The TSC Streetside Chat: Robert Wilson

Robert Wilson was one of the great stock investors of the past 50 years. He started with $15,000 and had a miserable rate of return in the early years. But from 1960 on, he turned $70,000 into $225 million over 26 years before retiring in 1986 at age 59. In his day, Wilson was a peer of Warren Buffett and George Soros.* Wilson's investment strategy was to go both long and short -- long because he believed in the long-term future of America and short because he never wanted to be wiped out in a downturn.

Today, Wilson is blissfully out of the money game. His fortune, approaching a billion dollars, is managed for him by a small posse of investment advisors -- some short, some long; some U.S., some overseas; some value, some growth; some large-cap, some small-cap. From an urban aerie overlooking Central Park, Wilson keeps a watchful eye on the markets. He spoke earlier this week with TSC's new Chief Markets Writer Brett D. Fromson. Wilson spoke candidly about his adventures on Wall Street, the pleasures and pain of investing and today's turbulent market.

*For more on Wilson, see the chapter on him in John Train's investing classic, The Money Masters.

Brett Fromson: How much money did you start with, and how much money did you end with when you retired?

Bob Wilson: I started with $15,000 and ended with around $200 million.

And this is over what time period?

Oh, that would be from -- what? -- 1949 to 1986.

And, primarily, your style of stock investing would be described as growth stock investing?

Yes.

Of course, it's important to say that you didn't really make your money from fees off of other people's money. It was your money.

Principally, yes.

Principally?

Almost entirely.

Talk to us a little bit about your basic investing style.

Well, it was a hedge fund, as it's now well known. I used to go short a lot of stocks. Let's say I'm worth a hundred dollars and I couldn't buy more than a hundred dollars worth of stocks. But I could borrow an extra $100 on margin in order to go long $200.

But if the market went down, 30%, 40% with the kind of growth stocks I owned, I could be rendered worthless, whether I was worth $100 or a million dollars. If you own 50% margin and the stock goes down 50%, you don't have any money left, no matter how much you started with.

So the way I dealt with that was instead of being long $200 worth of stocks with a $100 net worth, I would be long $150 worth of stock, and short $50.

So you were always net long.

I was always net long. When I was bearish, I was maybe 25% net long, and when I was bullish, I might be 125% net long.

Why did you never go net short?

Because I never wanted to get up in the morning hoping that things would be getting worse. All intellectuals, I think -- and I don't use that as a particularly flattering term -- but all intellectuals tend to have a pessimistic streak.

There's something intellectually much more intriguing about failure, which is knowable, rather than success, which is sort of unknowable.

The way people fail is understandable and predictable and almost inevitable, whereas the way people succeed may never have happened, and so an intellectual is drawn towards failure, I think.

Now at that time, where were you getting most of your good ideas, stock ideas, for longs or shorts?

From other people. I networked. Even when I was at a brokerage firm and was not paying for ideas, I would exchange ideas.

You're going to have to explain, for some of our readers, "paying for ideas." This is under the old commission system. If you gave commissions to a broker ...

A broker would give me an idea, and I would buy the stock through the broker. Let's not get into the give-up technicalities ...

I think it's academic.

Yes, it's academic, and it's complicated. So I would buy the stock through the broker who gave me the idea, and his profit would be from the commission.

So basically, it was a time on the Street when brokers actually were generating ...

Some of them.

Good stock ideas.

Oh, very much so. In fact the trend in those days was for the bright young man to start off in a brokerage firm rather than, say, a hedge fund or an investment fund, and he would impress some money manager after five, or six, or seven years, and then he would be hired by somebody on the buying side.

To help run money.

To help run money, whereas now most people go directly from college or business school or whatever to the buying side.

And did this phenomenon of the broker as a source of good stock ideas -- was it based simply on their fundamental research or was it based on some sort of inside knowledge that some member of their firm was going to issue a buy recommendation?

No. Among other things, that wouldn't be enough of an inside knowledge to warrant a purchase. I was looking to make 50% or 100% on my money and if the brokerage firm was going to make a buy, that might be a temporary blip of 5%, but so what?

