Confessions of a Wall Street Analyst (6 page)

I did, however, get my first taste of the good life in August 1989, when Ed took me on my first business trip to meet the top brass at the companies I was going to cover. Over the course of 10 days, we hit most of the Baby Bells, flying to Atlanta to meet BellSouth’s top executives, to Denver for US West, to Washington and Philadelphia for Bell Atlantic, to Chicago for Ameritech, and to St. Louis for Southwestern Bell. This was a new, heady experience. I sat in the office of each CEO and asked the toughest questions I could come up with. They actually answered them too. It was a blast.

Even more of a blast was the way Morgan Stanley, unlike the utilitarian MCI, loved to spend its money. We traveled first class, stayed in the finest hotels, and ate at some of the most happening spots in the country. It would be unseemly not to; it was the Street, after all, and not spending the money implied you didn’t have it to spend. Money begat money. My trip to San Francisco to meet with Pacific Telesis ended with a quick flight to Los Angeles to meet Tim Armour, the telecom analyst at Capital Group—next to Fidelity the largest and most important institutional investment firm on the Street—and his wife, Nina, for dinner. I knew Tim from my days in MCI’s investor relations department, and Ed was quite close to him. We went to Chinois on Main, Wolfgang Puck’s “It” restaurant of the 1980s, and found ourselves sitting next to Madonna. Tom Cruise was standing outside, chatting with someone. I tried not to gape and failed. Working on Wall Street didn’t make you a Hollywood stud—yet.

The next morning, we flew back to JFK on MGM Grand Air, at the time an all first-class airline. Ed and I had a “stateroom”—four seats, facing each other, with partially drawn curtains—and the plane had a bar section with lounge chairs, each of which had its own airphone. I looked across the aisle and realized that in her own stateroom, with her own personal assistant, was none other than Elizabeth Taylor. She was, we later learned, en route to Morocco, where she would attend Malcolm Forbes’s over-the-top 70th birthday party—to this day, one of the most lavish parties ever held.

Our analyst jobs didn’t get us invited to that shindig, so we had to content ourselves with spying on Miss Liz, which was tons of fun in itself. She slept for several hours, her personal assistant helping her turn until she was perfectly comfortable and carefully arranging her blanket around her. It would be a lie to say she looked glamorous; without her makeup, she looked like just another middle-aged lady. Eventually, she woke up and headed for the bathroom. Ed, ever the in-your-face New Yorker, decided he wanted to get up close and personal, so he followed her. She eventually came back, and
I watched through the curtains as her assistant applied layer after layer of makeup to get her ready for the press at JFK. Let’s just say that I was glad to be a man.

Suddenly, Ed entered our “suite” with an enormous grin on his face. “So what happened?” I asked. “Did you talk to her? Did she realize what a big swinging dick you are, that your opinion moves stocks, like, daily?”

“No, I didn’t talk to her,” Ed said, cracking up, “but I did sit on the same toilet seat!” I think he was sincerely thrilled. After all, how many people can say they sat on a can heated by Elizabeth Taylor’s tush? Ahhh, Wall Street. I was beginning to like it here.

I
LIKED IT A LITTLE LESS,
however, when I actually had to sit down and write my first report. Believe it or not, my first report as a Wall Street equity research analyst took nine months to write. And the funny thing was that no one thought that there was anything outrageous about that. At the time, analysts were expected to spend a lot of time thinking and reasoning, and the firm was totally supportive. No one saw analysts as a potential source of income, so if it took nine months to write a report, well, so be it.

The harder I worked, the more my nerves got the better of me. My insecurities kicked in once again. “This is the Ivy League, not SUNY Albany, where I went to college, and Morgan Stanley is paying me all this money,” I fretted every time I found myself at my computer at 3:00
AM
. “I’d better blow them away or else. I’d better know every single detail of every line in that report cold,” I warned myself.

My response to insecurity was to work harder. So I worked my tail off at the office, came home to Scarsdale, locked myself up in my attic office, and worked some more. Sometimes, Paula would bring me dinner upstairs, which I really appreciated, because I wouldn’t have had a chance to see her—or to eat—otherwise. I tried to learn every facet of the telecom industry, every twist, every angle. The pressure, however, was coming from me and only me. Ed was calm, Morgan Stanley was calm, and everyone else seemed to have faith that I could actually do this job.

