by John Brooks
In 1935, Johnson became counsel for Incorporated Investors, a small, old-line Boston mutual-fund firm. Gradually, he was drawn by his predilection deeper into finance and further from the law. In 1939 he left Ropes and Gray to become full-time vice-president and treasurer of Incorporated Investors. Four years later, he was offered the opportunity to take over Fidelity Fund, another Boston mutual-fund operation that then managed only the unimpressive total of $3 million—and Johnson had an investment company of his very own. It is particularly significant, in the light of subsequent events, that the man who turned the Fidelity organization over to him refused to take a nickel for it, in keeping with the traditional Boston concept of a trusteeship as a sacred charge rather than a vested interest to be bought and sold.
The notion of a mutual fund as a trust was deeply ingrained in State Street at the time, and would remain so until about 1955—this in spite of the fact that a mutual fund is actually not a trust at all. A trust is a property interest held under law by one person for the benefit of another—typically, an inheritance held by an older person for the benefit of a younger person who is the heir. The beneficiary has not chosen the trustee, or indeed the situation of trusteeship, and may have no control over either one. In the case of a mutual fund, on the other hand, the share owner, or beneficiary, has chosen the fund he wants to invest in and has thereby granted the fund’s managers the right to reinvest his money, for a fee. The managers of the fund are not trustees but investment advisers, and are therefore bound not by the laws governing trustees but rather by those governing investment advisers. Nevertheless, before 1955—in Boston and elsewhere—they felt like trustees. Or most of them did. Edward Crosby Johnson II, for all of his trustee-like ways, clearly had a speculative background and temperament; after all, his stock-market idol was one of the master speculators. Right from the start, his approach to investing Fidelity funds was an unorthodox one that he would later describe in the following characteristically picturesque terms: “We didn’t want to feel that we were married to a stock when we bought it. You might say that we preferred to think of our relationship to it as ‘companionate marriage.’ But that doesn’t go quite far enough, either. Possibly now and again we liked to have a ‘liaison’—or even, very occasionally, ‘a couple of nights together.’”
His maverick operations as head of Fidelity, while they fell far short of creating a scandal on State Street, nevertheless caused a certain amount of talk there during the nineteen forties. What in Tophet had come over Edward Johnson, a good sound Boston and Harvard man if there ever was one? But what he was doing then was only the beginning, and the next stage in Fidelity’s evolution began with Johnson’s first encounter with Gerald Tsai, Jr.
This encounter occurred early in 1952, when Johnson received a telephone call from a friend of his at the investment counselling firm of Scudder, Stevens and Clark. “I’ve got a young Chinese here, a clever fellow, but we don’t seem to have a place for him at the moment,” the friend said. “Anything you can do for him?” Johnson asked his friend to send the young man around. When Tsai appeared, Johnson liked his looks and hired him on the spot as a junior stock analyst.
The young man, then twenty-four, had been born in Shanghai in 1928 to Westernized Chinese parents; his father had been educated at the University of Michigan and later become Shanghai district manager for the Ford Motor Company. In 1947, with the war over at last, the younger Tsai was sent to America to college. He went first to Wesleyan University; finding Middletown, Connecticut, too much of a hick community for his liking after the bright lights of Shanghai, he transferred to Boston University, where he felt right at home, and applied himself so diligently that he finished his undergraduate courses in economics six months ahead of schedule, and devoted the last term of his senior year to writing a master’s thesis on “Economic Development in Shanghai.” Thus, in the summer of 1949, he was able to take his B.A. and M.A. in quick succession. He worked for a year with a textile company in Providence, then for another year or so with the securities giant Bache and Company in New York, getting married along the way to a Chinese-American girl. Then he went back to Boston and, having decided once and for all that stock investment was his métier, met Johnson and Fidelity. “I liked the market,” he would explain years later. “I felt that being a foreigner I didn’t have a competitive disadvantage there, when I might somewhere else. If you buy GM at forty and it goes to fifty, whether you are an Oriental, a Korean, or a Buddhist doesn’t make any difference.” The reader’s attention need hardly be called to the similarity between Tsai’s reason for liking the market and that of Edward Crosby Johnson II—“you were what you were not because you were a friend of somebody, but for yourself.” Boston Yankee and Asian immigrant, they were kindred souls in appreciating the market’s cool objectivity, which gave both a chance to escape any feeling of prejudice. That the polarity of the prejudice differed—differed, indeed, by precisely 180 degrees—was beside the point.
