The TSC Streetside Chat: Gerald R. Jordan, Jr., of Hellman Jordan Management

Gerald R. Jordan, Jr. is the real deal, a proven money-maker since beginning his investment career in the late 1960s at Putnam Management in Boston. Since 1978, Jordan has overseen the portfolios and private partnerships for the clients of his firm, Hellman Jordan Management Co. Hellman Jordan manages between $2 billion and $3 billion for endowments, pension funds, wealthy individuals and the partners of the firm. In the 1990s, the firm's largest equity partnership compounded at 31.6% annually, compared with the S&P 500's 18.2%.

Fitter than most of those 10 years younger, the 61-year-old Jordan has a gas trading from his office overlooking Boston Harbor. And why not? He's so darned good at the game it must be fun to play.

His most aggressive hedge fund is up over 60% in the year to date.TSC chief markets writer Brett D. Fromson visited with Jordan on Oct. 4 and they spoke at length about how Jordan has been making money this year and in years past. He has been long health care and oil stocks and short tech stocks. But in the past few days, he has covered all his tech shorts and gone long. How long will he stay a bull? Not long. It's just a three-to-five-day trade.

He doesn't discount the possibility that some tech highfliers could hit new highs, but then he expects tech in general to resume its slide. Jordan is a good storyteller and doesn't pull any punches. Have fun.

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TSC: Gerry, what themes have worked for you so far this year?

Gerald R. Jordan: Energy. Energy's been working to a fare-thee-well. We have done very well in energy, and the only other theme that has been working to that extent is shorting different sectors of technology. They've been money-makers in shorts. Not as much as we probably should have made, given what's happened, but it was better being short than being long tech.

I basically believe that as the decade of the '70s was a big energy decade, the decade of the '90s was a decade of technology. I think the decade of the '00s is going to be a decade of energy again. And that the entire world, most especially and notably the U.S., has got an enormous amount of work to do to rebuild the infrastructure for energy. Most people are seeing disparate reports and activities on oil and gas, but if they follow a lot about it, they'd recognize that we've got a real problem. We don't have enough crude oil because we don't have enough refining. We don't have enough tanker capacity. We don't have enough pipeline capacity. We don't have enough natural gas, and we don't have any leadership in Washington. So where are we going with energy? I think energy has just begun. I suspect by the year 2005 we will have seen, or will be seeing, the price of oil above $70 a barrel.

TSC: Adjusted for inflation?

Gerald R. Jordan: This is in the futures market, the spot market for light sweet crude will be $70-plus a barrel. Whether it's on that date or not -- I suspect we will have seen it before then -- whether it's much higher or much lower than that remains to be seen. But this is an event I suspect we're going to have to face. The only thing I think will preempt that might be a very serious depression worldwide. But growth worldwide, especially outside the U.S., is totally moving in a linear fashion related to the consumption of energy: crude oil, gasoline, diesel fuel, natural gas, everything else. And as long as the economy grows, the demand for energy will be greater.

When I talk to oil analysts, they say, "Wait a minute, the price of oil always goes back into the teens. Oil is a depletable resource." My response is that today the world will consume 75 million barrels and tomorrow whatever oil exists in the world will be 75 million barrels less. And that will happen every day going into the future, on average, but increasing to the extent that by the year 2010 that 75 million barrels a day will probably be 85 million to 87 million barrels a day, unless we have a deep economic slump where people stop using as much energy and the demand for energy doesn't grow as rapidly. I question whether the reserves or potential reserves exist throughout the world that will allow us to fuel the economies of the world going forward, over the next five to 10 years.

TSC: At current price levels?

Gerald R. Jordan: At any price level. Eventually -- and your readers must realize -- the world, theoretically, will run out of oil. There will be no more oil.

TSC: What do you say to the analyst who says that at higher prices more supply will come on, and that would then naturally bring prices back to some lower equilibrium level?

Gerald R. Jordan: I would say to them, "Where will this supply come from?" And they say, "Well, there's oil, there's plenty of oil in the world." And I say, "Well, where is it?" And then they come back to saying, "Well, OPEC." My view is maybe it's in OPEC. OPEC has convinced the world that it's certainly there.

TSC: Are they 35% right now of the world's total production?

Gerald R. Jordan: Of production? Yes. And it's going up, and if there's a lot of oil in the world, it's certainly in OPEC. I'm not refuting, but I question whether OPEC has the capacity over the next five years to increase production substantially.

TSC: Why?

Gerald R. Jordan: Well, we know that of the 11 OPEC nations, nine of them have reached capacity. And I guess they can drill, they can do more infill development to drilling to increase production. I hear rumors that the production in Venezuela is actually declining when they, in fact, are stating that it's increasing. Who knows? Most of the information we get out of OPEC is really weird.

TSC: In what sense?

Gerald R. Jordan: In the sense that it's terribly unreliable. The oil minister says one thing about what's happening, and then the dictator, the despot or the president or whomever is running the country says something different. And then the two of them change positions two months later. Now, I have no idea how much oil there is out there. I do know that there's not as much oil as the American people seem to think. I do know that when Al Gore talks about the oil companies creating this conspiracy of higher prices along with OPEC, it's rubbish. I mean, it's ridiculous.

Because the oil companies themselves are afraid that there's too much oil out there, but they're not going out looking for it, because it's too expensive. And they're still afraid of lower prices. So it's a very interesting conundrum, and until we have a really cohesive energy policy, which won't be forthcoming certainly until next summer, we're going to be subject to, I think, ever-increasing prices.

