MY CALL TO ADVENTURE:
was born in 1949 and grew up in a middle-class Long Island neighborhood, the only son of a professional jazz musician and a stay-at-home mom. I was an ordinary kid in an ordinary house and a worse-than-ordinary student. I loved playing around with my pals—touch football in the streets and baseball in a neighbor’s backyard when I was young, and chasing girls when I got older.
Our DNA gives us our innate strengths and weaknesses. My most obvious weakness was my bad rote memory. I couldn’t, and still can’t, remember facts that don’t have reasons for being what they are (like phone numbers), and I don’t like following instructions. At the same time, I was very curious and loved to figure things out for myself, though that was less obvious at the time.
I didn’t like school, not just because it required a lot of memorization, but because I wasn’t interested in most of the things my teachers thought were important. I never understood what doing well in school would get me other than my mother’s approval.
My mother adored me and worried about my poor grades. Up until middle school, she would make me go to my room and study for a couple of hours before going out to play, but I couldn’t bring myself to do it. She was always there for me. She folded and rubber-banded
the newspapers I delivered and baked cookies for the two of us to eat while we watched horror movies together on Saturday nights. She died when I was nineteen. At the time, I couldn’t imagine ever laughing again. Now when I think of her I smile.
My dad worked very late hours as a musician—until about three in the morning—so he slept late on weekends. As a result, we didn’t have much of a relationship when I was young other than him constantly nagging me to take care of chores like mowing the lawn and cutting the hedges, which I hated. He was a responsible man dealing with an irresponsible kid. Memories of how we interacted seem funny to me today. For example, one time he told me to cut the grass and I decided to do just the front yard and postpone doing the back, but then it rained for a couple of days and the backyard grass became so high I had to cut it with a sickle. That took so long that by the time I was finished, the front yard was too high to mow, and so on.
After my mother died, my dad and I became very close, especially when I started my own family. I both liked and loved him. He had a casual, fun way about him the way musicians tend to, and I admired his strong character, which I assume came from living through the Great Depression and fighting in both World War II and the Korean War. I have memories of him from when he was in his seventies, not hesitating to drive through big snowstorms, shoveling himself out whenever he got stuck like it was no big deal. After playing in clubs and cutting records for most of his life, he began a second career in his midsixties, teaching music in high school and at a local community college, which he continued until he had a heart attack at eighty-one. He lived another decade after that, as sharp as ever mentally.
When I didn’t want to do something, I would fight it, but when I was excited about something, nothing could hold me back. For example, while I resisted doing chores at home, I eagerly did them outside the house to earn money. Starting at age eight, I had a newspaper route, shoveled snow off people’s driveways, caddied, bussed tables and washed dishes at a local restaurant, and stocked shelves at a nearby department store. I don’t remember my parents encouraging me to do these jobs so I can’t say how I came by them. But I do know that
having those jobs and having some money to handle independently in those early years taught me many valuable lessons I wouldn’t have learned in school or at play.
In my early years the psychology of the 1960s U.S. was aspirational and inspirational—to achieve great and noble goals. It was like nothing I have seen since. One of my earliest memories was of John F. Kennedy, an intelligent, charismatic man who painted vivid pictures of changing the world for the better—exploring outer space, achieving equal rights, and eliminating poverty. He and his ideas had a major effect on my thinking.
The United States was then at its peak relative to the rest of the world, accounting for 40 percent of its economy compared to about 20 percent today; the dollar was the world’s currency; and the U.S. was the dominant military power. Being “liberal” meant being committed to moving forward in a fast and fair way, while being “conservative” meant being stuck in old and unfair ways—at least that’s how it seemed to me and to most of the people around me. As we saw it, the U.S. was rich, progressive, well managed, and on a mission to improve quickly at everything. I might have been naive but I wasn’t alone.
In those years, everyone was talking about the stock market, because it was doing great and people were making money. This included the people playing at a local golf course called Links where I started caddying when I was twelve. So I took my caddying money and started playing the stock market. My first investment was in Northeast Airlines. I bought it because it was the only company I’d heard of that was selling for less than $5 a share. I figured the more shares I bought, the more money I would make. That was a dumb strategy, but I tripled my money. Northeast Airlines was actually about to go broke and another company acquired it. I got lucky, but I didn’t know it at the time. I just thought making money in the markets was easy, so I was hooked.