2
For ways that are dark
And for tricks that are vain
The heathen Chinee is peculiar.
Gerald Tsai’s Oriental appearance and background, and the aura of dark ways and vain tricks that Bret Harte in 1870 so airily associated with Orientals, were eventually to work as a powerful asset in projecting him to the public as a genius. But the bonds that drew him and Edward Johnson together in 1952 were more fundamental than a common love of the stock market.
Johnson was something of an Orientalist in two separate ways, by local tradition and by personal predilection. His ancestors, the early Yankee traders, had been Orientophiles for the most practical of reasons—that the Orient was in large part the source of their wealth. Clipper-borne around Cape Horn, Oriental culture, along with Oriental goods, influenced Boston’s architecture and interior decoration and thought and even its hierarchy of social values. In the Union Club, which occupies two houses just off the Common that were once owned by the Lawrences and the Lowells, there hang among the portraits of whiskered old nineteenth-century Yankee eminences two solemn, respectful representations of Chinese traders. Again, Johnson personally had a lifelong hobby—inherited, as hobbies so seldom are, from his father—of studying Oriental religions. A sense of affinity with the Far East came almost as naturally to him as going to Harvard.
Tsai, for his part, was prepared to meet Yankee culture a good deal more than halfway. If his heart was just Oriental enough to stimulate and fulfill the fantasies of a Bostonian, his mind and manner were eminently Western. With only the faintest trace of his origin in his fluent and slangy American speech (he said “thouand” for “thousand”), he was brisk, practical, ambitious, energetic, logical, aggressive—almost a very model of a modern Yankee trader.
And one more force drew Johnson and Tsai together. The young man had always been close to his mother—a strong and remarkable woman with a trading sense of her own, whose haggling in Shanghai markets was one of her son’s strongest childhood memories—but relatively remote from his father. In Edward Johnson he found, no doubt, a chance for a surrogate father, and Edward Johnson was glad and proud to assume the role. That Johnson had a son of his own, a bright and personable young man named Edward Crosby Johnson III and called Ned, who also worked at Fidelity, was a circumstance that, predictably enough, serves to thicken our plot.
At Fidelity, Tsai was not long in making his mark. Always impeccably groomed, his moon face as impassive as a Buddha, he showed himself to be a shrewd and decisive picker of stocks for short-term appreciation, and so swift and nimble in getting into and out of specific stocks that his relations with them, far from resembling a marriage or even a companionate marriage, were often more like those of a roué with a chorus line. Sometimes, to continue the analogy, the sheets were hardly cool when he was through with one and on to another. Johnson—“Mister” Johnson to Tsai, as he was to almost everyone else in his own organization and the mutual-fund business in general—was fascinated and ever so slightly scandal
ized. Years later Tsai said of his old boss, “Basically, Mr. Johnson was not as orthodox as other Boston investment men. He is a very flexible person, not really fond of tradition. He always wanted to give you your head, give you your chance to work on your own rather than as part of a team or committee. But when he gave you your head he was also giving you your rope—‘Here’s your rope,’ he’d say. ‘Go ahead and hang yourself with it.’ That was one of his favorite expressions. Another was, ‘Do it by yourself. Two men can’t play a violin.’”
By 1957 Tsai felt confident enough of his position at Fidelity to write Johnson a memo asking—indeed, very nearly demanding—permission to start his own growth fund. “It took him only half an hour to decide,” Tsai recalled long afterward. “He called me into his office, handed my memo back to me, and said, ‘Go ahead. Here’s your rope.’”