TSC: If Gore is elected, he's clearly intent on focusing on the demand side of the equation, not the supply side.

Gerald R. Jordan: Right. Exactly.

TSC: How effective do you think that would be?

Gerald R. Jordan: Well, when I read the popular press, they claim that oil is no longer a very important part of our economy, like it was back in the '70s.

TSC: Right. I think the factoid I saw was from 13% to 7% GDP or something?

Gerald R. Jordan: I think back in the '70s it was as high as 25%, and right now it might be 7%...

TSC: Right.

Gerald R. Jordan: I accept that. But what that means is that the price of oil can go considerably higher before it starts to have an impact on the economy. That's empirical.

TSC: Just mathematically.

Gerald R. Jordan: That's right.

TSC: Maybe there'll be less screaming about it simply because it's a smaller percentage?

Gerald R. Jordan: Exactly. So if I come at it from the back side, maybe we're talking $100 a barrel for oil before the economy starts to hurt. Now this is all predicated on, not my prediction, but my assumption or fear that maybe all that oil does not exist out there. Because if you put a real oil man's nose, ear to the ground and say tell me where this oil is, he won't know.

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"I suspect by the year 2005 we will have seen, or will be seeing, the price of oil above $70 a barrel."

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TSC: I assume you've asked a few people.

Gerald R. Jordan: I've asked everybody. A noted bear on the price of oil on Wall Street is coming in today, and I will say to him, "There's plenty of oil in the world." And he'll say, "Of course there is." Well, where is it? The only place we know it is is in OPEC. We know there's oil in the Caspian Sea, but that's not going to be here for five years.

TSC: There's some in Alaska, but we don't want to drill.

Gerald R. Jordan: But that's five years away. Everything is five years away. There's plenty of oil in Russia, that's five years away. I'm concerned about the next three years.

TSC: When did you first begin to get long oil stocks, and how did you originally come to this view?

Gerald R. Jordan: (Laughs) This is the Peter Lynch method of initial analysis. A year ago May, I was driving down to my summer house. Since I wasn't sure whether the water system was working, I stopped to fill up my gas tank and also to buy a couple of gallon jugs of water, and I was sort of struck by the fact that the water cost more than the gasoline. I know that the water came out of a pipe in New Hampshire, and I know that the oil came out of a pipe 5,000 feet in the ground in Saudi Arabia. And I said, "There's something wrong with that. I know that water is a renewable resource, and that oil isn't." I thought I'd look into this, and that's what's happened.

Now, if we talked about oil ultimately getting back to its place as a valued resource, $70 a barrel would only put it back to where it was in 1979 based on a 2.5% inflation rate. But back in 1979, we had done a lot of drilling. We had done a lot of exploring. We had found a lot more oil. OPEC had increased their productive capability. North Sea oil and gas was coming on. Alaska had already come on. Offshore western Africa. More development drilling in Indonesia and the Gulf of Mexico. We were doing a lot more things. But we're not in that position now. I mean, in 1981 -- was it 1981? -- there were 5,300 drilling rigs operating in the world. I've seen a figure over 5,000 internationally, and today I think it's 1,800.

TSC: What if you're wrong?

Gerald R. Jordan: All of my investments and trades are typically based on an implied risk/reward relationship that I compute based on my own analysis of the opportunities and the risks in each situation. And when I talk about oil going to $70 a barrel or higher, I think that's going to happen. Now, if it doesn't happen, that doesn't mean I'm out there on a limb, waiting for $70 a barrel. If I thought that, I'd retire and put all my money with 5% margin into oil futures. Who knows? I think the fundamentals suggest that that could happen.

TSC: How do you express this view in the market, then?

Gerald R. Jordan: So I express this view by owning all of those companies that will benefit from the price staying above $25 or $27 a barrel. Which I think the world is ready to accept, and certainly OPEC.

TSC: Therefore, it's a sustainable level?

Gerald R. Jordan: It's a sustainable level, and it's a level at which the oil companies can profitably go out and, we think, explore for more oil. We think. But we won't know until they do that. So our largest position is in the oil service industry, going the gamut from Schlumberger (SLB:NYSE - news - boards) to Grey Wolf (GW:Amex - news - boards).

TSC: I don't know Grey Wolf.

Gerald R. Jordan: Grey Wolf is a small land driller that sells at $5 a share.

TSC: How many names are we talking about, roughly?

Gerald R. Jordan: In the oil services side of the portfolio, there's probably seven or eight. Then we go to natural gas. We're running out of natural gas, too. So we have a lot of positions. First off, some of the oil service stocks that we own, predominantly gas plays, are either in the Gulf of Mexico or Canada or Continental United States.

TSC: You don't, by any chance, own Alberta Energy (AOG:NYSE - news - boards), do you?

Gerald R. Jordan: Yes. We own them all. And we own three Canadian gas companies, Alberta Gas being one of them, because that's where the biggest plays are going to come. The reason we don't have a huge exposure there is because we don't know much about it. We don't know much about the people. We're a small firm. Most of our research is kind of back-of-the-envelope. Then we position ourselves in front of the wind.

We know what's going to happen, we think, to gas. So long as we're going to consume more gas than we can produce, the price isn't going to go down, and people that are drilling for it are going to command higher rates and build more rigs, and people that are drilling and producing it are obviously going to have much higher cash flow because the prices are so much higher.

