“Genius is a rising market.” Michael Batnick used that quotation, from famed economist John Kenneth Galbraith, to lead off chapter seven of his 2018 book, “Big Mistakes: The Best Investors and Their Worst Investments.”
Gerald Tsai was one of those best investors. To understand his meteoric rise, it’s necessary to get a taste of the times in the 1950s and 1960s. Most importantly, we need to know that a career in investing had become an old man’s game, for an understandable reason: Performance had been terrible, with a 90% decline in market values between 1929 and 1932, followed by 50% decline in 1937. Much of the nation wanted nothing whatsoever to do with the stock market.
In the two decades between 1930 and 1951, the New York Stock Exchange hired just eight people to work on the trading floor. Additionally, ,utual funds had assets of only $1.3 billion in 1946. Not surprisingly, then, very few young people were choosing to go into finance. As one observer put it, a whole generation was missing from Wall Street.
So there was no surprise when Edward Johnson of Fidelity Funds had a chance to hire 24-year-old Tsai in 1952, he did so. Five years later, Tsai was named to manage the Fidelity Capital Fund, and he quickly became a star. Essentially, he was a momentum investor. Batnick wrote, “He was trading large blocks of stocks, in and out, rapid”fire. If it was going up faster than the market, he bought it. When it slowed down, he moved onto something else.”
Among those impressed by the young man was Johnson himself, who wrote, “It was a beautiful thing to watch his reactions…. What grace, what timing – glorious!” Prudent investors might have been more cautious: Tsai’s turnover often exceeded 100%.
Still, his returns were outstanding. Between 1958 and 1965, he delivered a return of 296%, compared with an average of 166% for other equity funds. Such returns drew in shareholders quickly; for example, in the one year between May 1960 and May 1961, the shareholder count rose from 6,000 to 36,000.
Batnick observed, “Hailed as a hero, even by competitors, Tsai was recognized as one of the top fund managers on the scene, and he was giving the industry a good name. What his investors, competitors, and even Tsai himself saw as skill and genius was nothing more than luck.” In this assessment, the author may have exaggerated; after all there may have been fewer fund managers in the 1950s and '60s, but there were still a number of them and Tsai outperformed most of them most of the time.
In 1965, Tsai sold his stock back to Fidelity and moved to New York. He understood he could not get to the top at Fidelity because Johnson planned to name his son Ned to replace him.
With the $2.2 million he collected from his Fidelity stock, Tsai started his own fund: The Manhattan Fund. To get going, he planned to sell 2.5 million shares in the fund, but he was so popular that his firm issued 27 million shares, raising $247 million. At the time, it was the biggest-ever offering for an investment company.
In fact, the $247 million represented 15% of all cash going into equity funds that year. And, to top it off, investors had to pay an 8.5% sales load to get Tsai and Manhattan to take their money.
Those who did get in must have thought it was fine to pay high fees—for the first year at least: In 1967, the Manhattan Fund returned nearly 40%, which was more than twice the Dow's return. But, the following year, it lost 7% and worse was to come when the market tanked in 1969. Batnick wrote:
“When the market crash came, the people responsible were entirely unprepared. By 1969, half of the salesmen on Wall Street had only come into the business since 1962 and had seen nothing but a rising market. And when stocks turned, the highfliers that went up the fastest also came down the fastest.”
And those highfliers were what Tsai had traded so successfully in the past dozen years. He was caught, for example, on National Student Marketing; he purchased 122,000 shares that fell from $143 in December 1969 to $3.50 in July 1970. According to Batnick, “Tsai was playing a game that could not be consistently won. He was the first of a new breed of traders who ditched the slow”and”steady to chase immediate profits.”
Tsai spared himself to some extent, since he sold his company in 1968 for about $30 million worth of stock in the C.N.A. Financial Corp., an insurance company. But he couldn’t do anything about the criticism he received after 1968. Tsai complained:
“Either I overstayed, or I had the wrong stocks. But I think the press has been very unkind, because Fidelity Capital started in 1958, so you might say, from 1958 to 1967 we were always on top. We had one bad year, in 1968, and I've been killed in the press ever since.”
There’s no word on whether or not he recognized the costs borne by the people who invested in his fund.
Batnick concluded:
“The Manhattan Fund would lose 90% of its assets over the next few years; by 1974, it had the worst eight”year performance in mutual fund history to date. A rising market lifts all ships, and Tsai's investors learned a very important lesson: Don't confuse brains with a bull market!”
Batnick doesn't cover the rest of Tsai's career, which was successful.
He left C.N.A. in 1973 and bought an insurance company of his own, Associated Madison, in in 1974. Four years later, he sold the company to American Can Co., where he became vice chairman. In 1987, American Can bought Smith Barney, the finance house. The combined company became Primerica (PRI, Financial) and Tsai became its chairman and CEO. A year later, he merged Primerica with Sanford Weill's Commercial Credit Group; Tsai was its biggest shareholder and a director, while Weill became the CEO. Tsai later bought, ran and sold Delta Life Corp.
He died in 2008 at age 79.
Disclosure: I do not own shares in any company listed, and do not expect to buy any in the next 72 hours.
Read more here:
- Big Mistakes: Michael Steinhardt
- Big Mistakes: John Bogle
- Â Big Mistakes: John Meriwether and Long-Term Capital Management
Not a Premium Member of GuruFocus? Sign up for a free 7-day trial here.
