that Richard try NASDAQ when his British stockbroker had shied away from sponsoring a flotation on the London Stock Exchange. NASDAQ specialised in trading the shares of fast-growth companies. Microsoft and Genentech had been just two of their success stories. Over the years it had begun to trade foreign shares as well, often of companies that had too short a track record to trade on their own domestic stock exchanges.

  ‘Well, the share registration system works differently in the US to the UK,’ Willie continued. ‘The original shareholders at flotation show up on the register under their own names. All those who bought stock in the public offering hold it through a nominee account with their broker, which in this case is Wagner Phillips for just about everybody.

  ‘Now, some of these are employees of FairSystems who bought stock during the offering.’ Willie pointed to a cluster of holdings with similar numbers. There were about twenty in all; quite a good take-up, since there were only fifty employees then. ‘They all add up to about two per cent.’

  ‘And the others?’

  ‘Those are all Wagner Phillips’ customers.’

  ‘How can we find out who they are?’

  ‘We can ask Scott Wagner,’ Willie said. ‘He’s coming up here next week. If you’re here, you can see him with me. But somehow I don’t think he’ll tell us anything. Don’t worry, though. If anyone builds up a stake of over five per cent, they have to file with the Securities and Exchange Commission in the US to make the information public. These shares seem to be distributed widely. Look, no one holding is more than two per cent.’

  I took his word for it. I wasn’t too pleased that so much of the company was owned by five hundred numbers; I would have been a lot happier to see names. Still, if that was the way the system worked, so be it. There was nothing there to suggest to me that anything strange was going on. I doubted it had told Richard much either.

  I looked at my watch. It was already half past five, but there was still one important area I wanted to cover.

  ‘Are there any legal issues outstanding? Any problems with patents, anything like that?’

  ‘That’s a nightmare,’ said Willie, ‘especially as far as software goes. We use a very good firm in Edinburgh that checks our patents. Burns Stephens.’ That was the firm who had handled Richard’s will, I remembered. ‘They charge reasonable rates too. They think that the patent on our new lightweight headset is pretty good. But basically we can’t rely on patents to do anything more than slow down the competition.’

  I shrugged. That must be the same for all computer companies, I thought.

  ‘No other legal problems?’

  Willie looked uncomfortable again. I hadn’t spent that much time with him, but I could already read him easily.

  ‘Willie?’

  He didn’t hesitate long. ‘There is one possible legal problem, but it looks like it won’t come to anything.’

  ‘And what’s that?’

  ‘It’s an accident in California. A seventeen-year-old boy named Jonathan Bergey was playing with one of our systems all evening. After he’d finished, he got on his motorbike to ride home. He missed a sharp bend, crashed into a tree, and died in hospital a few hours later. This all happened three months ago. His father’s lawyer contacted us, claiming that he crashed as a result of being disoriented by the VR machine. It had me worried, but we received a letter from the father himself two weeks later saying he was dropping the claim. It was quite a relief. American litigation can cost millions.’

  ‘I didn’t know we did much in entertainment.’

  ‘We don’t. This was a trial we were running with Virtual America, an American amusement arcade company. We only have twelve prototypes out there.’

  A near miss indeed. ‘Are we insured?’ I asked.

  ‘I’m working on it,’ said Willie. ‘It’s difficult to get cover, as you can imagine. There are no VR accident statistics for the actuaries to get their teeth into. But I have a broker looking into it. They haven’t been able to turn up a single VR-related accident yet, apart from possibly this one in California.’

  I shook my head. This business was a minefield. It made trading bonds seem tame indeed.

  Before leaving the factory, I dropped in to see Sorenson. He was in Richard’s office, talking to David Baker. He beckoned me in.

  David passed me at the doorway. ‘Interesting day?’

  ‘Very interesting,’ I said. ‘Thanks for that presentation.’

  ‘No trouble,’ he said, and left.

  Richard’s office was glass encased, and functional, like the others, with a smooth black desk-top and a computer. Like Rachel, Richard had a small screen window. It was turned
off. I wondered what he had chosen to display there. The rest of the wall was taken up with photographs from the early days of FairSystems and before. Weird VR rigs, with long metallic arms attached to the headsets, and wires everywhere. In most of the pictures, the user was Richard, but in one or two, Rachel’s dark curls pushed out from underneath the bulky helmets.