Now, if the stocks are not going to perform, and we know that a lot of the major oil stocks have not performed, then what's ultimately going to happen is they're going to take that cash that they generate and buy back their stock. It's going to come down to one of the most simplistic financial decisions a company can make. The cheapest oil they will then be able to find will be in their own backyard, when they buy back their own stocks.

TSC: That's a fairly simple calculation.

Gerald R. Jordan: Right, and if the oil business goes the way I think it will, these stocks will eventually sell at 20 times earnings, and they'll find it makes more sense for themselves and their shareholders to go out and drill for more gas and more oil.

TSC: Now we haven't really talked about the majors here. I assume you have positions in majors?

Gerald R. Jordan: We do. Not big positions, but we own some of the major, domestic integrated companies. That's our smallest sector.

TSC: Because?

Gerald R. Jordan: Because they're not growth companies. They're not growing production, most of them, but they're dirt cheap, and on a cash-flow basis, it's like finding black gold. In addition, we own the refiners.

TSC: Who are the refiners in this day and age?

Gerald R. Jordan: Valero (VLO:NYSE - news - boards), Ultramar Diamond Shamrock (UDS:NYSE - news - boards) and Sunoco (SUN:NYSE - news - boards).

TSC: Any others?

Gerald R. Jordan: Well, there's a lot of small ones. But typically, when people go down in quality in an industry, it's because they're buying more interesting, riskier, lower-multiple stocks. What do we think Valero is going to earn this year? Close to $6, and the stock has just made close to its all-time high of $34. (Laughs)

Now, one of the reasons we're having a problem getting heating oil in the Northeast is that we don't have enough refining capacity. As a matter of fact, the most recent API data figures showed that we produced a huge amount more of gasoline than heating oil in the latest week, when in fact you and I know that we need to be producing more heating oil. Why did we produce more gasoline? Because it was more profitable for the refiners to produce gasoline. They're in the process, a lot of them, of converting. They can't convert all, but they can convert to where they produce more heating oil, but unless the price is appropriate, they'll produce what's most profitable.

TSC: Obviously you would be long on heating oil futures here.

Gerald R. Jordan: Yes, I have been.

TSC: Let me change the subject for a moment. You raised the question of a possible recession as one thing that could undercut the probability of this outcome. What is the economic tone as far as it seems to you both domestically and globally?

Gerald R. Jordan: Well, it's no secret that everything is slowing globally. I think we're kind of at a crossroads here. We've had a wonderful decade of returns in the stock market. Just about one out of every two Americans is involved somehow in the stock market. They're either speculating in it or they own it in their 401(k), their pension plan, or they work in the industry. Kids coming out of college, all anybody wants to do is get in the investment business and make a million in five years.

TSC: Right.

Gerald R. Jordan: It's an extraordinary phenomenon that's going on. Now, the most extraordinary of all phenomena was what happened last year with the Internet, telecom, technology craze. I mean, that was an event that started or reached its blowout stage, but the blowout stage started last October and ramped on into early March of this year. And it was the most extraordinary, speculative binge the stock market or the financial markets have ever seen.

Well, I'm sort of a historian of the stock market, and this was the most extraordinary binge. I don't have any data that would tell me exactly what was going on from perhaps March to September in 1929, but I know that the country hadn't taken up daytrading. I mean, the Internet spawned the ability of the entire world to jump into the stock market with ease, and it created stock for people to own. They were eating their young, and now they're digesting. This is the latter part of the digestive process.

TSC: In response to my question about the tone of the economy, you have no doubt that globally we're seeing slowing?

Gerald R. Jordan: Globally we're seeing some slowing. And it's a combination of a number of things. It's a combination of stock market slowing. It's a combination of oil. It's a combination of you just can't get something this big to grow continuously at 6%, regardless of how well you feed it. And finally, getting into the predictive phase, we used to have something called the presidential cycle, that the incoming president would clear the decks early in the term. And we know we're going to have a new president early in the next term, and I would suspect that he would encourage the Federal Reserve Board chairman to keep the brakes on and do everything he could, including cutting back on spending in the hope that the markets go into decline so that in the fall of the year 2002, that the markets bottom and we go into a huge bull market for the next two years to allow him to be re-elected. That's the way it always worked, and it seems to me that this is a pretty good opportunity to see that historical event unfold again.

TSC: Without regard to your political preference, would you say Bush or Gore is the odds-on favorite here?

Gerald R. Jordan: I honestly don't know. I think it's pretty close.

TSC: Would it make a difference to you who was elected?

Gerald R. Jordan: That's a very difficult question to answer. On the one hand, I think it's fairly obvious that Mr. Bush is more inclined, or prone, and equipped, to address some of the more immediate needs from an energy standpoint than Vice President Gore. And from a stock market standpoint, the companies that we're invested in probably would do better. I would expect to see much greater tax incentives because he, I think, would address mostly the supply side with less consideration for the demand side. However, I have a suspicion that Vice President Gore might do a lot of the wrong things as far as the future of this country is concerned, as far as energy self-sufficiency is concerned, and maybe that would, in a selfish way, enable me to have a much bigger, longer play.

TSC: At the same time you have had this view, obviously you trade in and out of the market, intraday as well as intraweek, or what-have-you.

Gerald R. Jordan: Well, it obviously depends on what our intermediate-term view of the market is. We're very much oriented by the market.

TSC: Intermediate is how long?

Gerald R. Jordan: Six weeks. And what I mean by that is that it's very important for us not to lose money. We rarely take long-term positions unless we have huge convictions. Back at the beginning of the '90s, we did take long-term positions. We took long-term positions in technology.

