8. New Beginnings
It was the turn of the century and change was afoot. The stock market had soared to incredible heights, and there was plenty of gold on the horizon—I simply had to find my pot.
I had several conversations with Jim Cramer and Jeff Berkowitz during the final few months of 1999, and we were seemingly on the same page about me moving over to their shop. At $400 million, it was a much smaller fund than Galleon, but they dangled the elusive word: partner.
We met on several occasions to discuss the particulars of my term structure. I would join the firm and run the entire trading operation. My base salary would be $300,000, which provided the security I was looking for, but more enticing was that I would receive a nice percentage of the profits.
Jim was wildly emotional, but from what I could tell, honest and fair. Jeff and I had become good friends through the years, and I came to know him as pragmatic and balanced. Jim and Jeff complemented each other as partners, and my skill-set figured to mesh equally well.
When I told Slaino of my plan, he asked me a simple question: “Do you trust them?” It was a simple yet critical criterion. Would they watch my back? Would they put my interests on par with their own? Would they do the right thing? I believed they would, and we met at the Gramercy Tavern in Manhattan to discuss the remaining details.
Cramer Berkowitz had a proven track record, beating their benchmark over the lifecycle of the fund, but recent years had proven more challenging, and they were looking to jumpstart their performance. I was coming from a different direction, but we all wanted the same thing, and it was hard to contain my enthusiasm as we discussed our future together.
The energy was palpable as we talked about the markets and the world at large. Jim continued to reference a financial website called TheStreet.com, which he co-founded in 1996 and took public in May 1999. I’d heard of it, but wasn’t familiar with what it was or how it fit with the world of money management. I would soon find out, for better and for worse.
Lucky Charms
For those managing money at the beginning of 2000, the price action was nothing short of surreal. Each day was a journey, a volatile eruption of emotion that somehow morphed fantasy into reality at the end of each session. I couldn’t have scripted a better beginning to my new endeavor of running the trading operation at Cramer Berkowitz. After a flurry of emotional buying following the Y2K scare, the NASDAQ dropped 450 points—11%—in a matter of days, and our desk gelled as if we had worked together for years.
They say everything is funny when you’re making money, and there were giggles all around as the ink dried on my contract. We were all on our best behavior, but make no mistake, we were a collection of distinctly powerful personalities with proven formulas for success. Jeff had a brilliant analytical mind, research director Matt Jacobs was plugged into the Street, Jim was a master of momentum, and I used volatility to my advantage, selling rallies and buying dips. When we were on the same page, it was akin to four chefs mixing the perfect brew. As we captured the violent market swings and dropped money into the till, we drank the sweet taste of success like nothing I had ever experienced.
In February 2000, Cramer penned his infamous “Winners of the New World” column on TheStreet.com, extolling the virtues of ten high-flying technology stocks. Each of them was sitting on a parabolic perch after a massive rally, but he believed they would continue higher and tried to convince us in kind. I tried to separate his online persona from our internal dynamic, sometimes successfully and other times not. Yet, our first few months were blissful as profits padded our portfolio, and while I struggled when I started at Morgan Stanley and Galleon, I was immediately at ease when I arrived each morning at the head of the desk.
As part of my charge, I was responsible for the implementation of risk management systems, commission allocation to our trading partners, and staffing decisions on the desk. The status quo that preceded my arrival would quickly change. I was ready to put my fingerprints on the operation and finally—finally—achieve the wealth and status that I had strived for my entire life.
The New Kid in Town
Our offices were on 40 Fulton Street, next to the Brooklyn Bridge and down the street from the World Trade Center and the New York Stock Exchange. It was the center of the financial universe and at the heart of the world’s biggest cash register.
We had a dozen or so full-time employees, including three clerks who were directly under my charge. They had made multiple-six figure annual salaries for executing orders on behalf of Jim and Jeff, which seemed awfully extravagant given my experience. If I had learned anything climbing the ranks of Wall Street, it was that producers got paid and the pretenders faded away. It was the purest form of Darwinism; the strong survived, and the rest were left for dead.
