Just over 40 years ago, on June 18, 1971, I incorporated Towneley Capital Management, Inc. in Delaware. Not wishing to use my own name, I sent five old English names to Delaware and they rejected all five; gosh, I thought, it was a good thing I did not send them my own name. I pursued the naming a little further and discovered if I added an additional “e” between the “n” and the “l” they would accept my new company name. That silly “e” has caused more misspellings than I could ever have imagined; it also separates the vendors into those who pay attention and those who do not. My goal was to provide investment counseling services to high-net-worth families, endowments, insurance companies and pension funds. Now, 40 years later, I must say it has been a great ride. I have had fun, met fabulous and interesting people, employed a wonderful group of men and women, been constantly challenged and perhaps, most of all, helped many people from the brink of financial disaster. I even made some money. All in all, I have had a challenging and rewarding career and a great life. No complaints.
When I founded Towneley I was 29 years old and an assistant professor at the Graduate School of Business at Columbia University. I taught security analysis and portfolio theory, mostly to second year MBA students. I found it ironic that I used the book Security Analysis by Graham and Dodd; I first read this book at the insistence of a mentor my father had arranged for me. I was 14 then.
Both my parents were, as I look back on it, incredible mentors and very wise. They encouraged me from age 8 or 9 to pursue my interest in stocks and commodities. [1] My mother would trek with me to book stores, the library and eventually to a stock brokerage office in the neighboring town. My father found men knowledgeable about investments and somehow wrangled a meeting for me; in two cases I was hired as a “researcher” and actually got paid. I recall receiving something along the line of $0.35 per hour for data collection, graphing prices on charts and going to the library on my bike to look up something; this was, after all, 1952. Much later I realized these little jobs taught me invaluable precision and methodology about data collection, analysis and decision making.
In 1957, when I was 15, I got a job working for a very successful investor. This investor was trained as a chemical engineer and had a great quantitative mind. His investment style was to buy long and sell short companies in the same industry, like Ford, Chrysler and GM, or DuPont, Monsanto, and Dow, or the papers, oils, and steel. To do this he needed a valuation model. He had me update weekly and monthly charts graphing relative price ratios, price-earnings ratios, dividend yields, price-to-book ratios, and other data. Perhaps even more interesting, he had me maintain statistical measures of extremes in the differences in these ratios on a monthly and quarterly basis to compare against data he had retained for years. I asked this gentleman where he got the idea for his investment strategy. He said he learned the concept from an old friend of his father’s who used to trade railroad bonds and did comparative financial analysis on bonds of companies in the same industry.
During my employment for this gentleman I had an idea for an improvement to his “timing” indicators. At that time he had me keeping 10, 20 and 100 week moving averages of the Friday closing prices of several “pairs” of stocks in the same industry. I also maintained the ratios of the stock prices one to another. My idea, to which he responded with great enthusiasm, was to weight the weekly volume by where the stock closed on Friday within the weekly range. So, for example, if the stock closed at the top of the range I called it “strong” and if at the bottom of the range “weak.” If the price was in the middle I assigned half the volume to the “strong” column and half to the “weak” column. All this computation was done by hand with data sheets and a slide rule.
The result was a huge improvement in his profitability but only in a special way. If his valuation measures said that Ford was cheap relative to GM and the new volume-weighted relative price differential signaled strong buying in Ford relative to GM, then he would buy Ford and sell short GM. He suggested I enter the idea in a regional science fair; then he recanted. He reckoned the idea was “too useful” to give away. So we compromised and I took one stock, Dow Chemical, and calculated a modified trend measure for five years and submitted it to the science fair. Even though my idea was watered down, I won second or third place. Here is the picture my proud mother took of the science fair display. [2] This gentlemen had a powerful impact on my thinking about numbers and their relationships. He was an incredible mentor. He shared his ideas openly; he made me think and encouraged me to experiment and learn from my mistakes. He taught me it was “ok” to say “I do not know.” Three decades later I listened to a private and hushed presentation on a “new” investment concept called “pairs” trading; I nearly fell off my chair.
The mentoring and work experience I enjoyed as a teen encouraged me to open the doors to my own firm. When I told the assistant dean of the business school I intended to go into business for myself and wished to become an adjunct professor teaching only security analysis, he was floored; he warned me that I was giving up on my academic career, that it was risky, that I had never worked on Wall Street and that professors were not generally very good entrepreneurs. Similarly, a number of my colleagues also thought it a very risky and poorly thought-out plan. Curiously enough, my second and third clients were former professors of mine, one from the University of Michigan and one from the Columbia Graduate School of Business. Today my firm manages money for the children and grandchildren of one of those professors.