TSC: For example?

Gerald R. Jordan: Intel (INTC:Nasdaq - news - boards) and Microsoft (MSFT:Nasdaq - news - boards).

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"The Internet spawned the ability of the entire world to jump into the stock market with ease, and it created stock for people to own. They were eating their young, and now they're digesting."

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TSC: At what kind of multiples?

Gerald R. Jordan: With hindsight it doesn't matter. In the range of 10 to 25 times earnings. The two biggest years we had in that decade were 1991 and 1995. Where we really do best is coming out of a market downturn where everybody has gotten bearish. It's far easier for us to predict the bottom of the market than the top of the market.

TSC: Why is that?

Gerald R. Jordan: Well, because at the bottom of the market they ring a bell. At the top of the market they don't.

TSC: And exactly what is the sound of that bell?

Gerald R. Jordan:There's about eight different bells that can be rung; they usually ring one or two. For example, for your readers, the next time you see 1,500 new lows on the NYSE, get fully invested and walk away. Because you have just witnessed a great, great bottom and this happens every four or five years and it's a wonderful way, for the next year, for you to be up 50% to 100% and that's the time to put on leverage.

TSC: Have you become more active in your trading in recent years?

Gerald R. Jordan: The market's become much more volatile. Maybe not overall, but in certain sectors the volatility is enormous, and I maintain it's because of the derivative hedging that goes on. We do a lot of it, but we're not a very big participant. But the big participants, to use a phrase, jerk the market around to a fair-thee-well, and it doesn't take a lot of money to do that.

TSC: Explain a little bit, because I don't think very many people can appreciate how that occurs.

Gerald R. Jordan: A large technology fund, for example, if they feel that their technology position, that technology has become overbought and they think maybe it's starting down, all they have to do is go in and buy 2,000 put options on the Nasdaq -- the index of the top 100 Nasdaq stocks. And those 2,000 options in a down market will cause the index to decline close to 2%.

TSC: Simply because some dealer has to hedge that bet by selling into the underlying market?

Gerald R. Jordan: Exactly. Precisely. And this can happen in a half-hour period. And that's one player.

TSC: So, with that kind of volatility, you can't afford to just sit?

Gerald R. Jordan: That's right. We do, as I said, a lot of hedging. This morning we covered some of our shorts, but we also got out of a lot of long derivative positions in energy, even though we like energy. We do a lot of overwriting. One of the very important things I love to do is sell option premiums. And that involves selling rich premiums of calls -- selling calls where the premiums are rich, where a stock or an index is overbought.

By the same token, if it's in the energy area, I love it when they get oversold and the put premiums are high, and I can go in and sell put premiums. And the risk of that is it continues to go down and I have to end up buying the stock or the index, which might be even better.

TSC: Particularly if you like it long term, anyway.

Gerald R. Jordan: Exactly.

TSC: Why are you generally bearish on technology stocks?

Gerald R. Jordan: Well, earlier I talked about the biggest speculative binge in the history of the world. I mean that none of this has happened before, and I have a belief that things in life operate along a sine wave-type curve.

TSC: Which means cyclical.

Gerald R. Jordan: Yes, the higher it goes on the upside, the lower it's going to go on the downside to balance the curve. And I suspect that we have a huge debt out there some place. We've started to see it in some of the great speculative Internet companies. For example, CMGI (CMGI:Nasdaq - news - boards) has gone from 160 to 24.

TSC: Is there any value at 24? [More recently, it traded at $18 a share.]

Gerald R. Jordan: I don't know. The problem is, the move on the upside was a binge. And it was people buying because the stock price was going higher. What ultimately happens on the down side is that people sell because it's going lower. It's pretty scary.

TSC: What's the problem with tech stocks these days?

Gerald R. Jordan: The problem is they belong to a fraternity where they're kicking a lot of members out of school. From the creme de la creme Cisco (CSCO:Nasdaq - news - boards) to Oracle (ORCL:Nasdaq - news - boards) to Intel to Microsoft. And I suspect, as typically happens in the evolution or devolution of a group, ultimately they get to the best at the last. Now they may hit new highs before it's over, but then...

TSC: Meaning the fastest-growers?

Gerald R. Jordan: Yes.

TSC: Explain your short position in tech.

Gerald R. Jordan: Most of these companies that I've shorted operate in the fiber-optic technology area of supplying the Internet.

TSC: Which is the hottest...

Gerald R. Jordan: The hottest of the hot. And I think that all of the prior hottest of the hot are being taken out and shot, that they owe this group something, too. Of course, I may cover these shorts tomorrow. [He did this past Wednesday, covering shorts in Applied Materials (AMAT:Nasdaq - news - boards) and Sycamore Networks (SCMR:Nasdaq - news - boards), among others. Then he went long them for a trade.]

TSC: Let me change the subject. What's the most fun thing about what you do?

Gerald R. Jordan: I guess it's an intellectualized way of satisfying an urge to gamble or something like that. I've been doing it since I was 13.

TSC: Stocks?

Gerald R. Jordan: I did it in high school in stocks, I did it in college. I'm kind of addicted to it. It's so much fun. It's gotten to a level now where I rationalize it by saying I give an awful lot of money to charity; that's the way I rationalize this addiction. I can't teach, and I can't preach, and I can't heal. Maybe I can help do something by giving a lot of money, most of which I'm creating in the short term, so instead of just sharing it with the federal government, I have the federal government share it with a charity.

TSC: Gerry , you like the health care sector too?