In those days, Fortune
magazine had a little tear-out coupon you could mail in to get free annual reports from Fortune 500 companies. I ordered them all. I can still remember watching the mailman unhappily lugging all those reports to our door, and I dug into every
one of them. That was how I began building an investment library. As the stock market continued to climb, World War II and the Depression seemed like distant memories and investing seemed like simply a matter of buying anything and watching it go up. It would certainly go up, the common knowledge held, because managing the economy had developed into a science. After all, stocks had nearly quadrupled over the previous ten years, and some had done much better than that.
As a result, “dollar-cost averaging”—investing essentially the same dollar amount in the market every month, no matter how few or many shares it could buy—was the strategy most people followed. Of course, picking the best stocks was even better, so that’s what I and everyone else tried to do. There were thousands to choose from, all neatly listed on the last few pages of the newspaper.
While I liked playing the markets, I also loved playing around with my friends, whether in the neighborhood when I was a kid, using fake IDs to get into bars when we were teens, or, nowadays, going to music festivals and on scuba-diving trips together. I’ve always been an independent thinker inclined to take risks in search of rewards—not just in the markets, but in most everything. I also feared boredom and mediocrity much more than I feared failure. For me, great is better than terrible, and terrible is better than mediocre, because terrible at least gives life flavor. The high school yearbook quote my friends chose for me was from Thoreau: “If a man does not keep pace with his
companions, perhaps it is because he hears a different drummer. Let him step to the music which he hears, however measured or far away.”
In 1966, my senior year of high school, the stock market was still booming and I was making money and having a blast, cutting school with my best friend Phil to go surfing, and doing what fun-loving high school boys usually do. Of course I didn’t know it then, but that year was to be the stock market’s top. After that, almost everything I thought I knew about the markets was proven wrong.
A surprise simultaneous attack by the North Vietnamese on more than one hundred cities and towns in South Vietnam.
CROSSING THE THRESHOLD:
I came into this period with the biases I had picked up from my experiences and the people around me. In 1966, asset prices reflected investors’ optimism about the future. But between 1967 and 1979, bad economic surprises led to big and unexpected price declines. Not just the economy and the markets but social sentiment deteriorated as well. Living through that taught me that while almost everyone expects the future to be a slightly modified version of the present, it is usually very different. But I didn’t know that in 1967. Certain that stocks would eventually rebound, I kept buying them, even as the market fell and I lost money until I figured out what was going wrong and how to deal with it. I gradually learned that prices reflect people’s expectations, so they go up when actual results are better than expected and they go down when they are worse than expected. And most people tend to be biased by their recent experiences.
That fall, I started at a local college, C. W. Post. I got in on probation because of my C average in high school. But unlike high school, I loved college because I could learn about things that interested me, not because I had to, so I got great grades. I also loved living away from home and having independence.
Learning to meditate helped too. When the Beatles visited India in
1968 to study Transcendental Meditation at the ashram of Maharishi Mahesh Yogi, I was curious to learn it, so I did. I loved it. Meditation has benefited me hugely throughout my life because it produces a calm open-mindedness that allows me to think more clearly and creatively.
I majored in finance in college because of my love for the markets and because that major had no foreign language requirement—so it allowed me to learn what I was interested in, both inside and outside class. I learned a lot about commodity futures from a very interesting classmate, a Vietnam veteran quite a bit older than me. Commodities were attractive because they could be traded with very low margin requirements, meaning I could leverage the limited amount of money I had to invest. If I could make winning decisions, which I planned to do, I could borrow more to make more. Stock, bond, and currency futures didn’t exist back then. Commodity futures were strictly real commodities like corn, soybeans, cattle, and hogs. So those were the markets I started to trade and learn about.
My college years coincided with the era of free love, mind-expanding drug experimentation, and rejection of traditional authority. Living through it had a lasting effect on me and many other members of my generation. For example, it deeply impacted Steve Jobs, whom I came to empathize with and admire. Like me, he took up meditation and wasn’t interested in being taught as much as he loved visualizing and building out amazing new things. The times we lived in taught us both to question established ways of doing things—an attitude he demonstrated superbly in Apple’s iconic “1984” and “Here’s to the Crazy Ones,” which were ad campaigns that spoke to me.
For the country as a whole, those were difficult years. As the draft expanded and the numbers of young men coming home in body bags soared, the Vietnam War split the country. There was a lottery based on birthdates to determine the order of those who would be drafted. I remember listening to the lottery on the radio while playing pool with my friends. It was estimated that the first 160 or so birthdays called would be drafted, though they read off all 366 dates. My birthday was forty-eighth.
