Five Minutes Is a Long Time

By Otto Robert Theurkauf

From 1950 to 200, Otto. Robert Theurkauf had the uncommon experience of working fifty years for one firm, Scudder, Stevens and Clark. He had his victories and his defeats. But then, in April 1982, as Chairman of Scudders Investment Policy Committee, he predicted the end of the a bear market, a twelve year period when the market had been under water. To the complete surprise of almost all, 1982 was the start of the greatest bull market of all time.

His story is a journey from One Wall Street, to California, to Japan, and back to Park Avenue and with some interesting places in between. His transfer to California in 1962 at age 35 was a turning point in his personal development as well as his career. There was more than on future path along the way. His life could have turned out differently, but it didnt.

His good show hunter, Indiana Jones, is twenty five years old and is retired in Florida. Since Indy doesnt want to show any more, neither does Theurkauf and he is also retired from showing.

Theurkauf and his wife live in a small town fifty miles north of New York City.

• Language: English
• Publisher: Xlibris US
• Release date: May 13, 2008
• ISBN: 9781462839308

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Copyright © 2008 by Otto Robert Theurkauf.

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Contents

Introduction

Chapter 1

Chapter 2

Chapter 3

Chapter 4

Chapter 5

Chapter 6

Chapter 7

Chapter 8

Chapter 9

Chapter 10

Chapter 11

Chapter 12

Chapter 13

Chapter 14

Chapter 15

Chapter 16

Chapter 17

The Principal Characters

The Author And His Book

Acknowledgments

Bibliography

For Sarah, Susan, and Amy

Lydia in memoriam

INTRODUCTION

In 2000, I picked up Henry Kaufman’s book On Money and Markets: A Wall Street Memoir in an airport. His centerpiece was his now-famous memo predicting the end of the bear market in bonds in 1982. I was inspired to write my own memoir, particularly when I looked at the other books on investing. Most offered easy lessons on how to beat the market.

In April of 1982—as chairman of the investment policy committee at Scudder, Stevens & Clark—I gave a talk to my organization predicting the end of the bear market in common stocks, some months before Kaufman’s dramatic call in bonds. I was fifty-five years old. I had been in research for thirty years. In 1982, almost every strategist was bearish. I was alone. This was the start of the greatest bull market of all time. My memo also acquired some fame but only within Scudder since we did not publish our work. It is my masterpiece. The difference between my memo and Kaufman’s was that Kaufman was a bond man. I looked at the world from the standpoint of corporate earnings and the equity market. Of course, there was one other slight difference: Kaufman was just about the most famous and most respected name on Wall Street as Dr. Doom, and I was hardly recognized by my own associates when I left the floor of the research department.

A second and more interesting aspect of Kaufman’s book was that it gave insight into his personal development.

Scudder, founded in 1919, was one of the oldest and largest investment-counseling firms. My career was essentially in the research department from 1950 to 2000. Fifty years with one firm was an uncommon business experience and may seem stupefying and benumbing. But in fact, I had some weird, ridiculous adventures, perhaps less than amazing but also perhaps still worth recounting. The uninitiated might learn something about how the stock market works. The pros might be amused as to how I handled some awkward situations. I can make statements that the academics cannot make. I was dealing with real clients, real money, and live ammunition.

When I wrote this book, I had no particular audience in mind. It was not written specifically for the day trader, the momentum investor, academics, or mutual fund managers, who properly or improperly are under the gun to turn in strong relative performance every quarter, although any of these pros might get a kick out of reading it. My book is for anyone who might wish to see how one research analyst made this fifty-year journey—sometimes under considerable pressure. It is not written for those wishing to make a quick buck in the stock market.

The industry owes Scudder a great deal, and for that reason alone, this book may be worth reading. Scudder pioneered independent field research and the separation of research from investment banking. But this book is not primarily about Scudder, Stevens & Clark. For those interested in the history of SS&C, I refer them to The History of Scudder, Stevens & Clark by David Grayson Allen. My pages are personal memoirs, nothing more, with the focus on my family and my own business experience which happily was with SS&C.

Along the way, I explore Wall Street in the 1950s, field research, the Gold Rush of 1849, Los Angeles in the 1960s, the oil industry, Kuwait, Japan, the 1982 Bull Market, and China.

The title of the book Five Minutes Is a Long Time, When Your Head Is Underwater comes from a speech given in 1966 by Thomas W. Phelps, one of Scudder’s more original thinkers. Phelps’ platitude is a self-evident truism but nonetheless became part of the lexicon of Scudder, Stevens & Clark. Tom Phelps was well-known before he was brought in to head research in 1960. He was a reporter, a world traveler, and an established financial writer having been associated with Barrons, F. I. Dupont (the brokerage firm), and Mobil Oil Company.