I ushered in several changes during my first few months. The existing clerks were replaced with young guns that had skill-sets designed for the trading process, and while they weren’t producers out of the gate, they had the talent to one day become stars, and eventually, most of them did. Further, while we actively traded $400 million, the profit or loss was calculated at the end of each session, and the actual performance—along with our trade errors—arrived from Goldman Sachs the following afternoon. That too, would have to evolve.
After ten years of paying dues, making salads, and being emasculated by my superiors, I was hungry and motivated. I had promised myself that nobody who ever worked for me would be held down by internal office politics. I believed that the way to facilitate growth was to build a team with people who could themselves grow, and those decisions were made in kind.
I met with the desk heads of our various brokers—many of whom were the same folks who covered me at Galleon—and told them that commission revenue would be correlated to their idea generation and the liquidity they provided. It was indeed a meritocracy; we were tough but fair and always operated within the letter of the law. We were everything that a hedge fund was supposed to be and more. It was, I thought at the time, professional nirvana.
Word of our approach quickly spread and our firm hummed like a well-oiled machine. We got one of the first calls from our brokers when their analysts changed the rating on a stock; head traders communicated the directional flow from their “smarter” accounts, and I always shared what we were seeing in an attempt to establish goodwill.
We treated people the way I had wanted to be treated when I was on the other end of the phone. We always told them why we traded and rarely, if ever, hurt them with our flow. If we ran over them with one of our orders—if they didn’t have an opportunity to hedge our risk—we adjusted the price of the transaction as a matter of course.
All a man has is his name and his word. The trading operation at Cramer Berkowitz evolved into a direct extension of that.
Wild Pitches
Feeling emboldened in the spring of 2000, I swung at a pitch that was outside my strike zone. One of our brokers had alerted me to a special situation, a stock called Focus Enhancements that he believed was ready to run. We were making money, and as I was trading particularly well Jim and Jeff were happy to indulge me.
After we collectively weighed the opportunity, we established a six-figure position as the stock traded between $6 and $8. We were in a groove and our confidence was matched only by our growing reputation. With the market swinging wildly—10% to 15% at a clip—we seemingly had the script in our hands before the market moved, and by the middle of the first quarter, we established a sizable lead on the averages. We were feeling particularly bold.
“Focus Enhancements on the tape!” screamed Matt Jacobs as we trained our eyes on the headline. The news was negative, and the stock dropped 30% before we took our next breath.
Nobody said a word as the phones rang unanswered, and Maria Bartiromo chattered away in the background. I was frozen—we all were—despite the fact that the loss, while substantial, was a pimple in the much broader complexion of our $400 million portfolio. I sat across from Jim and watched his face turn from white to pink to a sullen shade of red, and then the twitching started, a facial tick that would become all too familiar with time. He pushed back from his turret and walked into his office. Instinctively, Jeff, Matt, and I followed and shut the door behind us.
I’ve always been my own harshest critic, and I held myself to the highest standards. Nobody needed to tell me I had screwed up. They knew it, I knew it, we all knew it. But this was one trade—a big trade, but one trade—in the context of a series of profitable decisions that netted our firm millions of dollars. I braced for some backlash but wasn’t prepared for what followed. Jim was relatively calm at first, but what began as a discussion regarding our alternatives to either mitigate risk or seize an opportunity quickly devolved into a soapbox rant.
It stopped being a dialogue between partners—Jim unleashed in a way that I had never before seen. All he could do was detail how horrible and unacceptable the situation was, over and over and over again, incessantly harping on the mistake rather than trying to identify a solution. He screamed. He swore. I may have even seen a tear by the time he was done. It was the strangest display of emotion I had ever witnessed in a professional setting or elsewhere.
By the time I left his office, I wasn’t thinking about Focus Enhancements. All I could think was, “Who is this guy and what the hell just happened?”
I’ve worked with some serious personalities over the years: Chuck Feldman was a powerful force, and Gary Rosenbach was difficult in an entirely different way, but what I witnessed that day set a new standard and provided a valuable lesson. Just as bad seasons define good fans and bad times define good friends, bad trades define the true colors of your partners in the pits.