I wasn’t smart enough to be afraid of going to war because I naively thought nothing bad could happen to me, but I didn’t want to go
because I was charging forward with my life and to put it on hold for two years seemed like an eternity. My dad, though, was adamantly against the war and hell-bent against me going, even though he had believed in and fought in the prior two wars. He had me examined by a doctor who discovered I had hypoglycemia, which gave me an exemption. When I look back on that, I see that I got out of serving on a technicality—that my dad was essentially helping me dodge the draft—which now gives me mixed feelings. I feel guilty I didn’t do my part, relieved I didn’t experience the harmful consequences so many others suffered from the war, and appreciative of my dad for the love behind his effort to protect me. I have no idea what I’d do if I were faced with the same situation today.
As America’s politics and economy deteriorated, the country’s mood became depressed. The Tet Offensive in January 19681
seemed to convey the U.S. was losing the war; that same year Lyndon Johnson decided not to run for a second term and Richard Nixon was elected, beginning an even more difficult era. At the same time, France’s president Charles de Gaulle was turning in his country’s dollars for gold because he was concerned the U.S. was printing money to finance its spending. Watching the news and the market move together, I began to see the whole picture and understand the cause-effect relationship between the two.
Around 1970 or 1971, I noticed gold was starting to tick up in world markets. Until then, like most people, I hadn’t paid much attention to currency rates because the currency system had been stable throughout my lifetime. But as currency events increasingly appeared in the news, they caught my attention. I learned that other currencies were fixed against the dollar, that the dollar was fixed against gold, that Americans weren’t allowed to own gold (though I wasn’t sure why), and that other central banks could convert their paper dollars into gold, which was how they were assured that they wouldn’t be hurt if the U.S. printed too many dollars. I heard our government
officials pooh-pooh the worries about the dollar and the excitement about gold, assuring us that the dollar was sound and that gold was just an archaic metal. Speculators were behind the rising gold prices, they said, and they would get burned once things settled down. Back then, I still assumed that government officials were honest.
In the spring of 1971, I graduated college with a nearly perfect grade point average, which got me into Harvard Business School. The summer before I started at HBS, I got a job as a clerk on the floor of the New York Stock Exchange. By midsummer, the dollar problem began to reach a breaking point. There were reports that Europeans wouldn’t accept dollars from American tourists. The global monetary system was in the process of breaking down, but that wasn’t clear to me quite yet.
Then, on Sunday, August 15, 1971, President Nixon went on television to announce that the U.S. would renege on its promise to allow dollars to be turned in for gold, which led the dollar to plummet. Since government officials had promised not to devalue the dollar, I listened with amazement as he spoke. Instead of addressing the fundamental problems behind the pressure on the dollar, he continued to blame speculators, crafting his words to make it sound like he was moving to support the dollar while his actions were doing just the opposite. “Floating it,” as Nixon was doing, and then letting it sink like a stone, looked a lot like a lie to me. Over the decades since, I’ve repeatedly seen policymakers deliver such assurances immediately before currency devaluations, so I learned not to believe government policymakers when they assure you that they won’t let a currency devaluation happen. The more strongly they make those assurances, the more desperate the situation probably is, so the more likely it is that a devaluation will take place.
As I listened to Nixon speak, I wondered what those developments meant. Money as we’d known it—a claim check to get gold—no longer existed. That couldn’t be good. It seemed clear to me that the era of promise that Kennedy had personified was unraveling.
Monday morning I walked onto the floor of the exchange expecting pandemonium. There was pandemonium all right, but not the sort
I expected: Instead of falling, the stock market jumped about 4 percent, a significant daily gain.
To try to understand what was happening, I spent the rest of that summer studying past currency devaluations. I learned that everything that was going on—the currency breaking its link to gold and devaluing, the stock market soaring in response—had happened before, and that logical cause-effect relationships made those developments inevitable. My failure to anticipate this, I realized, was due to my being surprised by something that hadn’t happened in my lifetime, though it had happened many times before. The message that reality was conveying to me was “You better make sense of what happened to other people in other times and other places because if you don’t you won’t know if these things can happen to you and, if they do, you won’t know how to deal with them.”
Enrolling at Harvard Business School that fall, I was excited about meeting the extraordinarily intelligent people from all over the planet who would be my classmates. And high as my expectations were, the experience was even better. I lived with people from all over the world and we partied together in an exciting, eclectic environment. There was no teacher in front of a blackboard telling us what to remember and no tests to see whether we remembered it. Instead we were given actual case studies to read and analyze. Then we gathered in groups to thrash out what we would do if we were in the shoes of the people in those situations. This was my kind of school!
Meanwhile, thanks to the wave of money printing that had followed the demise of the gold standard, the economy and the stock m...