Finally, in early April, exactly nine months after I had started at Morgan Stanley, I screwed up my courage and handed a 90-page draft to Ed and Peter Dale, the head of research. I braced myself for the worst: “You’ve worked on this for nine whole months and this is all you’ve got to show for it? What the hell have we been paying you for?” I imagined them exclaiming.
Much to my surprise, both Ed and Peter liked the report, but each suggested many specific changes. An editor colleague, Fred Miller, helped me with a lot of rewriting and came up with a catchy title that I could never have imagined myself: “Max Headroom,” which was taken from a TV science fiction series that was big at the time.

In “Max Headroom,” I argued that serious competition was coming to the Baby Bells from new local phone companies. Even worse, their earnings would be held down by regulatory rules that provided limited “headroom.” The Bells, in my view, were going to have a tough time growing earnings as fast as others thought. I rated four of the seven Baby Bells as Holds, which meant that I thought these stocks were not going up much; they were stuck where they were.

Every brokerage firm and investment bank had a different rating system for its stocks, but overall they were quite similar: Either a three-, four-, or five-point system, with the top rating called Buy or Strong Buy, the middle rating called Hold or Neutral, and the worst rating of all usually called Sell. In the five-point systems, there were two other categories: Outperform or Accumulate, which usually meant the analyst thought the stock would rise at a moderate level, by say, 10–20 percent, over the next year; and Underperform or Reduce, which meant the analyst expected the stock price to fall by around the same amount.

At Morgan Stanley at this time, there were only three ratings: Buy, Sell, and Hold. Buys were stocks we thought would rise more than 20 percent over the next year, Sells should fall more than 20 percent, and Holds stood in between, expected to rise or fall somewhere between 0 percent and 20 percent during the same time period. I didn’t see much upside for the majority of the Bells, so Hold was the appropriate rating. In the eyes of investors, I learned, this was considered a negative call, a group of stocks not worth investing in. That’s because the objective of a professional money manager is to do better than, or outperform, the broad stock-market indices such as the S&P 500 Index or the NASDAQ. So a stock that wouldn’t make that happen was not a stock most professionals wanted to own.

Though I didn’t realize it for a while, my opinion was pretty much the opposite of the one presented by Jack Grubman, who, five months earlier, in December 1989, had written a bullish report strongly recommending the Baby Bells. He argued that they would benefit from a string of high-tech new features and services, particularly video services. It was the beginning of an intense rivalry that would last more than a decade.

N
OW THE REAL FUN
was about to begin. The report went to Morgan Stanley’s legal compliance team for review, to make sure that I wasn’t disclosing—knowingly or not—any nonpublic information that our bankers, or anyone at the firm, might have become privy to. For example, if I had unwittingly discussed a potential merger that was already in process, all references to it would be omitted from the report. Even worse, the entire report might be scrapped if the lawyers did not want anyone, me included, to get the slightest hint of the pending, confidential deal. Fortunately, “Max Headroom” cleared those hurdles, and now it was time for my debut. I would present my report at Morgan Stanley’s institutional sales meeting on the afternoon of May 9, 1990, and officially take over coverage of what was called the “wireline” telecom sector from Ed.

All of Morgan Stanley’s top salespeople would attend the meeting, some by phone, most in person. Since Morgan Stanley didn’t yet have a retail brokerage arm that sold stocks directly to regular folks, these salespeople called primarily on big institutional investors and extremely wealthy individuals. They would listen to my presentation, and then, assuming they bought my argument, take it out to the Street. If the Street paid attention, we’d see these stocks fall, since I was presenting a pretty unenthusiastic opinion. Was I actually going to move the stock market?

Two days before the report was published, I was told to give the banker who covered the Baby Bells a copy of the report as a courtesy. I didn’t know what to expect, especially considering the fact that my opinions were not going to endear me to the Baby Bells—or to Bob Murray, the banker. But Bob couldn’t have been more professional. He read the report, and put it back on my chair the next day. His only comment? “BellSouth is one word, not two.” No interference, no “helpful” suggestions, no nothing. That was the way I first experienced life as a research analyst at an investment bank.

