Learn to Sell. The Rest Follows.

Often young people want to start as hotshot research and investment analysts or portfolio managers—certain they’ll be the next Warren Buffett or Peter Lynch—often naively disdaining anything sales-related. They almost never get their desired outcome. My advice to the young: Start by learning telephone sales—even if not investment-related. Here your youthful appearance won’t hurt you. Then, move to in-person sales, first with simple, then more complicated products or services. Sales competence comes fast when young. But the ease of learning to sell drops steadily with age. People in their 40s who’ve never sold can learn, but it’s harder, takes longer, and feels unnatural (like skiing!).

Product knowledge is less critical—it can be learned fast as needed. Thirty years ago Ken Koskella, who originally built sales and marketing at Franklin Resources (he retired rich and now does stand-up comedy for fun—the old business guy in a suit joking about how old business guys are funny), taught me if you really know how to sell, you could be dropped into America’s most remote town and make a living by the end of the week. Maybe not the living you’d want later, but you could get by—without knowing anything else beforehand.

Many think they don’t need to sell—they’ll start a firm and hire salespeople. On this road you simply can’t hire and manage salespeople well if you can’t sell yourself. Won’t work. This isn’t a book on how to sell or manage sales (I offer a list of those books later), but one reason to learn sales is so you can hire and manage a salesforce—key to many roads. Fact: Firms need salespeople more than they need 23-year-old ambitious but skill-less know-it-alls. Young folks on this road should learn to sell—anything—in their 20s, then sell finance products. You’ll learn some finance naturally en route. In your early 30s, reposition yourself to plumb finance’s analytical and technical depths. By then your extra real-world experience aids in learning finance.

Find the Right Firm

Any firm is the right firm if they teach you to sell. Big firms hire in volume. It doesn’t matter much if it’s Merrill Lynch, JP Morgan, or New York Life. Visit, interview, talk, and decide which one doesn’t make you want to jump out a window before you’ve learned to sell. Or go with a boutique firm—every major town has them. Neither is inherently better or worse. Big finance firms regularly hire folks straight from college or with no real experience—in volume with a

“throw spaghetti at the wall” mentality. If newbies flame out fast, no skin off the firm’s nose. (This won’t be you if you focus only on learning to sell.) For a more touchy-feely start, try a boutique. But learning to sell is key. For that, buy or borrow these books and keep practicing what they teach repeatedly:

• How to Win Friends and Influence People by Dale Carnegie
• You’ll See It When You Believe It by Wayne Dyer
• The Psychology of Selling by Brian Tracy
• The Difference Maker by John Maxwell
• Confidence by Rosabeth Kanter
• See You at the Top by Zig Ziglar
• Spin Selling by Neil Rackham

Then you must pass licensing tests before engaging clients. The tests are customized—based on what you’ll sell. They aren’t hard—if you study—and you don’t need a degree to take them. But beware: At many firms, if you don’t pass the first time—sayonara.

Then it’s selling time. And if you don’t sell, you’ll soon be shown the door. Most firms have periodic quotas—you must bring in maybe $500,000 or so in new client assets monthly. Fail to do so, and you’re history. This isn’t to discourage you but to emphasize the importance of learning to sell. You may be a super market forecaster, but if you can’t get clients to hire you, take a different road. Your firm should help with lists of names to call, but then it’s up to you.

Value the Business

So is it commission- or fee-based for you? To decide, think like a business owner. Here is an exercise you can use many ways to figure what’s worth what:

1. Go to Morningstar.com.
2. Search for any stock—a mutual fund like Janus Capital (fee-based) or a wirehouse broker like Merrill Lynch (commission-based).
3. Click on the “snapshot” button in the left-hand column.
4. Click on “industry peers” (across the top). Note: Whether a company is listed as a peer is up to Morningstar—sometimes the results seem wonky. For example, Merrill Lynch’s industry peers include Goldman Sachs and Morgan Stanley (other brokers), but also NYSE Euronext and Nasdaq Stock Market (exchanges). Ignore the exchanges.
5. Make a list of similar companies.
6. Divide each firm’s total value (market cap) by sales to create a ratio.
7. See who has higher or lower ratios.

I’ve done this for you as an example. You can do it for any stock. Table 7.1 shows results for mutual funds—fee-based firms. Most fund families have ratios from two to nearly five. Legg Mason and BlackRock are outliers. So the market says these kinds of firms are worth two to five times their annual sales.