No, there used to be research departments, as there still are, but there would be bright young men who were institutional salesmen who would take the information from the research department and sometimes use it, and sometimes use ideas they heard from somebody else's research department.

In fact, for a while, one of the Wall Street jokes was, practically every institutional salesman promoted ideas from some other firm's research product, and it was sort of incestuous.

With the idea being that the broker at that point served as a filter to filter out the really lousy ideas.

Yeah. The people in the research departments in those days didn't make the multimillion dollars they do now. They tended to be the mundane people.

Meaning what?

Not moneymakers. They tended to be intellectual types who followed companies painstakingly and knew their stuff. They weren't dumb, they just didn't have that aggressiveness, or that spark, to be moneymakers. And it was the institutional salesmen who plucked the pearls among the swine.

Right, and could see the market activity and could see what might be really valuable as opposed to the research analysts.

In other words, the investment, the institutional salesman at that time, was in a sense like a buyer. In other words, when he moved to the buy side, his role didn't change really at all.

He just was on the other side of the table.

Now let's contrast that with today's research departments. There's so much now connected with the investment banking end and often in the promotional end of things with bull stocks for the investment banking side of their firms -- or would you disagree with the name change?

Brett, unfortunately, I've been retired for 14 years and what's going on ... all I do know from a distance is that there are many research people now making a great deal of money. I think -- what's the highest salary now on Wall Street? $3 million, $4 million?

Oh, more, probably.

More? For a research person?

Certainly there are people like that.

And I read that somebody pulls a recommendation on a stock, and the stock goes down 15%. So I presume there are still research people who are recommending stock. They don't recommend the sale, because that has always been a tough business proposition.

You can alienate the company that could then not give you information or not do underwriting with you. Although the institutional salesmen could often recommend sales or shorts of companies, because they were individuals and not part of the firm, whereas the research department couldn't do it.

Right. Now, that said, why do you think research people in this day and age are being paid so much more money than they used to be paid? What does that tell you about the structure of the markets today and how it's changed?

Two things have to be kept in mind that are sort of paradoxical. Wall Street is one of the most purely competitive businesses there is. It's almost as competitive as retailing. In some ways, it's more competitive than retailing. It's an example of almost pure competition, and yet there are these enormous salaries, all of which means that there are really not enough qualified people to fulfill the demand in this rip-roaring market for servicing the people who run money.

The whole money management business is enormously profitable, but nobody's rigging it ... it sort of amazes me that there are so many people making so much money in a purely competitive market.

The only answer is that it's just one of those times in history where their services are in huge demand.

Well, yes, but it's always been. Wall Street has always been a very well-paying. It has historically not been as good a place to get truly rich as in manufacturing or industry and, you know, except for Warren Buffett and George Soros and a handful of people, it still isn't.

Why is that?

People who generally get very rich in manufacturing come up with some innovation -- a company has more potential than the portfolio stocks. It's sort of a matter, I would think, of pure statistics.

You mentioned there were two things about why you thought it would be so well paid. One, Wall Street is just generally well paid, but why the research people, do you think?

There aren't enough of them. The demand exceeds the supply. We tend to forget, a lot of these people who go into research are no good.

Maybe this is a tenuous analogy, but it's a little like movie stars. You know there is an acute shortage of movie stars and there always is. There are never enough of them. And yet, think of the people who go into the theater -- all the great-looking boys and girls and the number of them who you see who are good in the movies. But stars are rare, and it seems to be the same on Wall Street and everywhere else.

Bob Wilson: Then, a $3 million salary was a big deal.

Brett Fromson: Excuse me. And some people think it still is.

And therefore that would explain the big salaries for research people.

If these people were easy to come by, I don't think any employer would pay them a lot. I don't want to get into names but I was talking to this woman who is a researcher at one firm. Another firm offered her 30% more money, and she turned it down, and another firm offered to double her salary and give her more options and so I think she's now making $7 million or $8 million a year. She's so much better than who else is around.

I remember, many years ago, Tiger [Management] was a rather small firm, but they were always in the same office building from the time they started ...