Tsai’s rope was called Fidelity Capital Fund, and it was the company’s first frankly speculative public growth fund. Right from the start, he operated it in a way that was at the time considered almost out-and-out gambling. He concentrated Fidelity Capital’s money in a few stocks that were then thought to be outrageously speculative and unseasoned for a mutual fund (Polaroid, Xerox, and Litton Industries among them). He bought in huge blocks of ten thousand shares or more at a time, coolly notifying his brokers that if they couldn’t assemble the block without pushing the price up substantially—say, more than a point or two—the deal was off. The brokers grumbled, but usually assembled the large positions; with huge commissions at stake, if one broker wouldn’t deal with Tsai according to Tsai’s specifications another assuredly would. His annual portfolio turnover generally exceeded 100 percent, or a share traded for every one held—a rate of trading unheard of in institutional circles at the time. He got a well-deserved reputation for catlike quickness in calling a market turn. “It was a beautiful thing to watch his reactions,” Johnson says. “What grace, what timing—glorious! Why, if he had been on the Stock Exchange floor, he’d have become its number one trader in no time.” As Fidelity Capital’s net asset value rose and new money poured into it, Tsai came to be close to key men in corporate management: Harold Geneen of International Telephone, Nathan Cummings of Consolidated Foods, Laurence Tisch of Loews. And, gradually—although his name was still unknown to the general public—he came to be known and feared in corporate circles. The sudden dumping of ten thousand shares of one’s stock was not to be taken lightly, and the man capable of doing it on a moment’s whim was worth cultivating.
All rising artists suffer setbacks, and this young Picasso of the portfolio suffered one in the bad market of 1962. His whole method of operation—emphasis on growth stocks, concentration of his purchases in a few issues in which he took huge positions—implied maximum exposure in a crash; after the carnage of May 1962, Fidelity Capital Fund suddenly looked like a punctured balloon. But Tsai was quick to recover. After the Cuban missile crisis that October he suddenly turned decisively bullish. In six weeks, he put $26 million into stocks for Fidelity Capital; the market leaped upward, and by the end of the year the fund’s asset value had risen nothing less than 68 percent within three months.
Tsai had now perfected his method, and over the following three years he had the ideal market in which to project it. At the same time he began to rise within his own organization. By 1963 Tsai owned 20 percent of the Johnson management vehicle, Fidelity Management and Research—half as much as Edward Johnson—and was beginning to think of himself as Johnson’s successor. Up and up went Fidelity Capital’s asset value, and finally, for the vintage market year of 1965, the fund achieved a rise of not quite 50 percent on a turnover of 120 percent.
The go-go years had begun, and Gerry Tsai, more than any other one man, had brought them into being. Suddenly, he was nationally famous. Like Greta Garbo he courted publicity while quite sincerely shunning it. Fidelity never hired a public-relations firm, and when the press and electronic media began beating a path to his door, he was surprised and abashed. To a reporter from The New Yorker who asked to do a personality sketch of him for the magazine’s “Talk of the Town” department, he had a secretary reply, “Mr. Tsai never allows anything personal to be written about him.” But, of course, much was written and said anyhow, personal and otherwise, and by that manic autumn he was the stock market’s certified golden boy. Once, more than a generation earlier, Johnson’s hero Jesse Livermore had filled the same role, his every move and gesture studied by the hangers-on who hoped to ride to riches on his coattails. As once “Jesse Livermore is buying it!” had been the signal for a general stampede into any stock, so now it was “Gerry Tsai is buying it!” Like Livermore’s, his prophecies by force of his reputation came to be to a certain extent self-fulfilling. His legend itself was self-perpetuating, and a move by him in or out of a stock could in itself add to, or subtract from, the market value of a given company by hundreds of millions of dollars in the space of a few hours. The federal securities laws, which had not been on the statute books to bother Livermore in his heyday, now categorically forbade manipulation of stocks. But what could the securities laws do about Tsai? Was it his fault that everyone else wanted to follow his bets? A law-abiding man, he was a stock manipulator in spite of himself. As the first big-name star of the new era, he created fresh problems of regulation that the regulators in Washington did not at first recognize as having arisen.