Table 7.2 lists brokerage firms—commission-based. Note lower ratios—many under 2! Outliers are Charles Schwab and TD Ameritrade. (Schwab has a huge mutual fund business and is hybrid fee-based/commission-based.) The market values a buck of commission-based sales half as much as fee-based sales. The upside? Even medium-sized brokers are bigger than almost all money managers. There is vastly more business in the commission-based world, but it isn’t as valuable. That’s your trade-off—more versus more valuable. (Note: Even before Bear Stearns imploded in 2008, it was still about as profitable as its peers.)

Ditto for insurance (Table 7.3)—even more commission-based than brokers. With lower ratios, they’re less valuable than brokers, but the potential business is huge. Smaller players in Table 7.3 have more total business than many mutual fund families do.

Note: Huge insurers are older than most brokers and older still than money managers. So the trade-offs are size of opportunity versus value of revenue versus maturity. Think like an OPM founder-CEO. If a law dictated firms could have only up to $1 billion in revenue, no more, then hands down you’d want to be fee-based—the enterprise value would be so much higher. A small success in fee-based goes a long, long way.

This isn’t to disparage insurance and brokerage—which have created lots of mega-wealth. Some see Warren Buffett as an investor. He’s really an insurance CEO. Berkshire Hathaway’s profits come overwhelmingly from insurance. Buffett’s unusual—most insurance OPMers are in the low billions like Buffett’s ride-along, Charlie Munger. William Berkeley founded an eponymous insurer and is worth $1.3 billion.⁴ George Joseph sold insurance door-to-door in the early 1960s, noticed auto-insurance firms weren’t screening driver safety right, and started Mercury General to do it better (still kicking at 95, and worth $1.5 billion).⁵ Patrick Ryan ($2.4 billion) started a firm that became AON, America’s largest re-insurance broker.⁶ But beyond Buffett, they don’t compare to fee-based wealth—the top 15 are listed in Table 7.4.

Beyond Charles Schwab, Sandy Weill ($1.1 billion) also comes from commission-based brokerage.⁷ But even he evolved out of it. Originally a straight-up brokerage firm CEO, and a dynamite one at that, Weill made his fortune parlaying that into Travelers, an insurer, which later merged with Citicorp to become Citigroup. His big wealth came at Citi on the CEO road (chapter 2), not really from insurance or brokerage.

As a fee-based OPM founder-CEO, I’m not even successful enough to be among the 15 wealthiest fee-based OPMers. But worth $3.5 billion with my little firm, I’m doing OK and as high as anyone from insurance but Warren Buffett. That’s one attraction of fee-based OPM. You needn’t be as big overall to be more wealthy.

Still, brokerage is lucrative. James P. Gorman, Morgan Stanley’s CEO, earned $22.1 million in 2015 compensation. Lloyd C. Blankfein of Goldman Sachs got $22.6 million. Neither comes close to some of the mega-paydays highlighted in the first edition, but those were headier times, before the 2008 crisis. It will probably be many, many years before a brokerage exec tops former TD Ameritrade CEO (and current head coach of the Coastal Carolina Chanticleers, an independent football team) Joe Moglia’s $62.3 million 2007 salary or Lehman Brothers scapegoat Dick Fuld’s $51.7 million. Still, $22-plus million isn’t chump change. Even Bank of America Merrill Lynch’s Brian Moynihan’s $13.8 million is nothing to sneeze at.⁸ For huge wealth, fee-based is best. But to accumulate $2 million to $50 million, any form of OPM is fine.

Bet on Hedges

Hedge funds typically operate in specific categories like convertible arbitrage, distressed securities, long/short equity, market neutral, and more. Investors can buy them in multiple categories and diversify (although investors who do this invariably get poor returns because you can’t diversify widely, pay huge fees, and still end up ahead—see Chapter 10 on this relative to being frugal).

Hedgers also have varied hiring practices. To go this route, just apply everywhere—shotgun style! You can find endless names by doing a Google search—thousands. Most don’t hire. Most are one person, with maybe $10 million to $40 million, operating by him- or herself out of their bedroom. But if you keep looking you’ll find those that hire—they’ll invariably be the bigger ones.

There’s no security—a fund can blow up fast. I’m not suggesting this for a long-term career except as a founder-CEO or ride-along. But it’s a great place to learn and launch. Work there a few years. Learn what they do. Get the lay of the land. Then you can start your own.

