The Contrarian: Taking a Cue from 'Scarsdale Fats'

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By Douglas A. Kass
Special to

The Street

Before I start discussing the young, let me introduce The Contrarian, a new column for

The Street

. The objective of this column is to discover which market sectors and specific stocks are neglected and undervalued (these become purchase candidates) and to identify which are fully exploited and overvalued (these become short-selling candidates).

Today's stock market is bifurcated -- it is a market of "haves and have nots." Increasingly, price action is influenced by the dominant investor of the 1990s, the mutual fund manager. With stocks in so relatively few hands, equities often move based on the strategies employed by these funds. This makes for the kind of inefficiencies and opportunities we are seeking in this column. As

Warren Buffett

once put it, "Our job is to be fearful when others are greedy, and greedy when others are fearful."

I have learned over the years that in the equity market, there are few truisms. Today's established doctrine often becomes tomorrow's false beliefs as conventional wisdom does not always represent common sense.

It is important to recognize that a contrarian approach can be just as foolish as a follow-the-crowd strategy. What is required is thinking rather than polling.

Bertrand Russell's

observation about life in general applies with unusual force in the financial world: "Most men would rather die than think. Many do."

The purpose of this column is to make investors think.

In future columns, we'll do this by taking a hard-hitting, iconoclastic look at individual securities and sectors of the market.

Our first column, however, will deal with a person, not a stock. It holds several important messages that apply, in this writer's opinion, to the current state of the stock market -- a market that may have lost its moorings¿

Four years ago this month, a dear friend of mine passed away. As the major markets register all-time highs and we move into the summer months, it seems appropriate to reflect upon my friend and to recall some of the lessons he taught me.

My friend's name was Robert Brimberg.

Bob headed

Brimberg & Co.

, a small securities business by Wall Street standards. But by any measure Bob was a "Big Man," who hailed from Scarsdale, a toney suburb north of New York. His moniker, "Scarsdale Fats," was given to him by author Adam Smith, who immortalized Bob in his 1967 best seller,

The Money Game

.

In the 1960s, as in the 1990s, money managers with billions under management were welcomed anywhere. But mostly they gathered at Bob's spartan room on Broad Street, where corned beef sandwiches were the

plat du jour

. No house silver, no perfectly groomed waiters, just metal folding chairs, paper napkins and a big bowl of pickles and sour tomatoes were the standard offering.

Why were Bob's lunches

the

meal to be invited to? As Erich Heinemann recalled, "The price of admission was that you had to have something to say. Bob ran the only true salon for the investment community."

Bob put it this way: "I had to compete. What have I got? Nothing. Those hot young research analysts at

Donaldson Lufkin

can write hundred-page reports,

Bache

can field a thousand salesmen. The white-shoe firms can fly the Old St. Wasp flags. So I thought: Who has the money? The funds. Be nice. Ask them to lunch."

And that is how Bob Brimberg became the

Perle Mesta

of Wall Street.

Ultimately, Bob moved uptown to a corner table at Harmonie Club. It was in that setting, 20 years ago, that I met Scarsdale Fats when he invited me to my first lunch. I was a wet-behind-the-ears 27-year-old portfolio manager, and Bob exposed me to the best and the brightest on Wall Street.

Scarsdale Fats' pointed questions and sometimes brusque manner cut through the pretense, and the poker-game aspect stimulated even the most knowledgeable of us to prepare for the lunch.

And everybody came

, to be with the Yalie who was as comfortable talking about

Kierkegaard

as

Keynes

.

The

Dow Jones Industrial

stood at about 750 back in 1977, and we have been in a bull market ever since.

I, and many other people, owe a lot to Bob. Since his death and during my visits back to Harmonie Club for lunch (now as a member), I find myself gazing back to Scarsdale's corner table. I still vividly remember those spirited lunches, and how very much we profited from the conversation.

You see, Bob brought the sensibilities of a world-class bridge player -- which he was -- to our understanding of the markets. Above all, he taught us investment humility, that if you do not know who you are, Wall Street is an expensive place to find out.

Which gets me to the subject at hand. The market. For, as Bob put it to me one day in 1987, "Dougie, genius is a rising market."

And the market today again gets back to Adam Smith's

Money Game

, in which the author recalls a character named

Billy the Kid

"who was in Leasco Data Processing, Financial General, and Randolph Computer, and a couple of others I can't remember, except that they all had data processing and computers in the title. When asked why the computer leasing stocks were so good, he responded, 'Leasing has proved the only way to sell them and computer companies themselves don't have the capital. Therefore, earnings will be a hundred percent this year, and will double next year and will double again the year after. The surface has barely been scratched. The risk has barely begun.' "

As this piece is written technology is on a tear. I am awash in nostalgia: Today's investors are similarly obsessed with the future of technology, the Internet, and for that matter, the top tier of industrial equities like

General Electric

.

Adam Smith's fictional character, the

Great Winfield

, continues.

"The strength of my kids is that they are too young to remember anything bad, and they are making so much money they feel invincible. Now you know and I know that one day the orchestra will stop playing and the wind will rattle through the broken window panes and the anticipation of this will freeze us. All of these kids but one will be broke, and that one will be Arthur Rock of the new generation."

Bob, some things never change -- this is still a kid's market. Being over 40 years old has been a liability in the bull markets of the 1990s. But don't forget, it took over 17 years (1982) to eclipse the high in the averages established in the mid-'60s!

And despite the market's monumental rise, remember that prices have no memory, and yesterday has nothing to do with tomorrow. Every day starts out 50-50 (to paraphrase Professor Eugene Fama).

Sic transit gloria

.

Douglas A. Kass, partner with hedge fund

Kass Perkins Partners

, is a regular contributor to

The Street

. He welcomes your feedback at

Ekass73388@aol.com.