One other professor of mine told me I was “crazy” to go to work for myself. His name was Arthur Burns. Professor Burns had taught a course on business cycles in the Graduate School of Economics at Columbia University that I had attended in 1964 or 65. My conversation with him on the subject of my future career path occurred in the spring of 1969 when I told him of my intention to resign as a member of the White House Staff; at the time I was a very junior assistant to him. [3] He was serving as counselor to President Nixon. The title of Counselor to the President was a placeholder position while he waited to be appointed Chairman of the Federal Reserve. Although my staff position was very low, and I was only 26 years old, Burns respected my economic views and chuckled at my political naiveté. I reported to him my desire to go back to the university and plan the formation of my investment firm. Over dinner that evening, the only time I ever shared a meal with him, he tried to persuade me to continue working in the White House and consider a spot at the Federal Reserve, although he did not promise me a position. Barring that, going back to the university was, of course, acceptable; but to go into the investment business was sheer insanity.
“Arthur,” I said, somewhat jokingly but in my mind deadly serious, “once you are the Fed Chairman you will make me rich. At the first sign of a weak economy and rising unemployment you will step on the gas.”
Burns, having lived through the depression as a practicing economist, had a deathly fear of high unemployment. I had not only taken his classes and read most of his writings but had enough discussion with him to know that he was at heart an inflationist. I left the White House staff, for which I was ill-suited, returned to the university and started my firm. As I predicted, Arthur Burns was an awful Fed Chairman. [4] His behavior was just as I expected and very useful in adding to my net worth.
My first, and for the first ten years my largest, client was a very charismatic and dynamic businessman who made his fortune buying, merging, operating and selling businesses. He is still a friend. My fourth client was a medical doctor. With my cash flow somewhat secured through the promises of these four clients, I proceeded to rent a very small office and hire one analyst, one part-time secretary and one very part-time bookkeeper. For the first ten years I worked 12 hour days, six or seven days a week. I would invest and study by day and market our services by night. I was having the time of my life. One day I woke up and I had a firm with seven or eight employees, several hundred million dollars under management and a pretty good list of clients. For an abbreviated timeline on the Towneley business and product offerings go here.
Our first office in 1971 was a few hundred square feet in the Architect’s Building at 101 Park Avenue. The building was very old and women’s bathrooms were only available on every other floor. The rent was about $5.50 per square foot including electricity and cleaning. In those days the U.S. postal service was fantastic, delivering mail twice daily Monday through Friday and once on Saturday. My first employee was a 68-year-old gentleman by the name of Al; Al was of German descent and had lived through the 1920s hyperinflation in Germany. He managed money for a large New York bank from the late 1920s through the crash of 1929 and the Depression. With part-time clerical help we ran the business until 1973.
One funny incident occurred around Christmas 1971. Al said, “Wes, here is a Christmas card from our postman. You might wish to give him a little present in the form of some cash.”
I opened up the envelope to discover a card with 10 or 12 names; only one name meant anything to me—the guy who delivered our mail twice a day. “Al, I said, what do I pay taxes for? Who are these other guys?”
“Wes, I suggest that you give him ten dollars in an envelope, shake his hand and wish him ‘Happy Holidays,’” was his reply.
It stuck in my craw for reasons I cannot even fathom now, but I ignored it, took a vacation until January second and just forgot about it. On returning to the office after the holidays, I found we had received no mail, none of my subscriptions, nothing. I asked Al.
“Lost,” he said.
“Lost, all our mail from the day before Christmas until the second of January is lost?” I retorted, just a bit angry.
Al just looked at me blankly. “Wes, when the postman comes today, say you have been away, give him ten dollars in an envelope, shake his hand and wish him ‘Happy Holidays,’” was his reply. So I did as he said and mysteriously two huge bags of mail appeared at our door the following morning. I have never failed to give a Christmas envelope to an NYC postman since. Only New Yorkers will appreciate how silly I was and only Midwestern readers will understand why I did what I did.