Hedge funds are lightly regulated, so they’re very easy entry. A law firm like San Francisco’s Shartsis Friese with a hedge fund specialty can get you set up legally and take you through the rules like they’re spitting out popcorn. (Follow this URL for more law firm hedge fund practices: http://bestlawfirms.usnews.com/search.aspx?practice_area_id=33&page=1).

Then—and you may hate this—it’s all about selling to get clients for your fund. The tactics of running a hedge fund are pretty generic. Pay attention to your law firm’s do-and-don’t rules and then find something you believe the heck out of in terms of doing well looking forward and bet the house on it.

Often people find one big anchor investor before they start their fund. Say you’ve been a Merrill Lynch broker with a client list totaling $100 million in assets. Among them, you’ve got one big $40 million elephant you’ve served well and put tons of time into. People often decide they can make as much off the elephant in a hedge fund as everything else otherwise. So you quit, start your hedge fund with the one client as an anchor, and then try to build from there.

This whole process isn’t much more complicated than:

1. Betting big.
2. Finding clients who will back you in the bets.
3. Adhering to the applicable laws . . .
4. . . . while you collect 2 plus 20.

Maybe the most successful recent young hedge fund manager has been Ken Griffin. Now 46, worth $7.5 billion,⁹ he started Citadel Investment Group in 1990 in a classic hedge fund format. Today he has teams in multiple categories taking big bets on tiny profit potentials, which he leverages heavily for big returns. He’s a phenomenon because most who try what he’s done don’t just fail—they splat.

Even if you succeed, your future is uncertain. I’ve known Alex Brockmann through his father since he was a boy—one of the nicest guys you could ever meet, and very smart. Alex used to trade Latin American sovereign debt for Ken Griffin and got paid super well for succeeding. He made monster money in 2007—what he did worked—and Griffin happily paid for that. Now he runs a managed futures fund at TradeLink Capital and beat his peers in 2015. But Alex knows he lives and dies by the sword. Alex knows he might not be there at all in 2017 if 2016 fares badly.

My first example assumed no skill—just blind luck. Ken Griffin obviously has skill. Look back at the list of fee-based OPMers—this is how famous hedge fund managers (Soros, Cohen, Kovner, Simons) made it—by and large taking big risk for giant fees. This requires toughness, as Eddie Lampert knows better than anyone. Lampert’s currently worth only $2.3 billion, but he’s young and could become worth much more. Known for his keen-value eye, he bought Kmart—America’s third-largest discounter—in a 2002 fire sale that most thought was doomed to disaster. But Kmart turned around, initially generating huge returns for Lampert’s ESL fund.¹⁰ (Again: One huge risk that worked.) Now he’s trying to fix Sears, which he merged with Kmart in 2005. The jury’s still out, but give him time.

He almost didn’t get the chance. One evening, just after buying Kmart, Lampert left work. Heading to his car he was grabbed by four armed men, blindfolded, bound, and thrown into an SUV. He spent two days bound in a dingy motel bathtub. Lampert believed they would kill him, but remained calm. He noted they were disorganized. First, they claimed they’d been hired to kill him for $5 million.¹¹ No, they were to hold him for $1 million ransom.¹² They were armed and terrifying—but also young and scared. Turns out there was no elaborate plan—the four thugs had merely Googled for local wealthy people and found Lampert.¹³

Lampert tried negotiating, offering to beat whatever they’d been offered. He claimed they should let him go—that only he could sign for a big ransom check. But his chance came when he overheard them ordering pizza—with Lampert’s credit card! He pointed out the police would be alerted to his credit card being used—hadn’t they thought of that? The only way to avoid prison was to let him go—now—and run. Lampert reminded them he couldn’t ID them—he’d wisely averted his eyes when they removed his blindfold for the one meal they offered him.¹⁴ Sunday morning they dropped Lampert off on a highway a few miles from his home. Until they left, he still feared they might kill him. Lampert walked to a Greenwich, Connecticut, police station. They caught the thugs days later.¹⁵ Lampert could have panicked or given up. But he remained cool and attentive, thinking creatively of ways to extricate himself. Tough, cool, and collected! Like you must be to succeed in the hedge fund world! Are you that tough?

Corporate Raiders Lead to a Better World

The media paint these OPMers as greedy scumbags, but why? The stock can get a nice price bump when deals are announced. This is capitalism’s Darwinism. We all benefit from improved efficiency, productivity, and innovation. We don’t always get a better company after these deals. Things can go wrong, but the acquirer better make a good go of it or they’ll be history, too. And CEOs of lackluster public companies not wanting to be acquired (and unemployed) know they’d best improve or be history, too, adding incentive for corporate productivity, which benefits employees, shareholders, customers—everyone.