  Sorenson was wearing a short-sleeved shirt, open at the neck, and well-pressed trousers. It wasn’t a suit, but he looked tidier and more businesslike than I ever did. Papers were piled neatly in front of him, next to a brown, well-travelled briefcase.

  ‘So, Mark, what do you think?’

  ‘It’s an interesting company,’ I said. ‘Fascinating. It has some very impressive products.’

  Sorenson smiled. ‘No, Mark. Tell me what you really think. You’re a major shareholder in this company, and you don’t work here. You’re independent. I’d like to know your views.’

  He was sincere, and I was flattered. So I told him.

  My mind had been working hard all day processing the information thrown at me. It was all a whirl, but a familiar type of whirl. This was much like the trading problems I came up against every day. A lot was at stake. There was a whole array of different questions to consider, some quantifiable and some unknown. And a decision was required.

  I knew how to solve problems like this. Divide the problem into a series of factors that would affect the ultimate outcome. Assign the appropriate level of significance to each factor. Consider what the downside was and how likely it was to occur. Quantify the upside and the likelihood of that occurring. Weigh the two against each other, being very careful to identify and then ignore any emotional considerations that might sway the analysis. Take a decision. And then act on it.

  This approach had served me well in the past and I fell naturally into it now.

  ‘The first question to consider is the long-term potential of the company,’ I began. ‘Even allowing for bias from the people here, I believe this truly is enormous. The world virtual reality market will be worth billions of dollars one day, and right now FairSystems is one of the two or three leading companies in the field. So far no large company has really committed itself to the technology, but even if one did, one of the easiest ways of achieving this would be to buy a company like FairSystems.’

  Sorenson was listening, closely. Encouraged, I went on.

  ‘No one seems to know for sure which applications will really make the most use of virtual reality. But FairSystems is involved across a range of different uses. It’ll almost certainly be well placed to take advantage of any opportunities once they emerge, from whichever direction they come. And its customer list is impressive.

  ‘The problem is the short-term. FairSystems has yet to find a customer that will take more than one or two systems at a time. Last year it shipped a hundred systems at forty thousand dollars each. This year it hopes to ship two hundred, but at only twenty-five thousand each. Somewhere, demand will kick up to the point where the company sells thousands, not hundreds of systems, and then the cash will roll in. But that’s got to be very soon indeed, or else there won’t be enough cash to keep going.’

  ‘So, what do we do?’ asked Sorenson.

  ‘It’s difficult,’ I said. ‘In the hands of a company with deep pockets, FairSystems could be a very valuable asset. A rich parent could fund the cash shortfall for however many years it takes before the market really explodes. But, on its own, with access to the stockmarket difficult, and no bank interested, the company is very vulnerable.’

  It wasn’t really FairSystems’ or Richard’s fault. I knew that high-technology companies in America often found themselves in this predicament. And some of them went bust. Others were able to gain access to cash through the myriad of venture capital funds in the US, or through NASDAQ. But there was only so much money that Americans would invest in dreams, and, naturally, they preferred their dreams to be located in Silicon Valley rather than Silicon Glen.

  ‘So?’ said Sorenson.

  Leaving aside emotional considerations, the correct decision wasn’t really that hard to see.

  ‘We sell.’

  ‘Hmm,’ said Sorenson. His eyes studied me closely, assessing me. ‘You certainly have picked up a lot about the company.’ He thought for a moment. ‘Have you spoken to your father yet?’

  ‘Not yet,’ I said. ‘I was going to talk to him tonight.’

  ‘OK. You do that. And I’ll have a word with him myself. Then we can discuss it again tomorrow.’

  As I drove back to Kirkhaven, I mulled over the day at FairSystems. The more I thought about it, the more I felt that the analysis I had given Sorenson was the correct one.

  Leaving aside emotional considerations. As a trader, I had trained myself always to leave emotion out of my decision-making. It was one of the most basic rules. It was what I had accused Richard of not doing before he died.

  But I was not looking forward to calling my father.

  The sky cleared as I approached Kirkhaven along the road that skirted the sea a mile inland. Two white clusters of houses, St Monans and Pittenweem, hugged the coastline to my right, beyond a lush green patchwork of fields, grazed by black and white Friesians. I could see why Richard had lived here. The factory in Glenrothes was modern and functional, but grey and claustrophobic. This, though, this was a place to think, to let ideas roam far and wide, to make those seemingly accidental connections that can only come from a mind that is both relaxed and awake. The fresh salt breeze, and the weak but persistent sunshine provided the clear air and clear light that good ideas need to grow and develop.