I remember at one point, that Julian [Robertson] had just acquired some more space and had a lot of very lush offices, which weren't filled yet. And I said, "Are you going to hire people and give them offices like that?"

And he said, "Bob, if they come up with one idea a year, it'll cover that office and what I pay them, and all other expenses and if it's two or three ideas ... " and Julian never paid anybody much less than half a million. A nincompoop would make a half a million, and a really bright guy would make $3 million or $4 million. And that was back before the multimillion research.

We're talking in the early '90s ...

Yeah. In other words, I think it's only been in the last five or six years that the multimillion dollar salaries have been made by many researchers.

On the sell side.

Yeah, that's right, because ...

You're talking about guys whom Julian was hiring as analysts for him and his other guys.

And then a $3 million salary was a big deal.

(Laughs) Excuse me. And some people think it still is.

There's been much press about Julian [who closed Tiger Management two weeks ago]. First of all, what did you make of it? You met Julian when?

Oh, I knew Julian when I was richer than he was. I knew Julian from when he was still a registered rep at Kidder-Peabody -- the '60s -- and ... well, I don't think there's much secret about this, I think one reason Julian amassed so much money under management is he wanted to sell out.

And the more money he had under management, the better the price he could sell it for. Julian is a very high-grade guy, so I'm sure he wouldn't have sold it to [just] anybody. He would have sold it to somebody who could continue to do a good job for these people. And this I don't know, but I think Julian wanted to retire, or at least slow down. Again, I think, and I think most potential buyers weren't very interested without Julian's aggressive role. And then he -- I don't know how old Julian is now -- he's 67 or something like that, and I've always said young men and middle-aged men can make good money in the market, but not many old men can, and I define old as getting over 60.

Right. So you weren't surprised when he decided to hang it up?

I was surprised that he couldn't sell it. I was surprised that he did as poorly as he did and leveraged so much money, so fast.

Explain that.

Well, he went from $26 billion, down to what? Eight ... oh, billion. I mean, the people who ran out on him, the withdrawals, aside from his losses -- he could have handled the market losses -- but the withdrawals were just breathtaking.

I take it you did not have money with him.

I did not, unfortunately, I wish I had. But the reason I didn't -- I don't know if this would interest you -- but when I retired, it seemed to me Julian was getting a little tired. But then Julian did something I didn't anticipate. He started hiring all these bright young people who maintained his energy. He was still in prime enough shape to exercise judgment, but he had all of these other people to do the gophering. He had been in and out of Japanese stocks many times, before he'd ever been to Japan.

Now, he had a lot of his people who had gone to Japan. I know of no other superbly performing hedge fund that was much a management process as Julian's.

Once I got a Christmas card from Tiger and it showed all the beautiful blond types of both sexes, and no Julian. Julian wasn't even in the picture. Which I thought was very stylish, and sort of emphasized that it was a management achievement as much as anything else.

It's too bad the way it ended, because he's one of the great figures on Wall Street, and I think a very high-grade guy.

In your investing approach, give us an example of a great success. Just pick one that sticks in my our mind.

I think the greatest success of my whole career was the jets, when airlines switched from propeller-driven planes to jet planes. There are very few cases where the airlines' costs plummeted, the quality of their service skyrocketed, and if ever there was a win-win situation, that was it. People talk about the Internet "revolutionizing" the world. Well, jet travel revolutionized the world, too, and there was a huge amount of money to be made in that.

What years are we talking about?

Are we talking about, 1963-ish, maybe?

And first of all, how did you get this idea? What caused you to take a big hedge?

That I don't remember. I was constantly talking with people on the phone and I don't know who mentioned it first.

What kind of companies were you buying: the airlines or the manufacturers of the engines?

I didn't buy Boeing(BA Quote). At the time when jets came out, they were really only economical for very long routes. So Northwest Airlines(NWAC Quote), that execrable dog right now, was then the play. TWA(TWA Quote) was also a good play.

Maybe Pan Am?

Pan Am, long haul. With the original 707s, you couldn't economically fly from New York to Chicago, but you could fly to the coast. Coast to coast.

And what did these stocks do?

Oh, they went up manifold.

Five, 10 times?

I don't remember.