It’s fashionable to skewer these OPMers for their super-sized incomes. (If the media’s hot over some group’s pay, you know you’ve found a righteous road to riches.) Mr. Kravis unexpectedly found himself starring in a mockumentary—The War on Greed, Starring the Homes of Henry Kravis—supposedly a “light-hearted” look at the “excesses” of private equity. It juxtaposes Mr. Kravis’s homes against the modest abodes of “Average Joes” while detailing Kravis’s earnings.

Mr. Kravis is mega-wealthy—no crime there. (If you see wealth as a crime, you need a different book. Try Free to Choose by Milton Friedman.) Robert Greenwald, the film’s director, said, “I saw the numbers of what the guys make, I truly did not believe it. I thought they were a mistake. I’m a New Yorker, and this sort of egalitarianism is built into many of us.”¹⁸ Folks like Greenwald who object see big earnings as “unfair.” Their viewpoint is ever-fashionable today, championed by the Occupy Wall Street crowd and politicians on both sides of the aisle. If these guys and gals want “fair,” they should check out Cuba or Venezuela to see how “fairness” really works. In Venezuela, “fairness” brought the world’s most famous toilet paper shortage in 2015. Just working at these firms isn’t a bad career. There are lots of Alex Brockmann equivalents—and lots of rich ride-alongs (Chapter 3)—and those just making fat salaries who take the Road More Traveled (Chapter 10).

Lessons from the Trading Floor: Villians Like Vilar

Those stretching morality come in various flavors. Dick Strong comes to mind: former CEO of Strong Capital Management, a once-thriving mutual fund firm started in 1973, now history. By 2003, he was number 318 on the Forbes 400, with an estimated $800 million net worth. By 2004, he was toast. Regulators homed in on Strong, who had been short-term trading his own funds for his own account—not explicitly illegal. But a mutual fund CEO doing it on a nondisclosed basis at the expense of fund holders would irritate regulators. It moves to dead wrong when based on inside information—as Strong allegedly did.¹⁸

When the scandal broke, Strong stepped down—too late. The firm couldn’t survive—Wells Fargo bought it at a huge discount and dropped the Strong name. Was his “stretching” worth it? Never is. His trading scheme netted him a reported $600,000.¹⁹ This “gain” was probably the most costly gain in recent public record. Between the fines and decimated value of his firm when sold, Strong retained only a fraction of his prior wealth. And he was banned for life from the industry. Decimated, banished, name ruined, and a fraction of his worth. Ugh!

Then came Alberto Vilar, a villain who seemingly set out to cheat. He was capable but also twisted. I’d see him around in the early days when we were both first building our firms and would be in the same venues, seminars, conferences, and competitions. We’d chat. Something about him bristled. Too haughty, rigid, and regal! The women he dated were too young and pretty—showed too much skin. At least my wife thought so—said he gave her the “creeps.”

He bragged of all the super-successful startups he helped fund—like Intel. It was unclear what was true versus not—it just sounded too much. He boasted of growing up privileged in pre-Castro Cuba, then being impoverished when Castro seized his family’s assets. But his closest friends later recounted that as fiction—he grew up in New Jersey.²⁰

His investing stories were stunning, too, as were his late-1990s tech returns. In 2004, he ranked 327 on the Forbes 400, with an estimated $950 million net worth.²¹ But his firm wasn’t that big. At its peak in 2000, it managed only $7 billion. By 2004, it imploded to under $1 billion. Use the tables earlier in this chapter—at the peak, you don’t get near $950 million. He convinced folks (including Forbes) he owned lots of securities outside his firm—worth much more than his firm. Some people are. But an insider’s rule about the Forbes 400 is the Forbes folks are skeptical of those trying to get on the list. They know they’re usually worth less than they say—maybe lots less. That was Vilar. Still, he was convincing.

Vilar was a huge opera patron. Over the years, it’s estimated he gave beyond $300 million to the arts.²² (However, some, if not much of it, may not have been his to give.) When Vilar’s tech-heavy funds lost over 80 percent during the tech crash, he delayed millions in pledged donations to the Metropolitan Opera House. (They’d already put his name on the building!) Investigators came looking. He was charged with mail fraud in 2005. He, who claimed to be mega-rich from investments outside his firm, couldn’t make $10 million bail.²³ In my opinion, much of his net worth, like his background, was fiction—what he hadn’t fabricated he’d given away to the opera.