As for Edward Johnson, who dreamed of Jesse Livermore as a naval commander on deck in a cannonade, he had never become another Livermore himself—at heart he was too reticent and Bostonian for that. But now, surely without conscious intention, he had brought one up in his office.
So arises the question of to what extent, and with what moral overtones, Tsai’s race and national origin contributed to the mystique of his success. Wall Street had never had a non-white leader—seldom enough, indeed, one who was not purest Anglo-Saxon Protestant—and now it had one. Presumably it could pat itself on the back for broad-mindedness. But could it really? The Oriental as a powerful and morally equivocal force in Western society was nothing new; he was Bret Harte’s heathen Chinee in gold-rush California, or Peter Lorre in an old movie or Sessue Hayakawa in a newer one: suave, composed, his manners courtly and elegant, his intellect superior and essentially Western in character, his motives automatically suspect but subject to being used by the good guys. An un-stuffy Boston trustee had found a new, real-life Oriental genie in a bottle and loosed him on the nation. The Wall Streeters who eagerly followed Tsai into the go-go game, and the investors who flocked to get what they were beginning to call a piece of the action, were not responding to elevated social impulses. They were following a money magician whom they expected to make them rich, a winner with whom they had neither the desire nor the opportunity to engage in any human intercourse.
3
In 1965, Tsai’s career with the Fidelity organization came to a fork in the road. The elder Johnson was over sixty-five now and likely to retire soon. Who was to be his successor—Tsai, or Johnson’s own son Ned? The younger Johnson was a good-looking, highly competent man in his thirties, with a marked speculative flair of his own. He had a dry sense of humor. To his father he would say: “Talk all you want about your poop-decks and companionate marriages. Some people have a well-developed sense of self-preservation, and you are one of them.” The elder Johnson would smile delightedly; in truth, the two men had unusual rapport for a father and son. To Gerry Tsai, Ned Johnson would say little, except when they occasionally became engaged in a heated boardroom debate about the merits of some stock—a debate in which it may have sometimes seemed that there was more at stake than was being said. Self-confident with fame and success now, a national force in the market, Tsai could no longer be expected to sit quietly in the counsels of Fidelity. Finally he put the question of succession directly to Johnson. It must have been a hard moment for both, but Johnson faced it forthrightly and without evasion; he said simply that Ned was his son and that he intended that Ned should eventually su
cceed him. Tsai understood; he knew that Fidelity was basically a family business. But he also knew that he could not and need not endure a future of being permanently number two man. Later that year he resigned, sold his Fidelity stock back to the company for $2.2 million, and set out to New York to organize a new mutual fund of his own.
The movement he had had such a major role in starting toward a new, exciting, and dangerous conception of how to manage other people’s money was by now a national ground-swell. As mutual-fund asset values went up, new money poured in. Tsai and others like him seemed to have invented a money-making machine for anyone with a few hundred or several thousand dollars to invest. There were around three million holders of shares in standard mutual funds, and at the end of 1965 their holdings in those funds amounted to $35 billion. True enough, the holders were paying through the nose for the privilege of having their money managed by Tsai or the likes of Tsai; half of their first year’s investment often went for the original sales commission, and in late 1966 the S.E.C. would indignantly declare these charges to be excessive. But that was after the market had dropped; as we have seen, reform is a frail flower that languishes in the hot glare of prosperity, and at the end of 1965 the S.E.C. remained silent. So, for that matter, did the customers themselves, and no wonder. Wiesenberger Reports announced that for the year, twenty-nine leading “performance” funds had averaged a net-asset-value rise of just over 40 percent, while the laggard Dow industrial average, made up not of swingers like Polaroid and Xerox but of old-line blue chips like AT&T, General Electric, General Motors, and Texaco, had risen only 15 percent. Here, then, was a new form of investment in which it appeared that by picking your fund at random you could still make 40 percent on your money in a year’s time. The trick seemed to be to pay your front-end load, relax and be happy. You got what you paid for—assuming, of course, what just about everybody did assume, that the Dow would appreciate annually around 15 percent and the performance funds 40 or 50 percent. It was the sort of assumption that is widely made only in times when people have taken leave of their senses.