Gerald R. Jordan: It's another group that has been out of favor, like energy had been, where the economics became almost intolerable and it forced a lot of HMOs and other hospital-type companies into bankruptcy, and obviously with an aging population, we can't let our hospital and old-age retirement homes and the like go into disrepair.

We put our positions on when we start to think things are really cheap, and usually they're at a level where they've already come down quite a bit. And it gets into the idea of bottom fishing, but it's not technically bottom fishing, it's kind of fundamentally bottom fishing. We have a concept, and then we start to buy it and we look for confirmation that this concept is starting to approach fruition, that is, where the stocks start to act better and we start to see fundamental announcements that show that a turn may not yet be underway but the negatives are getting less negative. That typically is a forebear of positive things.

Whenever you have a situation where the wind has been in your face and the wind starts to shift, and you see the negatives diminish, it almost always leads to positives. And most people who are not there at the time choose to ignore it.

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"It's gotten to a level now where I rationalize it by saying I give an awful lot of money to charity; that's the way I rationalize this addiction."

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TSC: So when did you start buying the HMOS, the health care stocks?

Gerald R. Jordan: HMOS, and some of the hospital companies, a bunch of them. Last year, even late last year, early this year HealthSouth Corp. (HRC:NYSE - news - boards). We just finished trading out of our positions in the last day or so. Each time it tops like that, we sell it. We started selling this right in here, finished selling it up to there and if it comes back down into here, we'll probably buy it back again because the fundamentals are turning. But it's not a runaway, and this stock has nearly doubled in the last two and a half months.

TSC: So basically, you see a long-term trend with a bit of a tailwind for HRC?

Gerald R. Jordan: It's the beginning of a tailwind, but the wind is not blowing strongly yet.

TSC: So you trade nimbly, so as to take your profit where you can find it. If the tailwinds increased, would you trade less and just ride it?

Gerald R. Jordan: Yes. Ideally what we would like to do is to have a large position in a situation like this group where it's emerging.

TSC: Your stock-timing models basically are triggered on what kinds of variables?

Gerald R. Jordan: These are primarily price comparing. I did this maybe six or seven years ago. I started to chart prices on stocks and commodities. And I tried to look at what would suggest a change, given no change in the fundamentals of the market, just the ebb and flow of prices. And I found that there was a consistency and that it usually ran between eight and 12 days.

TSC: Meaning?

Gerald R. Jordan: Meaning that you bought them, and you'd go up for eight to12 days, and if this were a stock that had been moving sideways, at the end of eight to12 days you'd go back down to the bottom.

TSC: And that period tended to be about an eight-to-10-day period?

Gerald R. Jordan: Right. So each time it goes up like that, if it's a stock that we're not totally in love with, we like to take some profits.

TSC: How critical are these trading models to your total return?

Gerald R. Jordan: Oh, they're very important. I mentioned earlier, we do a lot of selling option premiums. This is one of the great guiding lights we have.

TSC: Gerry, give me a bit of your background. You graduated from Harvard College in 1961 and later got an MBA from the business school, right? Were you mathematically inclined?

Gerald R. Jordan: I was mathematically inclined. I was the valedictorian of my high school class. But I majored in liberal arts in college.

TSC: History?

Gerald R. Jordan: History, yes. I love math, but I played sports in college. I primarily played football, and I didn't want to have to spend a lot of time in math labs. It was serious math. It wasn't trigonometry and first-year calculus. But I've always had a strong affinity for math and so do my kids, which is interesting.

TSC: How do you apply this mathematical bent, and to what extent do you think it's helped give you an edge, a trading edge? The speed with which you can see patterns.

Gerald R. Jordan: You know, I think that's part of it. I'm able to perceive risk/reward relationships very quickly. I don't know if it's from a math background or if I've just been doing it so much that it's evolved that way.

TSC: When did you begin managing money?

Gerald R. Jordan: In 1969, I began managing the Putnam Vista Fund, which was an aggressive equity mutual fund.

TSC: Growth?

Gerald R. Jordan: Growth.

TSC: Sixty-nine. That was a pretty heady period.

Gerald R. Jordan: Sure was. Actually, back then one of the biggest plays was the oil exploration companies. Indonesia was a big, big play in energy. Now ask me when my kids were born or how old they are, and I can't remember that. But I can remember everything as relates to the stock market.

TSC: You were there then for the bear market from '68 to '70?

Gerald R. Jordan: We had a bear market from late '68 into early '70. We came out of that and went up and had a good growth stock bull market. As a matter of fact, in 1972 I was managing the Putnam Vista Fund and this was the last year of that bull move, because the bull market ended at the end of '72, and I had the No. 1 performing fund in the country in excess of $100 million. And we were only up to 39%.

TSC: Paltry in comparison to recent times.

Gerald R. Jordan: That's right. Paltry compared to recent times is an understatement. Just remember that sine wave. If you go up the way we have in recent years, there's a lot of give-up that may have to occur. That's what makes me so afraid here. As I mentioned earlier, one of the things we're very focused on is not losing money. Because I encourage everybody in the firm to invest in one of our products, and if they don't have the money, I loan it to them, just so that they get interested and we're all working toward a common goal.

TSC: When you say one of your products, you mean?

Gerald R. Jordan: In addition to the money that we manage for pension plans, endowments, wealthy individuals, we also manage some hedge funds, private equity partnerships. And we have one, a smaller one, that's for individuals who don't want as much volatility. The fees are a little bit lighter and I encourage the employees here to invest in it because I suspect that we can do a pretty good job. It's had a terrific year this year. It's up 62%.

