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.
The Great Stock InvestorPresent 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) 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.
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