Vilar’s performance may not have been up to opera standards, but for a long time, it gave him a grand lifestyle. My wife of 46 years still wonders what his hot young women with excess skin showing think now. There are more Vilars. Don’t be one.

Not Quite Big League, but Big Enough to Do Big Damage

The occasional Vilar-like villain may hit the Forbes 400 briefly before blowing up, but most evildoers get caught long before then. Frank Gruttadauria was. He served about seven years in the 2000s for copping maybe $300 million in client funds, plus perjury, obstruction, bribery, and racketeering—even an escape charge!

As a Lehman Brothers branch manager in Cleveland, Gruttadauria basically ran a Ponzi scheme, targeting mostly elderly clients. Clients deposited money that he transferred to accounts under fictitious names—for 15 years! Clients never knew because Frank doctored fake statements, inflating account values. Who complains when statements show huge growth and no losses? When clients wanted withdrawals, Frank wrote checks from other clients’ accounts. Meanwhile, Frank enjoyed country clubs, a ski condo, a private jet, and a mistress.²⁵

The Internet Age did Frank in. He told elderly clients Lehman had no online access. One relatively Web-savvy grandma wondered why her account wasn’t being impacted by the tech crash.²⁶ She led clients in an online charge and they found their accounts empty—despite monthly statements showing, in some cases, millions. Because Frank had faked documents for so long, it was hard to know how much he stole—investigators estimate at least $40 million from 50 different clients. But because of the doctored returns, clients believed they lost much more.²⁷

In 2015, Michael Oppenheim of JPMorgan Chase & Co. admitted he stole more than $22 million from clients over seven years to fuel his gambling addiction. At one point, he’d had about 500 clients and managed more than $90 million. He pleaded guilty to securities fraud and embezzlement. He said, “Judge, I am ashamed of my conduct. I wish I would have been caught sooner.”²⁸ I do, too.

You might think investors got better at spotting scammers after Bernie Madoff’s bust put fraud—and fraudsters’ tricks—on the front pages. But sadly, con artists still find plenty of prey. Even among smart, otherwise savvy people! Rep. Alan Grayson (D-FL) was one of America’s richest congresspeople in 2013. Self-made millionaire with an economics degree from Harvard and JD from Harvard Law, both with honors, and a successful lawyer representing whistleblowers in fraud cases. On paper, he looked immune! But a “financial advisor” named William Dean Chapman duped him out of $18 million.²⁹

How’d Chapman do it? Flashy tactics and incomprehensible jargon. He convinced Grayson and 121 other victims to sign their stocks over to him as collateral for a three-year cash loan worth 85 percent of the stocks’ value. According to the SEC’s filing, he “assured borrowers that [he] would engage in ‘hedging’ strategies, would ‘hedge’ or would enter into contracts with counterparties that would ensure the portfolios could be returned.”³⁰ If you know finance or do three minutes of Googling, you know that isn’t what a hedge does, but dupes don’t bother with due diligence. After the loans matured, Chapman was supposed to return the stocks. Instead, he sold them all to pay earlier loans and fund his lavish lifestyle. Now he’s serving 12 years.

Spotting the Fraudsters

Fraudsters are easy to spot if you know what to look for. I wrote a whole book about it in 2009—How to Smell a Rat—but crooks have three common threads:

1. They take custody of clients’ assets.
2. They advertise too-good-to-be-true returns.
3. Their strategies are complex, murky, and jargon-laden.

Many also exploit perceived prestige or social connections—like Gabriel Bitran, a former professor and dean at MIT’s business school, currently serving three years. He and his son started a hedge fund boasting a “complex mathematical trading model” developed at the school. In reality, they ran a “fund of funds” and decided to help themselves to $12 million of clients’ money.³¹ Sean Meadows, who just started a 25-year sentence, swindled family friends out of millions by promising 10 percent a year, every year.³² Instead of investing their money, he blew it on Vegas debauchery, online gambling, Rolexes, property, a fancy boat, and a 1968 Camaro.³³

Again: Don’t break the law. Do it the right way. Be honorable. Base a business on doing right for your clients. Make their goals your goals. Be on their side. Set yourself apart with your values. Earn people’s trust with honesty, hard work, and good results, and they’ll tell their friends, who’ll tell their friends. Your success will be bigger and longer-lasting than all these shysters who took the easy way out. And you’ll spend your retirement somewhere other than prison.