TSC: If you took a rough range of your private partnerships, how have they done this year?

Gerald R. Jordan: Through the third quarter in hedge funds, our most aggressive was up 60% and our least aggressive was up 30%.

TSC: By aggressive, what would be the difference? By the amount of leverage used?

Gerald R. Jordan: Leverage isn't a big factor in the way we manage money because we don't use much leverage. But the one thing is, the fund that's only up 30% cannot own commodities, and the one that's up 60% owns crude oil and natural gas.

TSC: The actual futures?

Gerald R. Jordan: Yes. And now we own some of these natural gas companies, which are putting up huge, huge numbers because the price of gas has gone up so much.

TSC: And so you really view them as earnings growth.

Gerald R. Jordan: Well, like everything else, they're earnings growth companies for a while. Just like everything is -- rarely do you find a Cisco or a Microsoft out of the thousands of candidates. I mean, to find a company that you can invest in for 10 years and have superlative returns for that period of time, the odds are something like 1 in 500. So what we try to do is find industries that we think are going to go through some transformation where the wind will be at their backs.

Now, we've been talking a lot about energy. One of the things I know is going to happen, if I haven't already talked about it, is there's going to be an energy bill next year. Because the United States of America cannot watch its domestic crude oil and gas production decline or the gap between consumption and production widen as dramatically as it has. To be dependent on foreign, sometimes less-than-secure sources of energy, is unacceptable. Something will have to be done next year.

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"If you go up the way we have in recent years, there's a lot of give-up that may have to occur."

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TSC: You think such legislation would be good for these companies?

Gerald R. Jordan: Oh yes. We'll drill offshore. We'll go up and drill in the Arctic, I suspect.

TSC: In August of '82, when the current bull market started, do you remember how you were positioned and what you were thinking?

Gerald R. Jordan: Of course I do! I remember I was away on vacation for a week. And I remember calling in. I called in after the market closed and prior to that, every day the market had been down and down and down. I called in and I said, "What happened?" And I talked to one of the fellows I worked with, and he said, "Oh, the market was up today." And I said, "Oh? How much?" And he said, "Thirty-nine points."

TSC: On the Dow?

Gerald R. Jordan: On the Dow. That doesn't sound like a lot, but the Dow was around 800 at the time. I said, "Thirty-nine points, what are we doing?" And he said, "Well, you don't like the market. We're not doing anything."

Now, one of the rules I have for all our new hires is that every day is a new day. And one of the things I can guarantee is that things will change. So if I say, "I don't like this today," it doesn't mean I don't like it tomorrow. So don't get complacent and think that whatever has been happening will continue to happen because the key to success is either anticipating change or reacting quickly to it.

So I immediately came back from vacation and I just started buying everything. I started buying savings and loan stocks. I bought the brokers big time. One of the things we don't do is diversify. We concentrate to a fair-thee-well. I have a strong belief that you can't find more than four or five great concepts in a market. And that might mean you can find two or three good industries with a couple of other great ideas. But when you find those ideas, if you have a strong conviction in them from a fundamentals standpoint, from a stock market standpoint and from a timing standpoint, then you really have to concentrate. And I was, at the end of 1982, the fourth-largest institutional shareholder of Merrill Lynch. And we had, back then, about $300 million in Merrill, which goes to show how small Merrill Lynch was, and how small the whole market capitalization was.

TSC: How were you positioned in August of 1987?

Gerald R. Jordan: Well, this is not a good story. I can remember going into August of '87 not feeding the market because the market kept moving ahead. I think at its peak the Dow was up something like 43% for the year, and we were up something like 38%. And one of the things I kept trying to do ... I was getting nervous because interest rates were going up, the currency was kind of a mess...

TSC: The dollar?

Gerald R. Jordan: The dollar, right. And I remember thinking the market was going to peak in early July, so I raised about 30% cash in early July, and the market didn't even back off. It continued to go high. So I put some more of it to work, and then going into August, going into the top, I raised a lot of cash. I raised 30% cash.

Now, if the story ended there it would be great. But then the market sold off hard into probably the 15th of September, and it started up again and I put, of the 30% cash that I raised, half of it back in. And I remember putting it in, and the stocks that I bought didn't budge. The market rallied back into the first day of October, and that was when technology had started to come to the fore. I remember Intel was one of the big stocks. It had become a big stock. I had bought it in 1986, and I sold it during the summer. And the stocks that I bought didn't rally as the market rallied because it was being pulled along by Digital Equipment and Intel and stocks of that ilk, plus some big cyclical companies. So I wasn't participating, but I was about 85% invested. And then we started down in the first week of October, and I remember, you probably know the name Ken Heebner?

TSC: Sure.

Gerald R. Jordan: He's an old friend of mine. I went out to lunch with him and a couple of other pals of mine on the Thursday before the Monday crash. And I remember lunch was getting close to over, and my friend Tom O'Neill said, "I've got to go back." And my friend Joe McNay said, "I've got to go back." So we kind of just got up in the middle of lunch, paid the bill and left and went back. And then Thursday ended badly, and Friday was down. As I recall, Friday was down I think 99 points in the Dow. I think it was 99 or 105 or something like that, and then on Monday morning, they opened in the hole, and I sold everything. I just sold all the stocks that had gone like that. Sold 'em all.

TSC: So you went 100% cash?