His 1966 speech was made when the Dow Jones Industrial Average reached one thousand for the first time. Although the economy was reasonably strong and inflation was quiescent at 2 percent to 3 percent, his point was that stock prices were high. His words of caution were prescient. In the ensuing sixteen-year period, 1966-1982, the DJIA touched 1,000 four times only to fall back each time. For over fifteen years, the market was under water.

By 2000, Phelps’s observation that the market can go down and stay down for years had long been forgotten. As the National Association of Securities Dealers Automated QuotationsNasdaq composite index roared ahead from under one thousand in 1955 to 5,048 on March 10, 2000, those on board claimed it was like a one-sided tennis match: point, game, set, and match. It’s all over. You lose if you don’t get in. A 15 percent annual return became accepted as a reasonable goal, and it was to be within reach every year without interruption. The old measures of value were no longer valid and did not obtain. But by 2002, Nasdaq hit bottom at 1,114; and today, five years later, is a little over 2,300—down 50 percent from its high. Today the conventional wisdom is that a 6 percent to 8 percent annual return from common stocks is about all you can hope to achieve. Expectations have been cut in half.

My story is a journey over fifty years from One Wall Street, to California, to Japan, then back to Park Avenue and with some interesting places in between.

I take the reader on some side trips as well. One excursion was to Pennsylvania recounting the role present value played in analyzing the value of farmland when my brother, Ed, and I bought a farm in Chester County. (A bottle of wine in a country inn probably had more to do with the decision than a present value calculation). When we arrived in California in 1962, we made a pilgrimage to an abandoned gold mine, which, in the 1880s, was controlled and managed by the California branch of my family.

In the 1970s, the firm was under considerable pressure to embrace Betas, Modern Portfolio Theory (MPT), and portfolio insurance. The inertia of our white-shoe, conservative culture saved us from attempting any new heroic approaches; but we also relied on common sense, some original thinking, and some wisdom from the racetrack, which also includes a recipe for jellied martinis. This chapter on risk will not be popular with academics.

In 1962 we moved to California. I was thirty-five years old. My wife, Tina, and I knew there was no turning back. Up to this point, the firm provided everything: clients, revenues, office space, recruiting, record keeping, compliance, and introductions. My new world was moving ahead. My broader responsibility became that of helping to create this environment for others. The differences between east and west were astonishing. Those who did not have this opportunity or turned it down missed some fun. And then in 1972 I returned to New York as director of research.

What impact did the Los Angeles office have on our New York and Boston offices on the firm as a whole, on the development of new business opportunities, on the structure of the firm, and on subtle changes in abstract attitudes and views as to how the world works? Why Los Angeles? When I was transferred to Los Angeles, the Chicago office was the larger of the two. What was it about the west—the remnants of the frontier? These are difficult questions to answer. Some answers may be sparse, elliptical, or incomplete. I have avoided any speculation on the motives of others and/or office politics. I suppose the point of memoirs is to have the writer emerge as an individual in a complex and disordered investment environment. The episodes are the pieces of this mosaic.

I started to write these memoirs early in 2001, having just completed fifty years of service with Scudder, Stevens & Clark. I thought I had some fun and had something useful to say about how the stock market works. At the least, I had run into some interesting characters along the way. A few months after I started, however, on September 11,2001, almost three thousand individuals including my nephew, Thomas F. Theurkauf Jr., perished with the destruction of the World Trade Center. With the 9/11 attack, all of this seemed trivial compared to the enormity of the current events. I put the project aside. We still do not know what the long-term significance will be of this catastrophe and our war on terrorism in terms of our country and our economy. We just don’t know. I decided to go ahead. The world is moving forward; we are not going backward.

The book is mostly about people and situations with a sense of mood and place. California was on the move and an exciting place in the early 1960s. I let the reader share my feelings but then let the reader make up his or her own mind. I have tried to recapture the moment cinematically with a few well-observed details. Each step of the way I did not know the outcome. No doubt there was more than one future path. My life could have turned out differently, but it didn’t.

CHAPTER 1

ONE WALL STREET, 1950

I reported for work at One Wall Street—the New York office of Scudder, Stevens & Clark on the day after Labor Day in 1950. It was an event that was so unremarkable that it therefore becomes noteworthy. SS&C forgot that they had hired me. It took all morning to track down in Quogue the managing partner, F. Vinton Lawrence, who in fact had offered me the job in May. He had said that most clients take the summer off and why don’t I do likewise—perhaps go to Europe. Instead I took a farm job in New Jersey.