In 1973 I hired three women. Sylvia served as administrative assistant/office manager and retired from Towneley in 2000. Maggie ran the back office; she worked for Towneley until 2000 when we sold the advisory contracts on the New York managed assets to an insurance company. After the sale, Maggie worked for the insurance company and subsequently went to work for a back office software company. Peggy was the third employee hired in 1973; she was a math major in college and had been working in the trust department of a large U.S. bank. Sadly, she died in October of 1994. In 1996, I supplied the seed capital to start a scholarship fund in her memory. Peggy was an extraordinary woman with whom I was honored to share over 20 years of my working life. [5]
We were a happy and productive crew. In the dull days of the bear market of 1973-1974 we took up playing darts in the late afternoon; the idea came from my employees when I explained the random walk and that stock selection could be done just as successfully by dart throwing. Our portfolios were stuffed with bonds, cash, gold stocks, cheap large cap companies and a handful of smaller companies selling below net cash per share. From December 1972 to December 1974 we lost 23% during a period when the market was down over 40%; we were fully invested by the end of the first week of January 1975 and had a spectacular 1975. The business grew and we soon needed more space and more employees.
In late 1975 we found a sublet space at 633 Third Avenue in a great building a couple of blocks from Grand Central and thus handy for my employees’ commuting needs. We added two additional employees: Joan for the back office and Sigrid for trading. Both Joan and Sigrid completed additional education and Sigrid, after earning a law degree, became our compliance officer. Both women worked at Towneley until the 2000 sale. During this time we supplanted our workforce needs with many part-time employees. It was a grand time. From the market bottom in late 1974 to the end of our sublet lease at 633 Third Avenue in 1982, the stock market soared in nominal terms; the story was much different in inflation-adjusted terms [4]. In the 1981 to 1982 period I hired two additional staff; Loretta became our receptionist and Dorian worked as bookkeeper/accountant for the business. Loretta continues to work for the company we sold the advisory contracts to in 2000 and Dorian continues to work at Towneley. Today, the average Towneley employee has worked with me for over 18 years. You may find a list of current employees here.
In 1980, tired of moving every five years and fearing rising rents, I started looking for a commercial townhouse in which to house my business. After much looking we purchased an 1870s brownstone in the Murray Hill district of Manhattan on East 30th Street. At the time, the neighborhood was rundown with an abandoned building on one corner of Third Avenue and 30th Street and a drug/crack house on the other corner. Ladies of the night were present from early evening until well into the wee hours of the morning. Used condoms were so prevalent in the gutter in front of all the buildings that I once was fined $50 for the “failure to clean the curb 18 inches into the street of ‘Hudson River White Fish.’” Fortunately for our firm, our institutional and high-net-worth clients only visited us during business hours when the drug dealers and working women were not on the street. Despite this dubious start, the neighborhood steadily improved and when we had to move some 18 years later I was able to sell the building for a very handsome return.
So, the first ten years were filled with hard work and much fun. We guided our clients through the 1972-74 debacles and protected their assets against the onslaught of the horrendous 1970s inflation. The subsequent thirty years saw additional clients, substantial assets and more wonderful employees. I hope in future posts to share these experiences with you.
[1] This picture is a spoof. It is me as a child with a book superimposed in my hands; one of my staff did this in honor of the fact that I used to give this book out to clients and employees that were in financial difficulty.
[2] This is a picture my sister found when digging through our mother’s belongings after she died; gosh, I thought when I saw it, moms keep everything. Actually, there was one thing she admitted heaving when she moved to California: my near perfect comic book collection of Superman, Batman and other similar characters. I cringe to think what that collection would be worth today.
[3] This is a copy of my letter of resignation from the White House staff to Arthur Burns in 1969 along with a short note from him to me on another matter; after my departure we had limited communication. He called me once on a private investment matter and I congratulated him on his confirmation as Federal Reserve Chairman. I think I only visited him once while he was Federal Reserve Chairman.
[4] This is a chart of the total return on the S&P 500 from 1972 until 1984 unadjusted for price inflation and adjusted for price inflation. Burns served as Chairman of the Federal Reserve from February 1970 until the end of January 1978; the record speaks for itself. He was succeeded in January of 1978 by William Miller who served only until August of 1979. The Burns-Miller record was one of pursuing economic growth by keeping interest rates below market which resulted in rapid monetary expansion and in high and rising prices and devaluation in the US dollar. The economic condition of this period was known as “stagflation.” It took the tough action of Paul Volcker, who served from August 1979 until August 1987 to raise interest rates and break the back of price inflation. Alan Greenspan, a close friend of Arthur Burns, was Volcker’s successor.
[5] The Margaret Leonard Memorial Scholarship Fund was established in 1996 to perpetuate the memory of Peggy Leonard Satterthwait and accomplish one of Peggy’s goals in life - to help young people to achieve their full potential by providing scholarship money to accomplished students in financial need.Labels: Memoir