And was it a multiyear play?

Yes, it was several years. Because as the new models of jets came, they were able to use them for shorter segments.

So actually, they got more leverage from the innovation with time?

Yes. Economically, it was one of the best things that's ever really happened. It didn't hurt anybody, to speak of. Everybody made out. It isn't as though somebody came in with a jet plane and ran existing airlines out of business. Or the Internet, e-tailers running standing retailers out of business. This is case where just everybody was happy, just everybody.

Now you have to talk to us about the Resorts. Very many readers today may not know the story of Resorts International. Tell us, briefly, what that was and what you ended up building?

Well, I didn't think that gambling would catch on in Atlantic City.

This was the 1970s?

It was 1977 to 1978. And I was wrong.

And you didn't think gambling would catch on because Atlantic City was such a pit?

Yeah. Keep in mind, there were jets then, and one could get on, go out to Vegas, and really have a good time. And it wasn't that expensive with promotional flights.

And Resorts -- what did they do? They had a gambling casino in Atlantic City?

No, they had a gambling casino in the Bahamas, which was not especially profitable.

But the stock was moving on the expectation ...

Well, then they opened the first gambling casino in Atlantic City, and they went from a 60-cent share of earnings to -- I forget, it's something like a $600,000 in one year to an understated $50 million in earnings. And I don't think, in all of history, even for some of these extraordinary new technology stocks to go from 0 to $50 million in one year is very common.

And that's in earnings. Not revenues.

Earnings. There wasn't a whole lot of difference -- well, there was, depending on how you define revenues.

Ah. OK. It's a high-margin business.

It was when you're the only game in town and it happens to work.

It wasn't simply that you didn't invest in it, you were short it. What led you to short the stock as opposed to just ignore it because you thought it was bogus?

Well, the stock would have gone down from where I shorted it, if it had been bogus. That's why I shorted it.

Tell me a little bit about the story -- you went on a trip around the world one time.

I was on a trip around the world while I was short the stock, but I knew what was going on. It was not as though I didn't keep in touch with things.

No, you were getting daily faxes.

And I was getting margin calls, too.

Explain: Before you left, roughly speaking, what did the stock do while you were on your around-the-world trip?

I don't recall. It went up manifold from what it ...

Five times?

I don't know. You could check that.

It went up enormously.

It went up enormously and my losses -- you know there is this old, untrue saying that you can lose an infinite amount of money in a short, because it can go up infinitely, whereas you would only make a limited amount when it's going down.

You get margin calls on the way up, so that I was forced to sell to cover stock. I was covered with much of my stock before it had gone through the roof.

So you were buying it in, as it went up.

Yeah. Basically Newberger and Berman -- who had a short position -- and I agreed that the dollar amount of my short would not exceed -- I forget the number -- a certain amount.

And they were concerned because they wanted whatever money they had extended to you to be repaid.

Yes. They were concerned about their financial wellbeing.

Right. Which is always a concern of any broker who lends.

It's certainly a concern of the customer who's causing the broker such stress.

Now what was the zenith of the pain as Resorts went up? Was it when you were still abroad, and you finally capitulated or was it when you actually got back to the States with a position that you finally said, "Just cover the whole thing?"

I covered it when I got back. I was fundamentally wrong, you see, and once I realized I was fundamentally wrong. ... Another thing: I thought competing casinos were closer to approval than they actually were. So Resorts had a monopoly for a couple of years.

Which you had not fully anticipated?

I did not anticipate that, no.

So what did you end up losing on that stock?

I think around $20 million.

In 1978? 1979?

Yeah. And I said to everybody at the time, I hope next time I make a boo-boo like this, I lose $200 million.

Because?

I'll be so much richer. You can't lose $200 million in an individual stock, unless you're quite rich.

Talk to us a little bit about dealing with losses.

I should point out that for the year in which I had that $20 million loss, I was up 25%, in my overall account and that was a very strong year in the market. I should have been up 50%, or 60% or 70%. That was only one position, and I had a lot of longs that did very well. So it was a plus year. This is the point of hedging.

Right. Of course, it can weigh you down a bit if you make a big mistake.