It took eighteen years to become a partner. However, when our president George S. Johnston died in 1991, forty-one years after I started, I held the most shares in the partnership of those active in the business, albeit a distant second to George’s interests. At an emergency meeting of the board of directors, as provided in the partnership agreement, it fell to me as the largest shareholder to nominate on behalf of the board the next president, Edmond D. Villani.

How did it happen that an analyst in the research department found himself in this position? How could this have happened? When I reported for work in 1950, they had forgotten that they had hired me.

In 1950 the firm was growing rapidly and was short of office space. I shared an office with Eckley B. Coxe IV out beyond the elevator bank in a stairwell. Buzz Coxe and George Johnston both went to Yale. Buzz was manager of the football team and George was captain of the golf team. I guess that they had other qualifications because in about five years they were both invited to become partners. In fact, Buzz became a key investor in the firm helping to organize, encourage, and lead our portfolio managers. George was elected president in 1969, a position he held for twenty-one years. The firm came into its own during their tenure achieving a remarkable growth. Revenues increased tenfold from $16 million in 1970 to $167 million in 1990.

I never forgot some advice Buzz gave to me in 1950. My first name is Otto, which is often used as kind of a nickname mostly by my horse show friends. Buzz told me, Otto my boy, the way we play this game is we try to see who can get the most shares. He didn’t say we try to become president or to have the most accounts or get the best title or biggest empire; he said we try to get the most shares. To Buzz, it was like another game—like playing capture the flag. It went without saying that the financial rewards would then cascade down upon you.

In the latter half of my senior year in college, I began to scan the job openings posted by the placement office. When I inquired about the Scudder notice, I was told I didn’t have much of a chance. I’m not sure why they would say that, but I told the placement office that I would like to give it a shot. Scudder hired me and one other. I had no special introduction or connection to Scudder. In fact, when I signed on, my father asked who and what is investment counsel. I respectfully told him that I thought that their $3,000 offer was better than the $1,800 offer (per year) he arranged at the old Corn Exchange Bank. I was hired for research. The other guy was hired for the client department. He wrote a letter to a client with a split infinitive. He lasted six months and was fired.

If one were to design a resume for a research job, it could model mine quite closely. I did not plan any of this. My life prior to 1950 was a random walk toward Wall Street. I graduated from Montclair High School in New Jersey during World War II. On October 25, 1944, the day after my seventeenth birthday, I enlisted in the Navy Air Corps. We all volunteered. Looking back, I now realize didn’t know what I was doing. My two older brothers were in the navy, Ed an Ensign on a destroyer in the South Pacific and Tom in the V-12 program. My mother did not say anything but couldn’t have been in favor of my enlistment. My father, as ever, was more sanguine. He always let us find our own way—never held or exercised undue influence. I guess he figured he gave us certain building blocks and clearly defined standards of conduct, and the opportunities and risks were up to us individually.

The general sense was that the Allies had turned the corner, but the war was by no means over. The Germans were about to launch their counterattack at the Battle of the Bulge on December 16, 1944. In the Pacific, on October 23, two days before I enlisted, the U.S. Pacific Fleet engaged the Japanese fleet in the Battle of Leyte Gulf, a crushing defeat from which the Japanese Navy never recovered. But back home we did not know this. We had very few details. In fact, we now know it was a dammed close call. Our main battle force, under Admiral Halsey, was decoyed by the Japanese and was three hundred miles north during the first day of the battle. The main Japanese fleet sailed up from the south but was held off by a much smaller U.S. force of destroyers and then inexplicitly withdrew. The Battle of Leyte saw the entry of kamikazes planes, which sank a significant number of our ships. And while our island-hopping strategy was successful, our losses were huge. We did not know any of these details at the time I enlisted due to wartime censorship, but the expectation was that the invasion of Japan would be a very long and bloody struggle.

The U.S. Navy was engaged in an active recruiting program in October 1944 against this real possibility of a long war. I did solo in a Stearman biplane, but fortunately I was a couple of years too young to be part of Tom Brokaw’s The Greatest Generation and never had to leave the United States let along land on a carrier. On May 8, 1945, the war was over in Europe; and on August 14th the Japanese surrendered.

World War II was still vivid in 1950. I gradually became acquainted with the older generation at Scudder. It seems they all had some military service. There were over eight million veterans at the end of the war. The war was the most important event by far in the lives of a whole generation. I had a neighbor who had gone through the Battle of the Bulge. This battle occurred over Christmas in 1944 when the Germans mounted