Failure Is an Option

It’s 10 p.m. Do you know where your money manager is? If the answer is anything but “in bed, sleeping soundly,” you might have a problem on your hands. For a very long time, the business of managing money was simply the business of buying stocks and forgetting about them. You went into the refrigerator or the medicine chest, and if you liked what you saw, you bought. (Oh, did you think there was more to Warren Buffett’s buys of Gillette and Coke than that?)

Lately, though, the business has gotten hard, because the kinds of stocks that have gone up these past few years could hardly be called household names. Worse, the businesses behind them required a pretty thorough understanding of how voice and information traveled from one personal computer to another via the Internet.

Meanwhile, if you stayed with the tried-and-true stuff – the branded-product stocks – you got your clock cleaned, falling 20 to 30 percent behind the nasdaq averages for the past couple of years. The result is that a lot of money managers who have been coasting for most of the past decade now find themselves frantically in reverse or, worse, doing things they just shouldn’t do, in order to please their clients. They would rather be sniffing ether or eating fiber, anything other than trying to figure out whether Ethernet is going to beat out Fibre Channel as the data-transmission method of choice for the future – which is what the rest of us nerds have to worry about now.

The new dispensation means cramming for finals every night of the week. It means having to do a massive amount of homework, much more than you ever had to do in the past twenty years, to make sure that you even understand what the company really does. Only then can you begin to find out whether it is any good at it, or is getting whipped by the competition. Especially when, if you don’t stay current, the competition can outmode your company’s wares in a quarter. Can you really afford to own Extreme Networks when Brocade has a better switch in the hopper? Don’t you have to worry about Cisco’s earnings if Juniper’s routers clock out faster and cheaper?

I am in a business where you are only as good as your last trade. I know it; so does your manager. We don’t like to admit it because it crushes our egos and makes us feel far more vulnerable than we’d like.

For us at Cramer Berkowitz, that means having to hire a ton of young people to help learn all of the 500 new “stories,” the slang in the business for stocks, that have come public in the past year. It means flying west four or five times a year to meet face-to-face with Silicon Valley executives to talk about “tone of business” (whether or not they’re “on plan” or “below plan,” namely the business plan they first articulated to Wall Street).

Which is why we never understood what all of those movie stars who were running around with Dana Giacchetto were thinking. Did they think he was boning up on the reverse-auction Business to Business market between screenings? Did they think he could just intuit the triumph of Kohl’s over Kmart? Did the impact of the Justice Department’s victory over Microsoft just come to him, like a really good screenplay idea? Believe me, you don’t want to pal around with us. We fall asleep at 8:30 p.m. reading a prospectus about LinkShare. We don’t want to speak to Leo DiCaprio or Courteney Cox, we want to get Craig Barrett or Carly Fiorina on the phone (the real superstars, the heads of Intel and Hewlett-Packard). And we are jealous of those who can, when we can’t. If we take a drink of anything other than bottled water past 9 p.m., we are going to buy Nokia in Turkey instead of Finland and sell Ericsson in Italy instead of Sweden. The business is just too hard and too fast to maintain real nightlife, unless it’s in the company of our most sedate and infirm client.

It’s not just the hours, though. It’s also the Darwinian need to constantly adapt that has recently infected our business. It may come as a shock to you, but most hedge-fund managers can’t handle more than one bad year, no matter how great they may be, or how beautiful their long-term record is. You may love Warren Buffett to death, and worship at the Oracle of Omaha’s feet, but with his short-term record he ought to be glad he’s not in the hedge-fund business. He’d be behind the counter at See’s or selling some furniture down at the mart, glad to be employed.

Don’t believe me? How about Julian Robertson, my idol, the Joe DiMaggio of our business: His 56-game hitting streak was eighteen years of plus 30 percent returns. That’s hedge-fund-hall-of-fame-on-the-first-ballot material. But Robertson bought some bum stocks, stuck with them, and made some horrendous bets in Russia and Japan, bets that led to massive redemptions that he, one of the richest men in the world, couldn’t handle. Simple hedge-fund economics got him down.

When you lose money in year one, you have to make it back in year two before you can take your cut. That’s fine if you are rich and on your own. But it’s not fine if you have to pay your employees and you have no profits with which to pay them. You can only dip into your own pocket so many times to pay people millions upon millions of dollars before it gets wearisome. Can you blame the clients who pull out? I am in a business where you are only as good as your last trade. I know it; so does your manager. We just don’t like to admit it because it crushes our egos and makes us feel far more vulnerable than we’d like if we’ve done well for you.

Don’t I know it. After running peoples’ money successfully for eighteen years, compounding at 23 percent after all fees, I stumbled in 1998. Coming into the home stretch of that year – after Long-Term Capital, the Greenwich money manager, got blown out of the firmament – we had an opening for my fund to please one of our clients. (Normally, we are closed to withdrawals.)

While we were off slightly for the year at the time of the opening, our investors, scared that the markets were too fragile, took advantage of the opening to demand $100 million of their funds in one day, a third of our invested funds. Most of these people had been with us for at least fifteen years. (Oh, unlike Dana’s, our clients’ names are none of your business.) I remember the afternoon of the opening, staring at the clock, waiting for it to hit 4 p.m., when the redemption window closed – a modern-day George Bailey hoping to keep a couple of bucks under management.

I respected the decisions of my ex-partners, even as I wanted to rip their lungs out. To this day, I have nightmares about that terrifying redemption – even though within eighteen months we nearly doubled the money of the faithful who stuck with us. Nevertheless, the scars left by the retreat of those summer soldiers still give me pain.

These days we have no illusions about what we do. We either perform or perish. To perform, however, means to work harder than you ever have and have much less to show for it as you share it with the younger people you need to stay in the game.

But then again, it was ridiculously easy for so many years, so easy that the guys coming into it didn’t think they had to do anything but buy and hang out with the rich.

Fortunately for those of us willing to do the work, those days are now over.

James J. Cramer is manager of a hedge fund and co-founder of At time of publication, his fund had positions in Intel, Hewlett-Packard, Nokia, Brocade, Microsoft, Gillette, and Cisco. His fund often buys and sells securities that are the subject of his columns, both before and after the columns are published, and the positions that his fund takes may change at any time. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Cramer’s writings provide insights into the dynamics of money management and are not a solicitation for transactions. While he cannot provide investment advice or recommendations, he invites comments at E-mail:

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Failure Is an Option