Yes. Right. And it was a year when I should have been up much more, it was a very strong market year, and 25% was deep underperformance.

Now, do you think that ... I'm wondering, in retrospect, do you think you should have just capitulated sooner?

Oh, of course.

What would be your general advice to an investor who, for some reason, has bet against a company and suddenly it's going the wrong way -- whether it's a long that suddenly goes down a great deal, or a short that goes up a great deal?

Well, I think you should look at the fundamentals. I always used to say, if I shorted a stock and it didn't go 20% against me, I probably made a mistake.

You mean before it went in your favor?

Yeah. Often it went up, because in the short side you get such delirious over-priciness that, who's to say that when you short the enthusiasm won't just all of a sudden evaporate?

Good point. And of course, short-sellers in the past 10 years have had a miserable time.

Yes. It's been an almost hopeless endeavor in the last 10 years.

Yet generally speaking, did you make money on your shorts?

I would say from the beginning to the end of it, throwing in the Resorts, I may have broken even on my shorts.

So there's a real lesson, that you had them there. Essentially, as a bit of a hedge.

Absolutely. And it permitted me to make a lot more money on the long side.

It extended you the comfort level to be more aggressive on the long side.

Yeah. It's not just comfort. It's a matter of, if the market collapses, I still have a lot of money.

And what would be your advice then to investors in this kind of a market?

I would forget the shorting. I think it's over. It's over for one simple reason: If shorts start working, that is, stocks go down for any sustained period of time, a great many people who are not now shorting will start shorting. There is a limited supply of stocks to borrow to sell short. Those stocks that are good shorts tend to be very obvious. As I've often said, I can predict with confidence that you'll die. I cannot predict that you'll be born, and so failure is analytically obvious and so everybody piles into the same short.

When I was doing it, it was a rather unpopular procedure, and I was able to borrow, generally. People are able to borrow now, but I do believe if shorting really becomes profitable again, it's going to become so crowded that most people won't be able to borrow stock.

The Great Stock Investor

Present company excepted, who do you think was the greatest stock investor that you have ever seen operating in the market when you were active?

Oh, well, Warren Buffett obviously.

What is it about him that impressed you?

Well, his prescience, his ability to buy stocks and see them go up multiples over a period of years. In other words, whenever I bought a stock, I always dreamed that it would go up a 100-fold over 10 years, and he bought one after another that did that. So, he not only made the most money. There is a correlation, of course. But he did it with such great style and imagination. There's nobody even comes close to him.

There is a lot of pooh-poohing of Buffett.

Well, Buffett is old. Buffett, I think, is almost my age, and I think his days of being a brilliant investor are over. I think he's too old, and in a way, is selling out. He can't sell the stocks, but he bought general reinsurance. He started diluting his equity, and I think he realizes this, too. He's not exactly a dumb guy, and I think he probably knows this, too.

Explain what you mean with regard to buying General Re? How does that, in some way ...

Well, let's say you have $100 worth of stock, and you can't sell it because the market won't handle it because you've either got so much or your prestige is so involved with these stocks. So, rather than selling, how about buying a company worth $100? In effect, you have sold 50% of your stock, in terms of percentage-wise, and that's what he's been doing.

What do you think would ever happen to Berkshire Hathaway (BRK.A Quote) if it ever went into a liquidation situation, given its portfolio of various companies, some wholly owned and some smaller positions?

I think, if it was not ... if, say, Buffett died, and if the sales were made, and they were not Buffett's decision ... I think [they] could be handled like any other major blocks. I don't think Buffett himself can sell them, though.

That would be hard from beyond the grave.

I think it would be, at least to the best of my knowledge.

Or do you mean: He could not sell them if he tried to sell them now ...

While he's alive, I think he would have difficulty. But if he died, or if he retired, and he was not the one making the decision, then people, potential buyers, could say, "Oh well, this thing's going into liquidation or blah-blah-blah, and it's not just that Buffett doesn't like it any more."

Right. That's an excellent point.

It's only Buffett who can't liquidate them. Anybody but Buffett can.

Good point.

Next, Wilson's evaluation of George Soros. Click here for Part 2.