  I rang my father as soon as I got in. It was the first time I had spoken to him since telling him about Richard’s death.

  ‘How are you, Mark?’ he asked. It might have been my imagination, but his voice seemed to have aged again over the last week.

  His question was a genuine one. But I couldn’t bring myself to tell him how I really was. The day of intense concentration in Glenrothes had pushed the pain and anger and guilt to one side for a few hours. Now it came flooding back.

  So I gave the easy answer. ‘Fine,’ I said. ‘How are you?’

  There was silence for a moment. ‘I’m finding it very . . . difficult, Mark,’ he said.

  I felt an urge to talk to him, to commiserate, to discuss Richard. But the barriers were too big, and I didn’t have the energy to cross them. I didn’t even know whether I wanted to cross them.

  I brought the conversation back to the reason I had called. I wanted to get it over with. ‘I saw FairSystems today, Dad.’

  He caught the seriousness of my tone. ‘Yes?’

  ‘It’s not good. The company’s going to go bust, if not during the summer, then probably in the autumn.’

  ‘That can’t be right. What about all that technology? All those new products?’

  ‘It’ll never survive long enough to make the most of them. There’s very little cash left. And it’s losing money every month.’

  ‘I don’t believe it. There’s got to be a way.’

  ‘There is, Dad. Sell.’

  ‘No, Mark, we can’t.’ My father’s voice was stronger now. Firm. ‘FairSystems was the most important thing in the world to Richard. In a way, the only important thing. We have to see it through for him. He refused to sell out only a few weeks ago. We can’t cash in now, just because he happens to have died. We have to hang on for another year or two, to give him a chance to realise his goal.’

  He sounded like a schoolteacher disciplining a naughty schoolchild. I didn’t like it. I had spent the day trying to get to grips with a very complex situation, and I thought I had done pretty well. I wanted the same from him: a cool discussion of the facts, followed by a sensible decision. I clenched my teeth, controlling my anger.

  ‘If we don’t sell, there will be nothing left. I know the shares are down to four and a half dollars, but if we market the company properly we can probably get more for it than that. Maybe eight. That’s
over three million dollars for your stake, Dad.’

  That shut him up, but only for a moment. ‘It might make financial sense. But if Richard didn’t want us to sell, I’m not going to, and neither should you.’

  I bit my lip. I didn’t like being told what I should do by my father. He had lost the right to do that ten years before.

  ‘What does Walter think?’ he asked.

  ‘I don’t know. I told him my views. He said he’d talk to you later on tonight. Then we’ll discuss it tomorrow. He’s quite keen that we reach agreement, since we’re the two largest shareholders.’

  ‘All right. I trust his judgement. I’ll talk to him tonight. But I’m not going to change my mind.’

  ‘OK. Well, bye, Dad.’ I put the phone down.

  I was angry. It clearly made sense to sell. And I didn’t like my father telling me what to think.

  I stood up, took a few deep breaths, and looked out of the sitting room window at the burn running down to the sea.

  Of course, what was really making me angry was that my father was right. The defences I had put up against those ‘emotional considerations’ crumbled and they came flooding in. My father and Rachel wanted to hold on to the company. I didn’t owe my father or Rachel Walker anything, but I couldn’t hide from the reason they didn’t want to sell.

  Richard.

  The guilt returned. Our row before he died. My refusal to come to his aid when he had asked for it. Dad was right, FairSystems was all that was left of Richard, and I was proposing to get rid of it.

  But if I didn’t, it would go bust, and then there would be nothing left anyway. And that would be stupid.

  I rang Karen. It was good to hear her voice. I told her about FairSystems and the mess it was in. I told her about my decision to sell, and my argument with my father. It helped to talk about it.

  ‘So, what do you think?’ I asked her.

  ‘I don’t know,’ she said. ‘You’re right, it is difficult. I mean, for Richard’s sake, it would be nice to keep the company, but if there isn’t going to be a company, then there isn’t much point.’

  ‘I’m glad to hear some common sense for once,’ I said, relieved.