Gerald R. Jordan: I went to about 60% cash. Then the next day at about 12:30, I put half the cash back to work because the market had rallied that morning. Now, I'd given back a lot in the past two weeks, so I went in and bought because some of these stocks had been decimated, and I went and I put half the cash back to work.

Wednesday, I sold half of what I bought up 25%. I'd gone back and I'd studied the crash in 1929, and Wednesday, they gapped them up, as we did in 1929. And I sold everything I could on that, then the market settled back for the next five weeks. I put a little bit more money to work. But by then, incorrectly, I was getting real nervous that the market crash was going to cause a recession, and I didn't really get back into the market to any great extent until the next summer, the summer of 1988.

TSC: How did you finish '87?

Gerald R. Jordan: We were up about 5% for the year. So it wasn't bad.

TSC: Lets talk about the '90s.

Gerald R. Jordan: The '90s were great because in the '90s you had a lot of everything. We bought a lot of stocks. Remember when I said that one of the things we do really well is to buy bottoms when stocks are cheap? In the fall of 1990, as we knew that we were going to war with Iraq and the market had collapsed, we started to get really bullish. I have something that I wrote in 1989. Now have you ever seen the T. Rowe Price New Horizons chart? They have a price-to-earnings ratio. They used to always compare the P/E of the fund holdings to the P/E of the market. And whenever the P/E of the New Horizons fund would go down to one times the market, you had to buy growth stocks.

Well, that had all happened in the beginning of '89. I'd been looking at all of this and I said, "We're going into a huge growth stock market." So I started doing a lot of work on this and I wrote a big piece on growth stock investing, starting in '89.

TSC: This was for your clients?

Gerald R. Jordan: Yes, and the big growth stocks ... Compaq (CPQ:NYSE - news - boards) was a big growth stock. I bought Compaq the week before Thanksgiving 1988. The market had been coming back. The public had been liquidating mutual funds. They'd been selling. The bullish sentiment of investment advisory services got down to 21.8%. And that was the lowest level since the bottom in 1974. And I said, "Something must be going on here. I don't like the market, but there's got to be something going on. Maybe we've got to buy stocks."

We started buying stocks. We ended up having a good '88, and we had a great '89, and then we gave a lot back at the beginning of '90 because the economy was slowing and the Fed was tightening, and interest rates were going up. Then we had, in early '90, the incursion by Iraq into Kuwait. And then we had that huge bear market, which wasn't that huge. I mean, thinking about it, having lived through '73, '74 -- but it lasted for about two or three months. At the bottom we got fully invested, and we were buying Intel, Compaq, all of these stocks that were great. We bought Digital Equipment. We bought all those stocks back then that had been hurt by higher oil prices. Back then mutual funds didn't have to stay fully invested. You didn't like the market, you sold everything. You didn't say, "Well, let me see where I can put this money." You just got out of the way. And you waited until things got better to put it back in again.

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"To be dependent on foreign, sometimes less-than-secure sources of energy, is unacceptable. Something will have to be done next year."

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TSC: What was the key thing that made you think it was a great time for -- you're basically, you guys are basically growth stock investors.

Gerald R. Jordan: I'll tell you what really got me. One morning, it was either the last week of September or the first week of October ...

TSC: 1990?

Gerald R. Jordan: Yes. We still have the war, which everybody knows we're going to have to go to. Oil prices are up in the high 30s and I had a client who was a smart guy, a very wealthy guy. He always panicked at the bottom. And he called up and he said, "I want to sell everything on the open." So I went into our aggressive accounts, and I bought all of his stocks in our accounts on the open. Now, in an investment advisory firm you can't do that legally. You can't sell one stock out of an account into another, but because he had instructed us to sell, I tried to talk him out of it, but he said, "No, I want out, I want nothing to do with this market." And that day was the bottom, and we bought all of his stocks. And he closed his account out.

TSC: Wow. Now, did you play tech stocks as we went into the later '90s?

Gerald R. Jordan: I did tech stocks most of the time. Cisco bottomed July 10, 1994. And I remember buying ... if you want to talk about bad sales, I bought a 7% position for all the clients in Cisco at $13, which was the low for the year, and it was down about 50%, right there. I sold it right here, in the second quarter of '95 because it had doubled. Think about that.

TSC: On the other hand...

Gerald R. Jordan:In 1995 off the bottom, I had an enormous year -- '95 and '91 were our two really big years. They were both 100%-plus years, which back then was big. It's not a big deal these days. But entering '95, I had about a 50% position in the growth technology. I had Micron Technology (MU:NYSE - news - boards), which doubled in the next six months, Intel, Texas Instruments (TXN:NYSE - news - boards). And what I was doing was I was trading options, and option premiums were dirt cheap and I was just generating huge amounts of income trading the options. Stocks would sell off for two days; I'd run and I'd buy the out-of-the-money option. They'd rally for a week and a half, I'd sell it.

I just kept trading and it was a fabulous trading period. I remember that was when Intel was having a problem with this new chip they had called the Pentium. And the stock was down, and every time they'd announce a problem with the Pentium, the stock would sell off, and I just kept buying and buying and buying.

TSC: Because?

Gerald R. Jordan: Because my associate Nick Gleysteen was talking to me about how, because of the Pentium, the company was going to see earnings up 50% in next year. And nobody thought that. We just bought. It was fabulous fun -- 1997 was a pretty good; 1998 was a great year.

TSC:And 1998 was the Long-Term Capital and Russian crisis.