Since my report was now 70 pages long, and I doubted the salespeople would read the whole thing (or any of it), I wrote and distributed a two-page crib sheet outlining my argument. That afternoon, I waited nervously as other, more experienced analysts made their presentations, describing softness in demand for deodorant and an uptick in orders for personal computers. Finally, they turned the microphone over to me, and for 10 or 12 minutes, I did my best to convince Morgan Stanley’s salespeople that my analysis of the Baby Bells was worth passing on to their buy-side clients.

I knew this material inside and out. But, as I started to speak to Morgan Stanley’s institutional sales force that afternoon, I feared that I was going to slip up somehow, or that I’d made the wrong call on the stocks. In this job, I’d get my report card quickly, when the next day’s stock market would make clear whether people thought I was a bozo or a brainiac. I made it through my presentation, but during the Q&A that followed, Bill McElroy, an astute salesman, stopped me cold with the most innocent of questions.

“Are you saying that investors should be underweighted or overweighted in the sector?”

Whaaaa? I froze. I was not prepared for such a basic but reasonable question, focused as I was on all the obscure details. What he was asking was whether one should put a higher percentage of one’s assets in telecom stocks than they represented as a percentage of the overall market. Basically, he wanted to know if I thought the Baby Bell stocks would perform better than the market. I glanced over at Ed, sitting in the fifth row center, who was calmly mouthing “under, under.”

“Underweight,” I blurted, trying to sound confident.

Once finished, I raced back to the office for the next phase of releasing a report. I called as many buy-side clients as I could to further explain my position to them and to make that “personal contact” I was learning was so very important.

After ten months of sweating bullets, the whole thing was something of an anticlimax. The salespeople were moderately but not overly impressed. I was just another analyst making just another report. And the stocks themselves? They didn’t budge. It was a humbling experience.

I eventually realized three things: first, I was covering slow-moving stocks that didn’t fluctuate a lot; second, I was brand-new and no one was going to invest money on my recommendations yet; and third, I had presented an entirely well-reasoned but entirely unsexy report. It didn’t have any juice, any pop, any emotion, any insider-type info. Other than “Max Headroom,” its title, it didn’t even have any catchy phrases. Those were the calls they loved, the calls that moved markets.

Ed consoled me. “Your job is not to move stocks the first day,” he said. “It is to get yourself recognized as someone who knows the industry. Your job is to get Fidelity and Capital Research and Alliance Capital Management to call you before they decide to buy or sell telecom stocks.” These were the huge mutual funds that were Morgan Stanley’s biggest trading clients, as well as the biggest owners of stocks and bonds in the world.

I knew Ed was right, but for years, I couldn’t help but stare hopefully at the screen the morning after I announced a change in ratings or put out a new report. Sometimes, particularly after I became known on the Street, my reports moved stocks immediately. But if I had interpreted an event or news report as bearish and Bell Atlantic or PacTel closed
up
50 or 25 cents, I took it personally. Why was someone at Putnam or Fidelity buying when I’d laid out such a well-reasoned argument against doing so? Eventually, I calmed down, but it always struck me that, unlike many people in the corporate world, investors and their advisers got graded every day. If I missed some news or made a bad call, I’d hear about it immediately, first from the trading prices of the stocks and then from an unhappy money manager who’d followed my advice or a Morgan Stanley salesman who’d pitched it hard.

The month after my piece came out, Jack Grubman wrote a quarterly update report, mentioning that those who were looking at regulatory “headroom” were looking at the wrong issue. He meant me. It was a personal shot, yet I got some satisfaction from the fact that I had at least gotten some attention and free advertising from a competitor who had confidently predicted my failure.

“We Do Not Make Negative or Controversial Comments About Our Clients.”

Over time, I acclimated myself to this whole new world. Yes, I had to sell myself, and surprisingly, I didn’t dislike it as much as I’d anticipated. But for the most part, I was free to pursue research, to write my honest opinion without the interference of bankers or anyone else, and to do the job the way I’d envisioned it.