Gerald R. Jordan: And everybody was negative. I'm recalling my son on the phone and he said, "Buy 'em, buy 'em, buy 'em." So, the first thing we always buy are S&P futures. And that's what we did. We had a great '98 and then I bought energy and got out of tech in '99. We had a good performance right through September, then lost money in the fourth quarter of '99. Energy went down and tech went the other way.

TSC: I assume you must think there's another leg down here for the tech stocks.

Gerald R. Jordan: (Laughs) How do I say this? I think there's a 50% chance, an even-steven chance that technology is done, dead, over. And that if one had a million dollars in the market, one should sell all of his technology holdings and move on to other areas.

TSC: Until when?

Gerald R. Jordan: The year 2007, 2009.

TSC: Now how can that be true given the fundamental economic drivers being so technology based?

Gerald R. Jordan: You're talking about the past, right?

TSC: Perhaps.

Gerald R. Jordan: (Laughs) No, we both know that you're talking about the past. I'm trying to make a prediction about the future. I don't care how fast, how wide the bandwidth is, if we don't find more, if we don't produce more heating oil, you're going to freeze your ass off communicating on the Internet. And you're going to find communicating on the Internet in 40-degree weather is less than comfortable.

We have lost sight of the fact that the oil infrastructure of the world has fallen apart, it's gone into disrepair. We don't have a refinery system that works in this country. The refinery industry in the '90s -- while tech was exploding -- the refinery industry was returning less than 4% on capital for the entire decade. No money flowed there, or money did flow there because the EPA mandated higher refining qualities of gasoline and heating oil, to lower pollution and carbon dioxide emissions. So that happened, and the EPA also mandated rules so that no new refineries have been built in this country in 15 years.

TSC: I want to get back to this point that there's a 50-50 chance that tech is over.

Gerald R. Jordan: I saw a friend of mine last June, after the tech debacle and the stocks had come back. He's a retired teacher. College professor, good guy, and he was asking me about the market. I said, "What do you care about the market?" He said, "Well, I'm an investor now." I said, "What do you own?" He said, "My biggest position is Cisco. What do you think?" I said, "I'd sell Cisco." He said, "Sell Cisco? How can you sell Cisco?" I said, "You call your broker, and just tell him to sell it. The problem is I know Cisco's a great company. You know it's a great growth company. Most everybody else knows it, and it's been a wonderful, wonderful stock. The problem is, everybody owns it." At the time, Cisco was selling at 68, down from 82. I said, "If Cisco grows at 25% a year for the next five years, it's going to become one of the major, major companies in the world. And if at that point in time it sells at 40 times earnings, you know where the stock will be?" He said, "180?" I said, "No, 64, and it's 68 today."

TSC: What'd he say?

Gerald R. Jordan: He said, "Thank you."

TSC: He didn't go out and sell the stock.

Gerald R. Jordan: No. What computes in investors' minds is lower prices. That's the only thing that computes.

TSC: You said there was a 50-50 chance that tech was sort of over in that regard, meaning that, five to seven years out, Cisco could literally be at the same price it is today.

Gerald R. Jordan: I would think it would be lower.

TSC: OK. You assigned a probability to that. What's the other probability? If there's a 50% probability that tech is over, what's the other 50% probability about tech?

Gerald R. Jordan: That if you invest in tech over the next eight years, that you compound your return 5% or 6%. I think this decade is going to be one where, sometime between the year 2006 and 2009, the Dow Jones average will be at 10,000.

TSC: Because?

Gerald R. Jordan: I don't think it's going anywhere. I think it's going to have a lot of volatility. I think the opportunities for trading will be great. I think if people want to make more than the return on a long-term government bond they're going to have to trade. I mean, there's too many uncertainties.

TSC: To be a growth stock investor, you've got to sort of be an optimist, to some extent.

Gerald R. Jordan: Growth stock investing is like everything else in the market, it comes and it goes. I've always had a problem with the concept of growth investment. I've had it since I was 13 years old. I understand it, I've done it probably as long as anybody. You have to be an optimist. You have to assume it's going to continue to grow. But most of these stocks, including Cisco, will eventually sell at 15 times earnings. Do you know how I know that? Because they always do. They always do.

You've got to think about this. You have trapped trillions of dollars in a generation of investors in overvalued growth stocks. Aside from them being overblown, overvalued, too volatile, with the economy of the world slowing and these companies needing strong economies to continue to grow, one added thing has happened -- the venture capital community has invested billions and billions of dollars and created a plethora of highest-quality competitors for all theses technology companies. All of these optical networking equipment companies. Think how many of them are less than two years old.

TSC: Probably a lot.

Gerald R. Jordan: Are there 10 of them or are there 300 of them? But 10 years ago, there were maybe only one or two PC companies that were in the gestation phase. Nothing like this has ever happened. We've created so much paper in the technology world that they're throwing paper at everything.

TSC: And it's not sustainable?

Gerald R. Jordan: Obviously I thought it was not sustainable. I thought we had peaked somewhere in '99. I thought that was it. Much to my regret, I missed five fabulous months because I just refused to play.

TSC: So at this point, will you short some of the tech here? Will you continue to do that?

Gerald R. Jordan: Only if they rally back up. My next move will be to buy them long for a trade, but I probably won't buy the stocks, I'll probably do some sort of a derivative combination for buying the indexes.

TSC: And at the moment, we could get a bit of a rally here in the tech stocks?

Gerald R. Jordan: Yes. Absolutely, and especially if they stretch it enough to the down side. Then you'll open up that possibility for money to come back into the stocks that report good fundamentals.

TSC: And then?

Gerald R. Jordan: For tech, lower.

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